This article was originally published in Taxation in Australia (Volume 57(5) November 2022).
The security industry commonly uses contractors to provide services to its clients. In the series of E Group Security cases, the courts considered whether payments to service providers met the definition of an “employment agency contract”, and therefore whether the taxpayer had a payroll tax liability. At first instance, Ward J focused on ss 38 to 40 of the Payroll Tax Act 2007 (NSW) which provided the statutory basis for employment agency contracts. Ward J focused on the UNSW Global test which looked at the “intended scope of the employment agency contract” to determine liability. On appeal, Bell CJ, Gleeson and Seeming JJA stated that there were “no compelling reasons to depart from the UNSW Global test”. The court suggested legislative change would be required to address the Chief Commissioner’s continued invitations to alter the meaning of the current legislation, as this would be applicable across all jurisdictions, not just in New South Wales.
On 6 July 2022, the Court of Appeal of the New South Wales Supreme Court made an important decision in Chief Commissioner of State Revenue v E Group Security Pty Ltd. This was an appeal from the original decision of the NSW Supreme Court.
The original case considered whether the taxpayer had a payroll tax liability for payments made to service providers — specifically, for security guard services. The case focused on an age-old argument that taxpayers continue to have with the state and territory revenue agencies: whether the relationship between the taxpayer and the service providers met the “employment agency contract” requirement in the payroll tax legislation.
The appeal case focused on whether the precedent set in UNSW Global Pty Ltd v Chief Commissioner of State Revenue (UNSW Global) was the appropriate test to apply, or whether the decision in Bonner v Chief Commissioner of State Revenue should instead be applied.
Facts of the case
E Group Security was the main operating entity that provided security services to clients. The security services provided included typical security guard services (eg patrolling buildings, maintaining static security posts, boom gate or access control, and crowd control) and other non-stereotypical services (eg concierge, loading dock control, and weighbridge services).
There was a re-branding in 2018 that caused some initial confusion, where one of the wholly-owned subsidiary entities was referred to as the “Employer — EGroup Payroll Company”.
E Group Security was the entity in the group that would enter into contracts with end-user clients. It was also the entity that would enter into contracts with third-party contractors for the supply of subcontractor security guards. One exception to this arrangement was in 2017, when contracts with clients and third-party contractors were entered into by a wholly owned subsidiary, Vital Security Group Pty Ltd.
E Group Security had more than 600 clients, over a variety of industries, grouped into the following categories: NSW Government clients; community non-profit establishments; sports organisations and events; superannuation funds, strata plans, landlords, property owners and trusts; one food industry client; builders and construction clients; retailers; hotels and pubs; and one-off and short-term clients.
On 31 August 2018, the NSW Revenue Chief Commissioner assessed E Group Security for payroll tax liability for the 2015 income year. On 3 September 2018, E Group Security received further payroll tax assessments for the 2016 to 2018 income years. These assessments were made following an earlier audit, where it was concluded that E Group Security was already compliant with its payroll tax obligations.
The assessments related to payroll tax in respect of wages paid to subcontractors providing security services.
Issues at first instance
The main issues in dispute was whether the arrangement between E Group Security and the client (Who received the services) constituted an "employment agency contract", as defined in s 37 of the Payroll Tax Act 2007 (NSW):
“(1) For the purposes of this Act, an ‘employment agency contract’ is a contract, whether formal or informal and whether express or implied, under which a person (an ‘employment agent’) procures the services of another person (a ‘service provider’) for a client of the employment agent.
(2) However, a contract is not an employment agency contract for the purposes of this Act if it is, or results in the creation of, a contract of employment between the service provider and the client.
(3) In this section —
‘contract’ includes agreement, arrangement and undertaking”
A secondary issue was whether interest charged on any payroll tax owing should be remitted in whole or in part. (Given the court’s decision on the payroll tax liability questions, it was unnecessary to address this secondary issue.)
E Group Security contentions
E Group Security did not dispute that the services it was providing met the statutory definition of “client” and “procures” for the purposes of s 37. However, it did dispute that the services were procured “for” its clients. This was a specific reference to White J’s statement in UNSW Global.
An alternative argument made was:
“… E Group Security says, first, that , when those arrangements are correctly understood, the wholly-owned subsidiaries do not ‘procure’ the services of security guards for the plaintiff (as the wholly-owned subsidiaries are not involved in any contractual relationship with the third-party subcontractors and simply perform a payroll function for E Group Security — the contractual relationship by which the services are procedures being said to be between the plaintiff and the third-party subcontractors); and, second, that E Group Security is not a ‘client’ of its wholly-owned subsidiaries in the relevant sense.”
What did the Supreme Court decide at first instance?
Ward J focused on ss 38 to 40 of the Payroll Tax Act 2007 which provided the statutory basis for employment agency contract arrangements.
Ward J referenced and then cited White J’s statements in UNSW Global:
“Relevantly, in UNSW Global at , White J, as his Honour then was, construed the word ‘for’ in s 37(1) such that a contract is only an employment agency contract if the asserted employment agent procures the services of another person ‘in and for the conduct of the business of’ the asserted employment agent’s client. His Honour considered that this construction gave effect to the intended scope of the employment agency contract provisions, which (at –) his Honour said:
63. … were intended to apply to cases where the employment agent provided individuals who would comprise, or who would be added to, the workforce of the client for the conduct of the client’s business …
64. One of the hallmarks of an independent contractor is that he or she carries on his or her own business. But sometimes that is done, or is said to be done, by the individual, in substance, working for the client in the same way as would an employee of the client. 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.”
