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Case V158

88 ATC 1030

PM Roach SM

Administrative Appeals Tribunal

Judgment date: 4 November 1988.

P.M. Roach (Senior Member): These reasons for decision arise out of problems of the ``cash economy''. That the problem exists at all is occasioned by the circumstance that there are many in the community who are able to carry out their income-earning activities in such a way as to be able to easily conceal their earnings. That circumstance does not of itself

88 ATC 1032

mean that there is any evasion of tax. However, tax is avoided in so far as those income-earners take advantage of that circumstance to understate their incomes and to thereby defeat the Commissioner in his endeavours to correctly assess all members of the community as liable to pay tax on their incomes as directed by the Parliament. Because there are a large number of persons in the community who are willing to be dishonest in tax matters, various attempts have been made over a prolonged period to limit the opportunities of the dishonest to defraud the Commissioner to the detriment of the taxpaying community.

2. Since, to date, the community has not persuaded the Parliament that it is willing to support more effective techniques, those endeavours have to date largely proceeded by means of making payers effect tax deductions from moneys due to their payees and thereupon remit them to the Commissioner. The references which have fallen for determination in these proceedings reflect some of the difficulties inherent for many payers in determining to what extent and in what circumstances they are obliged to make such deductions. To understand some of the difficulties inherent in the problem, it is appropriate to briefly consider the relevant legislative history.

3. In 1941, some five years after the enactment of the Income Tax Assessment Act 1936 (``the Act''), the Commonwealth legislated to introduce a system providing for the collection by it of moneys on account of income tax which would become due by persons employed on ``salary or wages''. The system so introduced has since then been known as the PAYE (``Pay As You Earn'') system.

4. In 1944 a system providing for payment of ``provisional tax'' was introduced which made provision for an interim payment on account of tax mainly by persons deriving income other than by ``salary or wages''. Payment was to be made during the financial year in anticipation of the assessment of tax after the close of the year.

5. In the former case, but not the latter, employers were placed to some degree in a position of being their brother's keeper because, to the extent to which they made deductions from ``salary and wages'' and remitted them to the Commissioner, they denied the employee any chance of defaulting in his tax obligations. So it was that the Revenue was advantaged in two ways:

(1) it received moneys on account of tax earlier than the date upon which they would become payable under any assessment; and
(2) the employee was denied the opportunity of defaulting in relation to the moneys deducted.

However, the Revenue had no such assurance as to the latter in relation to persons not subject to the PAYE system. Thus the way was left open for persons not subject to the PAYE system to avoid their full tax obligations by non-disclosure of their incomes, or by understatement of income, or by disposing of their income and assets so as to be unable to pay their tax properly payable when assessed.

6. In 1983 the Commonwealth amended the Act in two material respects. First, it further defined the concept of ``salary or wages''; and secondly, it introduced what is known as the Prescribed Payments System: a system providing for ``collection of tax in respect of certain payments for work''. (The operation of the system was considered in Case V129,
88 ATC 817.) The Prescribed Payments System was to operate extensively throughout the building industry. It was intended to ensure that something on account of tax would be deducted from all payments made other than to ``employees'' on ``salary or wages'' so as to ensure, to that extent, funds to the Revenue and to provide some degree of disclosure as to the identity of payees. Even so, such were rates of deduction that a dishonest individual who worked under a false name could easily be advantaged by having only amounts under the Prescribed Payments System deducted from his earnings in lieu of the higher rate which would have been deducted under the PAYE system, which deductions would more nearly have been related to his potential tax liability. Thus, even though the Prescribed Payments Systems would ensure some moneys to the Revenue where previously there might have been none, it was less secure from the standpoint of the Revenue than the PAYE system. The Commissioner claims that that gap was narrowed substantially in 1983 by the broadening of the scope of the PAYE system to impose on ``payers'' obligations in relation to ``payees'' where

88 ATC 1033

previously there might have been none. Those considerations give rise to the present problems.

7. These reasons for decision relate to the affairs of two unrelated applicants. Their cases were heard separately, but as the issues arising are both novel in so far as they challenge the claims of the Commissioner and, in large measure, common to both, I have prepared one set of reasons for decision. The bond which puts the applicants in common interest is the circumstance that each company has been assessed to penalty pursuant to sec. 221EAA of the Act. The Commissioner contends that the applicants paid ``salary or wages'' (as defined) and in doing so failed to comply with the PAYE provisions of the Act. The applicants contend that their obligations did not extend beyond adherence to the Prescribed Payments System, and in one case not even that applied.

The first claim: Boundaries

8. The first applicant (Boundaries) is a company which for many years has carried on business as a builder of timber fencing, specialising in paling fences. Its income-earning activities are, and always have been, directed by John, a director of the company. John gave evidence before me. The questions to be determined are whether, and if so to what extent, Boundaries failed in its duty to deduct tax under the PAYE system pursuant to sec. 221C(1A) of the Act, and if it did so fail, to what extent it should be punished for its failure. To appreciate the circumstances giving rise to the problems for determination and the legislation which occasions them, it is appropriate to consider the personal history of John.

