Talking Tax – Issue 99

Cases

JP Property Services cleans-up! A taxpayer win

In JP Property Services Pty Ltd Limited v Chief Commissioner of State Revenue [2017] NSWSC 1391, the Supreme Court of New South Wales (Court) allowed a Taxpayer’s appeal and revoked five payroll tax assessments concerning out of hours cleaning services provided to supermarkets and other businesses.

The Supreme Court concluded that none of the contracts used by the Taxpayer were Employment Agency Contracts (EACs), and therefore payroll tax was not payable. The services of the subcontractors engaged by the Taxpayer happened at a time when clients of the Taxpayer were not open to the public so the subcontractors were not considered to be added to the workforce of the clients of the Taxpayer.

The Taxpayer provided cleaning and property maintenance services to commercial and industrial clients, including supermarkets operated by Franklins Pty Ltd (Franklins). In providing these services, the Taxpayer used either its own employees or third parties (both natural persons and corporations), which were equally referred by the Court as “subcontractors”.

The Court referred to three types of contract used by the Taxpayer:

• the consecutive contracts over several years between the Taxpayer and Franklins
• the various contracts between the Taxpayer and its clients (other than Franklins) and
• the contracts between the Taxpayer and subcontractors (Subcontractor Contracts).

In May 2013, the NSW Office of State Revenue (OSR) notified the Taxpayer that they were conducting a payroll tax audit. Following this audit, the Commissioner of State Revenue (Commissioner) found that the Subcontractor Contracts were EACs under Part 3 Division 8 of the Payroll Tax Act 2007 (NSW) (Act) and that payroll tax was payable.

On this basis, in April 2015 the Commissioner issued five assessment notices in relation to the Subcontractor Contracts finding that the Taxpayer was liable to pay approximately $340,000 in payroll tax and penalty tax for the 5 years between 1 July 2008 and 30 June 2013 (Assessments).

Critical to the determination of whether the Subcontractor Contracts (and the other contracts) were EACs, was the questions of whether or not the individuals subcontracted by the Taxpayer comprised, or were added to, the workforce of the clients of the Taxpayer for the conduct of their business. As expressed by the Court, the relevant question was:

… are the individual’s services provided to help the client conduct its business in the same way, or much the same way, as it would through an employee, or are they services which, although provided for the client’s benefit, are not provided by the service provider working in the client’s business?

In June 2015, the Taxpayer filed an objection to the Assessments. The Taxpayer maintained that none of the contracts were EACs, and also challenged the Commissioner’s decision to levy penalty tax. The Commissioner denied the Taxpayer’s objection, and the Taxpayer applied to the Supreme Court for a review of the Commissioner's decision.

On the basis that the services of the subcontractors were not'for a client [e.g. Franklins] of the employment agent [JP]” in the requisite sense', the court concluded that none of the three types of contracts were EACs.

The court found that the services provided by the Subcontractors were out of hours cleaning services incidental to Franklins’ business (and the business of the other clients of the Taxpayer) as the cleaning was happening at a time when Franklins and other clients of the Taxpayer were not open to the public.

ATO updates

Tax and Corporate Australia

The ATO’s publication of Tax and Corporate Australia on 11 October 2017 (Tax Gap Publication) reveals some important aspects about the level of tax compliance in the large corporate sector.

In 2014-15 large corporate groups with a turnover of $250 million or more contributed $41 billion to the Australian economy.

While the ATO has stated that the vast majority of large corporate groups ‘do the right thing and willingly comply with Australian tax laws’, it has recognised that there will always be some who deliberately avoid their tax obligations.

Among other things, the Tax Gap Publication estimates the difference between the tax the ATO collects from large corporate groups and the amount that would have been collected if each group was fully compliant (known as the large corporate groups’ tax gap) to be $2.5 billion.

The Tax Gap Publication also explains how the ATO engages with large corporate groups and highlights the progress that the ATO has made in targeting large corporate groups through the use of new legislation such as the Multinational Anti-Avoidance Law (MAAL).

Legislation and policy updates

Asia Region Funds Passport & the corporate collective investment vehicle (CCIV) regime

The Asia Region Funds Passport (ARFP) is an initiative among participating countries in the Asia-Pacific region that aims to provide a multilaterally agreed framework to facilitate the cross-border marketing and use of managed funds products across ASEAN jurisdictions.

Through the mutual recognition of regulatory systems between countries, the ARFP will allow collective investment schemes based and regulated in one economy to be ‘passported’ or sold to investors in other economies in the Asia-Pacific region. Each participating country will be required to ensure that the domestic rules they implement to regulate the ARFP regime are substantially the same as the common set of rules known as ‘Passport Rules’.

The Government has released proposed legislation to give effect to the ARFP along with an Explanatory Memorandum.

Simultaneously, the Government also introduced proposed legislation for a Corporate Collective Investment Vehicle regime (CCIV Regime).

Currently, Australian funds management is generally conducted through a managed investment scheme (MIS), which has a trust-based structure. While adopting some of the features of the MIS regime to retain parity, the CCIV Regime will utilise a conventional company limited by shares.

A CCIV will be subject to ordinary company rules and must have share capital and a single corporate director. However, subject to meeting certain eligibility criteria, flow-through taxation rules which apply to managed investment trusts will be extended to CCIVs.

A key policy objective behind the CCIV Regime is to increase the competitiveness of Australia’s managed funds industry through the introduction of internationally recognisable investment products.

OECD releases CbC reporting implementation status and exchange relationships between tax administrations

Country-by-Country reporting (CbC Reporting) is an international measure aimed at combating tax avoidance. This is achieved through the comprehensive exchange of information between countries in accordance with Action 13 of the OECD/G20 Base Erosion and Profit Shifting (BEPS) Action Plan.

As of mid-2017, over 1,000 automatic exchange relationships have been established between jurisdictions committed to exchanging CbC Reports. An update in relation to the implementation of domestic legal frameworks for CbC Reporting can be found here. The full list of automatic exchange relations that are now in place are also available.

For more information on CbC reporting – and BEPS generally – see Talking Tax – Issue 86 and Talking Tax – Issue 64 or contact Rachel Law.