Ward J stated that other more recent decisions had followed the same test set as in UNSW Global.
Ward J concluded that there were no "employment agency contracts" in the arrangements between E Group Security and its clients. Ward J stated:
“Furthermore, let it be assumed that client participation in determining the parameters of an SOP (whether by way of suggesting or request) did occur from time to time (or can be said to have occurred by way of the setting or monitoring of performance to stipulated KPIs), I do not accept that this would necessarily amount to sufficient control or direction to warrant a conclusion that the security guards were integrated into the clients’ workforce. There seems no doubt at a practical level that E Group Security personnel were required to perform their tasks at the client’s premises subject to the direction and instruction of their E Group Security supervisors. In that regard, I accept the evidence of those responsible for supervision of the security operations at various of the clients’ sites to the effect that, on the ground so to speak, the security guards were directed to comply with E Group Security’s instructions and to report back to E Group Security. Responding to a request from a client (or answering a query from a customer of the client) does not change that).”
Ward J also referenced the Chief Commissioner’s “complaint” that the contractual documents were incomplete. Ward J referenced E Group Security’s evidence which included “that for a large number of clients … the arrangements were not in writing and were conducted by telephone calls”.
E Group Security focused on its obligations under the Security Industry Act 1997 (NSW). During the course of the matter, evidence from third parties (client representatives and previous E Group Security personnel) corroborated the consistent picture that E Group Security “takes its security licensing obligations very seriously and that E Group Security maintains control over the supervision of the security guards it provides to clients”.
Ward J listed the factors identified to be relevant when making the decisions of whether the subcontractor services were provided “in and for” the client’s business:
· location: this was generally the client’s premises, occasionally a roving location;
· regularity: in the commercial sector, the services were regular, but more ad hoc in the health and events sector and for short-term/one-off clients;
· level of interaction with client’s customers: this varied but generally there was some interaction;
· level of direction or instruction: there was some direction or instruction reserved to the client under the contractual documentation, but it did not extend to the control over or giving of binding instructions as to security decisions that are required to be made under the legislation by a security licence holder;
· access to and use of client staff facilities: this was limited or non-existent in most cases (except for one client, where security was required in staff areas, and other people, such as police officers, had access to the area); and
· significance of services being provided: there was a necessity and significance for clients of the security services, and clients may or may not have been in a position to obtain or hold a licence to perform those services themselves.
The decisions went on to specify circumstances that were relevant to specific industries. For example, for club and pub clients, Ward J stated:
“… as to the Club and Pub Clients and the like; … I see the E Group Security personnel as not sufficiently integrated into the client’s workforce. In general, the evidence is that the security guards use public facilities, that they take instruction from E Group Security, and that they wear distinguishing clothing. While they provide an integral function for the clients, they are not an addition in the sense of being integrated into the workforce.“
Commissioner’s contentions at appeal
The Chief Commissioner contented 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”.
The Chief Commissioner focused on the legislative history of s 37. He cited the original wording in the 1985 amending legislation:
“… 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 amending Act was repealed two years later and, in 1998, the current version was added. He argued that the word “for” emphasised in UNSW Global went against the intention of the legislation.
What did the Court of Appeal decide?
Bell CJ, Gleeson and Leeming JJA stated in their decision that there was “no compelling reason to depart from the UNSW Global test”. The court stated:
“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  that it was the Chief Commissioner who propounded the test which he adopted as correct:
‘the Chief Commissioner stated that he assumed that the “commonly understood” description of a “labour hire firm/agent” is an entity that procures persons to provide their labour “in, and for the purpose of, the ordinary conduct of the clients’ businesses”. In his contentions the Chief Commissioner agreed that EOS consultants typically did not perform services “in and for the purpose of, the ordinary conduct of the clients’ businesses” and were required to undertake only limited reporting, advisory and consultation tasks.’”
Further in support, the court stated:
“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.”
Future of payroll tax legislation
This decision not only impacts the security industry, but also other industries that heavily rely on subcontractor labour to provide the ultimate service to their clients, for example, the cleaning, road transport and construction industries.
At the end of the decision, Bell CJ, Gleeson and Leeming JJA made statements about the significance of harmonised payroll tax legislation across Australia.
Since 2007, six Australian states and territories (Victoria, New South Wales, Tasmania, South Australia, the Australian Capital Territory and the Northern Territory) have had harmonised legislation. Queensland amended its existing legislation in 2007 to align with the key provisions. And in 2012, Western Australia enacted similarly aligned provisions. As a result, all Australian states and territories have very similar payroll tax legislation, with the same concepts across each jurisdiction. With harmonised legislation, it became easier for employers who act in multiple locations with similar legislation.
The court suggested that legislative change would need to be made to give effect to the Commissioner’s arguments:
“… 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.
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).
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.”
Overall, in the absence of any such legislative change being implemented in the harmonised payroll tax laws, this important case confirms that the UNSW Global test still represents the most applicable approach for such potential employment agency contract cases. The authors suggest that this has obvious impacts on how state and territory revenue agencies should now be treating current and future cases in relevant industries that rely heavily on subcontractor labour.
Amanda Guruge, CTA
Tax Controversy Partners
Bruce Collins, CTA
Tax Controversy Partners
 Chief Commissioner of State Revenue v E Group Security Pty Ltd  NSWCA 115
 E Group Security Pty Ltd v Chief Commissioner of State Revenue  NSWSC 1190
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