9. About 35 years ago, when John was aged about 23 years, he started work as a builder of timber fences. He did the work of construction for others who had contracted with customers to provide paling and other timber fences. He was then spoken of, as such persons are today spoken of, as a ``sub-contractor''. (I shall use the term also but, unless otherwise indicated, I will use it without attributing any legal consequence to the use of the term.) John was paid on a cost per foot basis with additional allowances for the provision of rock holes, gates and other ``extras''. He was paid the gross amount he earned without any deduction for tax. He was responsible for his own tax affairs. He had an obligation to disclose his income truthfully to the Commissioner and, subject to any challenge there might be to the assessment, to pay the tax assessed. He was liable to pay provisional tax. With the passage of time, John progressed to being a ``principal'' to his own subcontractors and then to the management of the business conducted by his own company: Boundaries. The operations of the company were conducted initially on the basis that it was entitled to receive payment in full without deduction on account of income tax from any of its customers. (Later, as a payee, Boundaries became subject to the Prescribed Payments System where it applied.) However, Boundaries had, and according to its own understanding it accepted, liability to effect PAYE deductions from the wages of its ``employees''. At the same time it was asserting that it was not so obliged in relation to its ``sub-contractors'' who were carrying out the works of construction for the company under comparable conditions to those experienced by John in earlier years when he had been a ``sub-contractor'' to others.

10. As a man whose principal skill lay in fencing and in organising the construction of paling fences, it was not surprising to find (as I do find) that John was not particularly tax literate. I find that he was not a person given to reading extensively in the field of income tax, or of legislative change, or of reading such publications as might inform him as to those matters. The clerical management of the company in those days was quite simple. John attended to the writing out of short and simple quotations and instructions to his ``sub-contractors'' and his former wife attended to such bookwork as was necessary to record payments to suppliers, employees and sub-contractors. She also attended to the payment of such moneys as the company understood itself liable to pay to the Commissioner as a result of deductions on account of tax made from payments due by it. At that time the only persons considered to be salaried employees were John and his eldest son (Adam). John's former wife was not remunerated for the services she rendered. An accountant provided the services needed annually by Boundaries in dealing with the Commissioner of Taxation (Commonwealth) and Commissioner of Corporate Affairs (State).

88 ATC 1034

11. From 1 September 1983 there was a major change in circumstances. That date marked the introduction of the ``Prescribed Payments System''. It was also the date from which extensive amendments to the concept of ``salary or wages'' for the purposes of the PAYE system took effect. I am satisfied that it was from that date that, to the disappointment of some of the ``sub-contractors'', amounts to be paid to them in relation to the work they had done were reduced by amounts withheld by the company in intended discharge of its obligations under the Prescribed Payments System. The company continued its previous practice of making PAYE deductions in relation to John and Adam. (It was suggested that, at an earlier stage in the company's history it had in fact made PAYE deductions from the amounts it was paying to the ``sub-contractors'', but I am satisfied that that was never so.)

12. Then, on 17 or 18 July 1986, an officer of the Australian Taxation Office called to inspect the records of the company. As a result of that visit, by letter of 15 August 1986 the company received written notice from the Commissioner calling on it to pay penalties of $362.65 calculated to date of inspection. Boundaries was advised that interest was continuing to accrue at the rate of 20% per annum on the ``flat component penalty'' of $348.21. The letter was in the same form as the letter which later gave rise to the present dispute. However, unlike the later letter it advised Boundaries:

``N.B. On this occasion the level of Flat Penalty has been remitted from 100% of the total undeducted tax to either 20% or 40% on the basis of employee status.''

What ``employee status'' was, and in what way it was relevant was not explained. The company paid the demand but it continued its previous practice. I am satisfied that John did not fully understand the significance of the demand.

13. Then, on 22 January 1987, another tax officer called to inspect the company's records. Prior to his visit he was unaware of the earlier enquiry. Upon examining the written records produced to him he noted the annotation made earlier by his colleague and spoke with John about it. As a result, before finalising upon a course of action, he checked the prior records of the Commissioner and then discovered the earlier imposition of penalty. He discussed with John his practices in relation to the ``sub-contractors'' and advised him that the company was obliged to effect PAYE deductions in relation to all ``sub-contractors'' other than those recorded as being in partnership or as being registered companies.

14. As a result of the second inspection, Boundaries received a further letter. I quote the letter in full:

``Dear Sir

Pay as you Earn System: Penalty for Failure to Deduct

An inspection of your records on 22 January 1987 disclosed that during the period 1 August 1986 to 23 January 1987 you failed to make tax instalment deductions from employees in accordance with sub-section 221C(1A) of the Income Tax Assessment Act.

Sub-section 221C(1A) provides for tax instalment deductions to be made from all payments of salary, wages, bonuses, commissions and allowances paid (whether at piece work rates or otherwise) to an employee as such and includes any payments made under a contract that is wholly or principally for the labour of the person to whom the payments are made.

Failure to comply with this provision may result in either the imposition of statutory penalties or the institution of prosecution action. As a result a penalty, as set out below, is now payable in accordance with the provisions of Section 221EAA. This penalty is not to be shown on group certificates or tax stamp sheets, nor is it tax deductible.

