Payments made to independent contractors, under “relevant contracts”, are subject to payroll tax under the Payroll Tax Act 2007 (Vic) unless an exemption applies.

One of the exemptions is a contract where the provision of services is ancillary to the provision of materials or equipment. In CCSR v Downer EDI Engineering Pty Ltd, the taxpayer argued that the payments made to the subcontractor should be exempt from payroll tax since the services provided by the subcontractor are ancillary to the supply or use of the goods.

Summary of the facts

The respondent, Downer EDI Engineering Pty Ltd, had a contract with Foxtel, pursuant to which Downer engaged subcontractors to deliver and install Foxtel equipment to Foxtel customers. The appellant, the Chief Commissioner of State Revenue, claimed that payments made by Downer to the subcontractors under the subcontracts were liable to payroll tax. The Court of Appeal dismissed the Commissioner’s appeal and held that Downer was not subject to payroll tax on payments to third party contractors to install equipment for Foxtel Subscription Television at the premises of Foxtel customers on the basis that the services provided were ancillary to the supply or use of the good.

Court findings

The Court considered that the exemption poses five questions:

Was Downer supplied with services by the subcontractors?
Was there a supply of goods?
Was the supply of goods by the subcontractor?
Was the supply of goods by the subcontractor under the subcontract?
Were the installation services supplied by the subcontractor ancillary to the supply of goods by the subcontractor under the subcontract?

The Court held that the services being supplied to Downer enable it to fulfil its obligations under the Foxtel Contract. The subcontractor had a contractual obligation to deliver the equipment which he or she held as a sub-bailee. The contractual obligation to supply the equipment arose by virtue of a contract entered into by them with either Foxtel or the customer. It is not necessary for legal title to pass for there to be a supply of goods. In this matter, Foxtel retained the titles of the Foxtel equipment. The subcontractors were bailees of the equipment until installed. Once installed, the subcontractor as sub-bailee of the Foxtel Equipment lawfully passed possession to the Foxtel customer.

The Court held that the installation services were ancillary to the supply of Equipment under the subcontract. The equipment supplied would provide no benefit to the customer until they were installed. The Court also considered that the extent and nature of the services required are relevant to determine whether a service is ancillary to the supply.

Implication for taxpayers

Revenue authorities, such as the Victorian State Revenue Office and Revenue NSW, have been aggressively pursuing taxpayers in recent years. In particular, there has been a focus on compliance with the payroll tax laws. However, it is important to note that not all contractors are caught by the payroll tax regime and that there are a number of important exemptions that should be considered.

The Downer case shows the importance of examining such exemptions and, where applicable, pursuing them against revenue authorities.

Phil Broderick
Principal
T +61 3 9611 0163 l M +61 419 512 801
E: pbroderick@sladen.com.au

Denise Tan
Senior Associate
T +61 3 9611 0160 | M +61 438 714 965
E: dtan@sladen.com.au

Laura Spencer
Senior Associate
T +61 3 9611 0110
lspencer@sladen.com.au

Lucy Liang
Graduate Lawyer
E lliang@sladen.com.au