Further breaches may result in prosecution action being taken without notice, or the imposition of higher amounts of statutory penalty.

The total penalties of $1,445.70 (calculated to date of inspection), now due, should be forwarded forthwith as the 20% per annum component is continuing to accrue. Please return the enclosed official receipt with your payment, which should be made payable to the Deputy Commissioner of Taxation, GPO Box 4197, Sydney NSW 2001.

88 ATC 1035

*NOTE: Section 221U provides that a person who is dissatisfied with the Commissioner's decision may within 60 days of the service of this notice lodge with the Commissioner, an objection in writing against the decision stating fully and in detail the grounds on which the person relies.

Late Payment penalty component calculated to 22 January 1987

(A)           (B)             (C)            (D)         (E)            (F)
                                                                   Late Payment
                                            Flat                     20% per
Month     Gross Salary      Tax Not      Component      Days       annum of (D)
1986/1987  and Wages       Deducted       Penalty       Overdue   from due date
              $                $             $                            $
August     1,342.80          77.70         46.62         130             3.32
September  3,310.60         332.80        199.68         100            10.94
October    5,228.85         337.65        202.59          69             7.66
November   5,006.60         451.25        270.75          39             5.79
December   5,277.60         488.40        293.04           8             1.28
January    5,622.16         673.39        404.03           0             0.00
          ---------       --------      --------                        -----
TOTAL     25,788.61       2,361.19      1,416.71                        28.99
          ---------       --------      --------                        -----
PENALTY (D + F)                                                      1,445.70

N.B. On this occasion the level of Flat Penalty has been remitted from 100% of the total undeducted tax to 60%.''

Seven annexures to the letter related to the claim identified ``employees'' and, in relation to specified weekly periods, identified gross salary per payroll; additional payments; correct gross salary; tax deducted per payroll; correct tax due; and tax under-deducted.

15. Presumably analysis of the schedules would enable the taxpayer to reconcile the schedules with the monthly tabulations in the letter. However, with his limited reading ability I am satisfied that even then John did not fully comprehend what the letter sought to communicate. He consulted his accountant and thereon objection was taken to the demands made in the letter. In substance the letter of objection said:

``We do not believe that the `contract fencers' used by (the Company) should be regarded as employees and we therefore object to the Commissioner's decision. The contract fencers used by (the Company):

1. are paid a contract rate which is negotiated for each job;
2. provide their own means of transport to various job sites in and around Sydney;
3. provide their own equipment and tools;
4. have the right to hire labour to complete jobs if they so desire;
5. do not receive holiday or sickness pay, workers compensation cover or any other employee benefits;
6. are free to come and go as they wish and may do work for a number of fencing companies simultaneously.

It would seem to us that (the Company) are [sic] not required to deduct tax instalment deductions in accordance with sub-section 221C(1A) of the Income Tax Assessment Act and we therefore can see no basis upon which a penalty can be imposed.''

16. That objection was lodged with the Commissioner and was disallowed. The applicant then requested reference to this Tribunal. The applicant was represented at the hearing by his accountant who was without experience in these matters. The Commissioner was represented by counsel. I was informed at the hearing that this was the first occasion upon which such an assessment under the 1983

88 ATC 1036

amendments has been considered before any court or the Tribunal.

17. When the original letter advising of the assessment under reference was presented in evidence, it had annexed to it the schedules mentioned above. They did not appear in the formal documents submitted by the Commissioner to the Tribunal. It was only following the hearing, when the opportunity arose for close analysis of the information contained in those schedules, that some matters of significance appeared. For example, what was recorded in relation to the employee hereafter referred to as ``A'' was different in significance to what appeared in relation to the others ``B to H''. Secondly, the schedules were prepared on an assumption that the ``employees'' were only entitled to a general rebate: not on the basis of allowance being made for any dependants there may have been. Since no declaration forms had been provided, that was not unreasonable. But that does not ensure that the assumption was correct. In many instances the tax withheld may have have exceeded the amount required if the ``employee'' had dependants. In short, an ``employer's'' problems can be compounded by failing to obtain declarations from ``employees'' whom he erroneously considers to be not subject to the PAYE system.

18. Adam (referred to in the schedule following as ``A'') was the eldest son of John. He was one of the two employees treated by the company as employees in relation to whom it understood and accepted that it was obliged to comply with the PAYE provisions. As a result of the investigation, it was contended by the Commissioner that the company had failed to fully discharge its obligations as to PAYE deductions in relation to Adam. It appeared that Adam was employed on a fixed wage of $260 per week throughout the period. (No wage was paid in relation to week ending 2 January 1987.) In relation to each payment made the company deducted $39 but the Commissioner contends that, in the first 17 weeks, the company should have deducted $48.70 and in the last six weeks $45.25. No evidence was presented in relation to the alleged default.

19. However, the applicant can thank the investigating officer for advising that he had also found in the course of his investigation that there had been ``excessive'' deductions in relation to another employee - John. However, discovery of that circumstance did not avail the company at the time of assessment. The Commissioner treated the underpayment in relation to Adam as being as deserving of penalties as any other failure to deduct and did so even though there had been no suggestion of any prior offence in that regard.

20. However, those matters are less important than the issues relating to the other payees, as ``sub-contractors'' or ``employees'': B to H. As to them, the applicant's contention is that it had wholly discharged its obligations to the Commissioner upon complying with the Prescribed Payments System. The Commissioner does not accept that, although he has brought the Prescribed Payments System remittances to account in determining the alleged short-fall and, accordingly, has allowed for those remittances in fixing penalties.

21. In the table following, I have set out gross amounts paid to each individual in the period of week ending 1 August 1986 through to week ending 23 January 1987 (inclusive) as recorded by the Commissioner. The table does not record anything in relation to amounts due to either partnerships or any companies.

Week Ending       A       B       C       D       E       F       G       H
 1 Aug 1986              344
 8 Aug 1986            ** 60
15 Aug 1986              317
22 Aug 1986              282
29 Aug 1986              340
 5 Sep 1986     260      417
12 Sep 1986     260      666
19 Sep 1986     260      382
26 Sep 1986

88 ATC 1037

260 545 Week Ending A B C D E F G H 3 Oct 1986 *** 260 ** 186 ** 98 3 Oct 1986 *** 260 507 311 17 Oct 1986 *** 260 230 627 24 Oct 1986 *** 260 250 285 31 Oct 1986 260 235 292 128 7 Nov 1986 260 235 444 329 14 Nov 1986 260 ** 173 281 21 Nov 1986 260 235 361 413 28 Nov 1986 260 235 484 776 5 Dec 1986 260 300 499 12 Dec 1986 260 380 ** 138 ** 185 796 19 Dec 1986 260 399 644 * 24 Dec 1986 260 ** 202 474 221 2 Jan 1987 243 398 270 9 Jan 1987 260 300 705 725 312 16 Jan 1987 260 300 574 ** 123 23 Jan 1987 260 295 857

* A short week
** Excessive deductions - ranging from 10c to $11.35
*** The schedule records two payments $260 in each of these weeks, but none prior to 5 September 1986. Having perused the handwritten wages book I find it to be more reliable than the neatly typed schedule. However, the difference is of no consequence.

The table reflects:

(a) Adam's acknowledged status as an employee;
(b) the ongoing engagement of one ``fencer'' (B) - a son of John; and
(c) the casual and short-term engagements of other fencers.

22. I find that the ``fencers'', that is to say the persons most likely to be the persons whose physical effort would result in the construction of the fences, comprised persons working on their own account, whether as employees standing in a ``master and servant'' relationship to Boundaries or not; as persons working in partnership; or as persons working as employees of companies which they controlled. I also find that the ``fencer'' so described was the person to negotiate the contract with John.

23. I find that the fencers could come and go as they pleased. If they indicated their willingness to work they might be offered jobs. If a job was offered the fencer could accept it or reject it. If the fencer accepted it he would be entitled to payment on satisfactory completion of the work he had undertaken. He was entitled to have others carry out the works and to engage such labour and assistance as he pleased. If the work was not completed the ``sub-contractor'' would not be paid. If the result produced was unsatisfactory and it was known to be so before payment was made, the work would have to be brought up to standard before payment would be effected. If the substandard work was only discovered after payment, rectification would be required before other jobs were offered. But if no further jobs were sought. Boundaries was practical enough to accept the impracticability of seeking to recover.

24. I find that it was the responsibility of the fencer to use the materials provided by Boundaries, but that it was his own responsibility to provide the equipment necessary to do his job and to get himself, other workers (if any), the equipment and the materials to the job.

25. I find that some fencers worked for prolonged periods, undertaking an unbroken series of distinct jobs. They worked to a pattern such that there was a mutual expectation that another job would be offered when the current job was complete and that, when offered, it would be accepted. There was also a mutual expectation that in all probability it was the fencer who would personally do the job and

88 ATC 1038

that it would be done at standard rates of remuneration offered by Boundaries. I find that there were also others who, although experienced as fencers, would move from principal to principal according to their own whim or perception of opportunities. I find that there were yet others who had to be encouraged to try their hand at fencing. In relation to persons in the latter group, it was commonplace for Boundaries to assist them in two ways not called for with experienced fencers. First, they were paid to work alongside experienced fencers while learning the ropes. I find that under those conditions they were paid by the fencer with whom they worked; that the fencer was still paid agreed rates for work completed; but that the fencer could accept or reject their companionship and assistance as he pleased. I also find that they were assisted with equipment loaned to them by Boundaries, such equipment being in the way of nail guns, shovels and the like. Such loans were only made to other fencers when their own equipment was undergoing repair. On one occasion the company had loaned a truck to one of John's sons when he was working as a fencer. (That did not occur during the relevant period.) There have also been occasions, not within the relevant period, when the company delivered materials on-site for fencers who had no means of transport. On one occasion the company purchased a truck from a fencer who was about to return to New Zealand - but without having any obligation to do so.

26. I find that each fencer was quite entitled to engage whom he pleased and on what terms to work for him and with him. In the same way his days and hours or work were matters entirely at his choice, subject only to his obligation to effect completion of any work which he had undertaken in an agreed time or within a reasonable time. I find that there was no provision made for recreational leave (annual or otherwise); or for long service leave; or ``leave loadings''; or sick leave; or workers' compensation. I make no finding as to whether any of the fencers were entitled to the benefits of workers' compensation. I make no finding as to whether any of the fencers were entitled to the benefits of workers' compensation. Similarly, I make no finding as to the circumstances in which Boundaries would have been vicariously liable for the acts or omissions of any of the fencers.

27. I find that the fencers were paid to procure results, and that in that regard no distinction was to be drawn between the terms of the contracts which Boundaries made with companies, partnerships or individuals. I further find that the fencer was not liable to direction as to how to achieve the task he had undertaken to perform. Although there was no great scope for differences of opinion as to how best to construct a fence to the prescribed standard, fencers were free to choose wherever choice was possible. If they preferred to use hammers, rather than nail guns; or hand saws to power saws, that was a matter for them.

28. I find that from time to time less experienced fencers encountered problems they had not previously faced and that under those circumstances they would call on John or a more experienced fencer for advice. I find that, sensibly enough, they normally followed such advice, although having no obligation to either seek it or comply with it. I also find that there was little discussion about the terms and conditions of engagement. The terms and expectations were well known to the experienced and I find that the less experienced, so long as they remained involved, were content to accept the terms and conditions accorded the more experienced.

29. I also find that the only circumstance which distinguished arrangements between Boundaries and those who contracted with it as individuals, partnerships or companies lay in the circumstances that it would be assumed by John that the fencer was contracting on behalf of himself alone unless he asserted that he was acting on behalf of a partnership or on behalf of a company. I find that in such circumstances the applicant assumed the representations made to it to be correct. The assumption would not necessarily be true. The individual might have been an undisclosed agent; or the principal (partnership or company) might not exist. The point is significant because it raises questions as to how far an ``employer'' must go in order to establish that the partnership or company to believes himself to be contracting with exists; and how far he must go in establishing its continuing existence thereafter.

The second claim: Cladders

30. Cladders is a company which is also engaged in the building industry. It provides services by way of providing aluminium cladding for buildings, using for the purpose a specially extruded material. Extras are also

88 ATC 1039

provided. From the nature of its undertaking such a field of endeavours has a much shorter history than that of the paling fence. None the less there are many features of the trades which are common to both.

31. The endeavours of Cladders are concentrated around the procuring of orders to effect the fixing of cladding for agreed prices; and for the affixing of the cladding. So far as is material the persons who produce results can be identified as ``canvassers'' and ``salesmen'' in the first category; and ``fixers'' in the second. The procuring of orders utilises the services of individuals in two ways. Individuals, whom I refer to as ``canvassers'', work from the principal offices of Cladders. They engage in telephone canvassing. They work under the direction of officers of Cladders. They might have had their services provided to Cladders by other employers such as ``agencies'' which specialise in the short-term placement of workers or they might have been engaged under contracts with Cladders personal to each of them. When the investigation giving rise to the assessment under review commenced, all such ``canvassers'' were engaged under contracts entered into directly between the ``canvasser'' and the company. No tax was being deducted from the remuneration paid. That that was so was quite wrong and, in my view, quite indefensibly so. No attempt to justify the practice was presented before me.

32. The second stage involved personal, face-to-face salesmanship by individuals whom I shall refer to as ``the salesmen''. Contact names and addresses were obtained by Cladders through telephone canvassing and a variety of advertising methods. Salesmen were offered the opportunity to follow up those contacts with a view to procuring orders for Cladders and commissions as fees from Cladders. The salesmen might accept or refuse the opportunities offered them. As was said by the salesman who gave evidence, he was not going to waste his time and money on prospects which he judged to be quite hopeless. Once a salesman had assumed responsibility to follow up a contact he would arrange an on-site inspection in the course of which he would measure up the job contemplated by the property holder; determine what materials would be required; and calculate the return Cladders would require for its costs of supplying the materials and having them affixed. He would then add to the figure so calculated the ``commission'' he hoped to obtain and then try to negotiate a sale. He had no authority from Cladders to negotiate about the prices it had supplied to him as the rates it required for the provision and fixing of materials. However, he could use his discretion as to the amount of commission which would be available to him. In consequence, having expended his time and fully committed himself to the expenses of selling without any right of recoupment from Cladders, the salesman would often be prepared to take something less than the commission hoped for rather than go without. He not only honoured the precept ``half a loaf is better than none'' but even carried it to the point of recognising that from time-to-time one or two slices was better than nothing. If he succeeded in fixing on a price acceptable to the property owner, he then prepared the standard form of offer provided by Cladders and submitted it to the customer for signature and for provision of a deposit. Upon obtaining the customer's signature on the standard form, he witnessed it in the space provided and immediately thereafter and below completed a form of receipt expressed to be on behalf of Cladders. Many customers would have thought from the presentation of the document that the presence of the salesman's signature was not only in the first instance by way of witnessing the customer's signature upon the customer's offer, but also, in the second place, by way of acceptance by the salesman on behalf of Cladders of the offer so made. It was not intended to be so. The receipt was limited in its terms to an acknowledgement of receipt of the deposit on behalf of Cladders.

33. Having obtained the offer and a deposit, the salesman then submitted the document, the cheque and particulars of his measurements to Cladders. On receipt of that information, officers of Cladders sent better qualified assessors employed by Cladders to measure up the jobs and only if it was then found that the price offered was acceptable did Cladders accept that it would do the job. The greater the skill and experience of the salesman in measuring, the greater would be the prospect of the job proceeding at the offered price. Once the job was done and paid for by the customer, the services of the salesman were paid for. The payment would be made to the entity with whom Cladders had contracted. It might be

88 ATC 1040

made to the salesman as a person contracting in his own right (whether or not as an employee); to a partnership of which the salesman might or might not be a member; or to another third party such as a company which employed the salesman - even a company controlled by the salesman.

34. In all instances the services of the salesmen were retained on a job-by-job basis which the salesmen on offer were free to accept or reject. Cladders bore no expenses and provided none of the benefits for salesmen ordinarily associated with employment. The salesmen had no obligation to do more than the job or jobs in hand which they had accepted. In dealing with prospective customers they were not obliged to only promote the products of Cladders. The only obligation of Cladders was to pay commission if the job was completed. I find that it had no legal obligation to the salesman to accept any of the offers he introduced. The amount of the commission which it was to pay was only the amount by which the price contracted for and paid exceeded the nominated prices of Cladders for supplying and fitting. In short, the salesmen were rewarded, neither for effort (whether on the part of the salesman or not), nor for the time spent, but only for a result. Nothing was deducted under the Prescribed Payments System.

35. At the request of the Tribunal, following the hearing the Commissioner produced details not previously presented in evidence by either side. They identified ``salesmen'' (A to T) the dates on which, and the amounts by which, they were remunerated as appears in the following tables. The period was January to June 1985.


 2                   F
 3        D          F       G                    P              R
 6                           G    K           O                  R
 7                   F       G                    P              R
 9              E            G            M                      R
10                   F                L   M  N
11    C         E    F       G            M  N     P
12                                           N                          T
13                                    L   M  N                    R
14                                        M                          S
15                                    L   M  N                          T
16                                        M  N
17              E                         M  N                       S  T
18                                           N                       S
19                                           N                       S
20                                                                   S
21                                           N                  Q    S
22                                           N
23  A                    H      J            N                       S
24                                           N                       S
25      B                                    N                       S
26                                           N


1. Nine of the 19 salesmen were only remunerated once.
2. Only 3 of the 19 (M, N and S) worked over any significant period.
3. Remuneration appears from the following table.

88 ATC 1041


              Week        $                     Week       $
      A        23       3,146             N       10       500
                                                  11       800
      B        25         250                     12       300 and 200
                                                  13       600
      C        11       1,656                     15       300
                                                  16       400 and 100
      D         3       1,600                     17       498
                                                  18       206
      E         9       1,000                     19       500
               11       1,000                     21       500
               17       1,000                     22     1,462
                                                  23       100
      F         2       2,000                     24       500
                3       3,166 and 2,166           25       433
                7       2,166                     26     1,030
               10       2,166
               11       2,166              O       6     1,000
      G         3       1,000              P       3     1,000
                6         919                      7     1,000
                7         488                     11     1,475
               11       1,253
                                           Q      21       768
      H        23       2,000
                                           R       3       800 and 865
      J        23       2,616                      6     3,100
                                                   7       790 and 1,289
      K         6       1,680                      9       995
                                                  13     1,000
      L        10       2,000
               13       3,000              S      14       235
               15       2,845                     17       155
                                                  18       422
      M         9         400                     19       400
               10         400                     20       500
               11         300 and 400             21       514
               13         400                     23     1,102
               14         500                     25     1,100
               15         500
               16         500              T       3       300
               17         500                     12     1,996
                                                  15     2,060
                                                  16     1,000


A double entry refers to two payments within the one week.

36. Having decided to proceed with any particular task, Cladders used the services of ``fixers'' to carry out the work. The person with whom such contracts were negotiated was ordinarily the person who would actually physically carry out the work. Those persons might be working on their own account alone, or in partnership, or for companies which they controlled. They were free agents. They could accept or reject opportunities offered them.

88 ATC 1042

They had no obligation as to when they worked, or how. They had no entitlement to any benefits beyond the price to be paid for particular jobs. They were entitled to proceed about the jobs as they pleased using the services of whomsoever they pleased. (One fixer gave evidence that on occasion he was assisted in the physical work of fixing by his wife.) Prices to be paid for jobs were standard, although with differing rates for city and country work. However, special rates were provided for in special circumstances. It was always the responsibility of the fixer to arrange his own equipment which normally included: electric saws, drills and planers; ladders, trestles and planks; a truck or utility; nails, screws and touching-up paint; and silicon. If special equipment was required, such as scaffolding, special arrangements would be made for it to be provided by Cladders or a special rate of remuneration would be struck.

37. As with Boundaries and its ``fencers'', deductions under the PPS system were made by Cladders in relation to all payments made to fixers. The following tables identify the ``fixers'' (A to W) and the dates and amounts of remuneration paid. The period was December 1985 to February 1986


 2            D      F           J                         Q  R  S    U V W
 3   A  B             G  H                                    R  S        W
 4                 F     H     J                              R  S  T U V W
 5      B     D            H                                            V W
 6      B     D         G  H     J                                      V W
 7   A     C  D         G  H     J  K  L    N      P             S  T U V W
11                      G        J     L    N              Q  R  S     U
12            D   E     G  H           L  M N                    S  T  U V W
13         C  D         G  H     J                 P             S     U V W
14                      G  H


1. For W payments were regular in amount and were usually made on Friday.
2. For others there was no regularity.
3. Payments were made no one occasion only to:
              E          $861
              K          $337
              M        $1,981
4. Payment was made separately for each job. Sometimes there were two or more payments in the one week - usually on different days - for separate jobs.
5. Christmas Day 1985 fell on the Wednesday of Week 8.

The amounts paid to individuals and the weeks in which they were paid were as follows:

             Week           $                 Week       $
      A        3           3,604       M       12       1,981
               7           2,623
                                       N        7

88 ATC 1043

708 Week $ Week $ B 3 247 11 719 5 1,401 12 742 6 761 P 7 750 C 7 742 13 463 and 298 13 1,532 Q 2 1,065 D 2 1,753 11 770 and 860 5 410 6 864 R 2 1,353 and 472 7 1,578 3 208 12 1,131 4 1,167 13 1,101 11 948 E 12 861 S 2 766 3 934 F 2 1,487 4 694 and 622 4 687 7 418 12 1,743 11 227 12 679 G 3 1,360 13 900 6 1,980 7 1,955 T 4 878 11 1,410 7 550 12 1,430 12 1,088 13 715 14 1,320 U 2 1,205 and 715 and 1,206 4 1,380 and 1,252 H 3 622 7 1,845 4 951 11 1,974 and 1,118 5 440 12 950 and 975 6 907 13 962 7 899 12 710 V 2 867 13 828 4 220 14 764 5 685 6 440 and 967 J 2 958 7 845 4 3,420 12 676 6 2,838 13 220 7 1,202 11 1,550 W 2 450 13 440 3 450 4 450 K 7 337 5 450 6 450 7 450 and 880 12 450 and 450 13 450

38. In May 1985 a field officer of the Commissioner responsible for the inspection of records of ``employers'' came to inspect the records of Cladders. She paid many visits to the office of the company and over quite a lengthy period had access to its financial records. There

88 ATC 1044

has been no suggestion that she was in any way impeded in carrying out her investigations. At one point she set out to conduct and to record verbatim an interview with the principal officer of the company. She had not been trained at all for the task. She avoided the difficulties inherent in only seeking answers to a prepared set of questions. Instead she attempted the more difficult recording exercise of writing in longhand the questions as she composed them and the answers as they were given. She was not provided with recording equipment such as could have provided most conveniently and efficiently a credible verbatim record of that interview. Although she gave evidence and in the course of doing so presented in evidence a typed transcript of her original handwritten record - destroyed or lost following the preparation of the typed transcript - I am not persuaded that it constitutes a sufficiently reliable record as to draw any inference from it adverse to the applicant.

39. Following that investigation, and the report by the investigator to her superiors, the Commissioner by letter of 12 November 1985 gave notice to Cladders that it was being penalised. The letter so advising was not in standard form. It said, inter alia:

``... It has been established that persons engaged as commission salesmen, cladders and installers are employees of (Cladders) in terms of sub-section 221A1 [sic] of the Income Tax Assessment Act as amended.''

40. That was said to leave the company liable to either the imposition of penalties or prosecution action for non-compliance with the PAYE system. The letter went on to say that, ``having regard to the particular circumstances of this case'', it was not proposed to proceed with either course in relation to the fixers provided that tax instalment deductions were commenced from the next pay period after the date of the letter. However, it was not to be so as to the phone canvassers and commission salesmen. The letter stated:

``In this regard as a result of your failure to comply with your obligations to make tax instalment deductions in the period 1 January 1985 to 23 May 1985, a penalty as set out below, is now payable by you in accordance with the provisions of section 221EAA. Again this penalty is not to be shown on the employee's group certificate, nor is it tax deductible.

Penalty Relating to Failure to Deduct - Phone Canvassers

      (a) Gross wages paid for the
          period                          $77,761.96
      (b) Total undeducted amount as
          per schedule of undeducted
          amounts (see attached)          $25,783.62

      (c) Penalty (called the flat
          penalty) remitted under
          section 221N to the amount
          shown                           $10,313.42

      (d) Penalty at 20% per annum
          of the flat penalty,
          calculated from the date of
          undeducted amounts that
          would have been payable to
          the Commissioner                   $522.86
      Total amount of penalties           $10,836.28

Penalty Relating to Failure to Deduct - Commission Salesmen

      (a) Gross wages paid for the
          period                          $75,679.36

      (b) Total undeducted amount as
          per schedule of undeducted
          amounts (see attached)          $32,608.12

      (c) Penalty (called the flat
          penalty) remitted under
          section 221N to the amount
          shown                           $13,043.24

      (d) Penalty at 20% per annum
          of the flat penalty,
          calculated from the date of
          undeducted amounts that
          would have been payable to
          the Commissioner                   $666.31
      Total amount of penalties           $13,709.55

The penalties of $10,836.28 (relating to phone canvassers) and $13,709.55 (relating to commission salesmen) totalling $24,545.83 are now due and should be forwarded forthwith as the 20% per annum penalty component is continuing to accrue.''

88 ATC 1045

41. At this point it is only appropriate to say that it is only rarely that the courts impose financial penalties in excess of $10,000. In this instance two penalties, both in excess of $10,000 - one of which was substantially in excess of that figure - had been imposed by an administrative act.

42. Cladders objected to the assessment so made but only in relation to commission salesmen. The objection was disallowed and that decision is the first of two decisions to be reviewed in these proceedings.

43. Then by letter of 10 April 1986 the Commissioner gave notice of the imposition of a further penalty in the sum of $4,760.80. It related to the period from 1 December 1985 to 12 February 1986 and was made up as follows:

      Gross wages paid for the
      period                             $65,968.36

      Total undeducted amount as
      per schedule of undeducted
      amounts (see attached)             $23,625.55

      Penalty (called the flat penalty)
      remitted under sec. 221N to
      the amount shown                    $4,725.11

      Penalty at 20% per annum of
      the flat penalty, calculated
      from the date of undeducted
      amounts that would have been
      payable to the Commissioner            $35.69

In this instance the Commissioner's letter stated:

``Sub-Section 221C(1A) provides for tax instalment deductions to be made from all payments of salary, wages, bonuses, commissions and allowances paid (whether at piece work rates or otherwise) to an employee as such and includes any payments made under a contract that is wholly or principally for the labour of the person to whom the payments are made.''

(The emphasis is mine.)

44. Both assessments were objected to and, following disallowance of them, were referred to this Tribunal for independent review at the request of the applicant. At the hearing both parties were represented by counsel.

45. It is common ground that the penalties imposed in relation to the latter period relate only ``fixers''. No explanation was offered as to what the position was in relation to possible offences and the imposition of penalties in the period 24 May 1985 to 30 November 1985.

46. One factor of significance which at the one time reflects an endeavours on the part of Cladders to avoid being involved in a situation which obliged it to deduct under the PAYE system and which at the same time indicated its awareness of the existence - but not necessarily the extent of - such a system was a form of endorsement which appeared on its invoice forms recording claims made by salesmen and fixers. In terms directed to Cladders but on documentation provided by Cladders it said:

``Take note that I (name of creditor) am an independent sales agent/sub contractor [sic] working for a number of companies. As such, I carry my own insurance and pay for my own workers' compensation.

Furthermore, I pay my own taxation direct to the taxation department, each and every year, and as such, you are required to pay me the full amount of commission due on each and every contract submitted, and accepted by you.

Yours faithfully''

47. Cladders stood in contrast to Boundaries in that its general manager was an executive of very considerable ability. That was demonstrated by the rapidity with which he converted the company from the losses experienced under previous management to substantial profit.

Sufficiency of proof

48. Section 190 of the Act casts upon applicants the burden of proof. It is appropriate that it should be so because it is applicants rather than the Commissioner who are, or have been, seised of the information which is relevant. It is also well accepted law that under ordinary circumstances that burden is not an onerous one. It only requires that an applicant shall prove ``on the balance of probabilities'' the facts said to entitle him to the relief he seeks. However, the application of even that principle could become oppressive in circumstances such as those arising in these cases. The assessments which lie against these

88 ATC 1046

two companies arise out of their dealings with several persons. It follows that the facts which are relevant may differ from person to person. It might therefore be thought that it would be impossible for an applicant to discharge the burden of proof which he bears unless he adduced sufficient evidence in relation to each and every person with whom he dealt to enable the Tribunal to say that, in relation to each such person, the burden of proof had been discharged. That task could be so massive for an organisation utilising the services of thousands of persons as to prove to be practically impossible. I have no doubt that in recognition of that circumstance it is appropriate to have regard to evidence of ``system'' and, once the existence of a system is established, to then infer that the system was followed in relation to each dealing unless there was some evidence to suggest otherwise. But reasonable as that may seem to be in relation to very large organisations, that reasonableness might easily seem to be less so when dealing with organisations engaging a work-force as small as those used by Boundaries and Cladders. It does not then seem to be unreasonable to say that, where the Commissioner's allegation is that the applicant has breached his duty to the Revenue in relation to, say, six persons with whom it has dealt, proving no breach in relation to its dealings with one person does not establish that there was no breach in relation to the other five.

49. However, there is a further difficulty. Litigation such as this, like nearly all litigation, involves the presentation of evidence as to things past. The particular difficulty to which that gives rise in cases like these is that, from the nature of the enterprises in which these applicants were engaged, there is likely to be a quite mobile, non-permanent work-force. (Conversely, that mobility and impermanence, and the lack of personal identification which can easily attend it, creates a need for systems such as the PAYE and Prescribed Payments System in the absence of an identification system.) In consequence it can be extremely difficult, if not impossible, for organisations such as those of the present applicants to locate the persons with whom they were dealing even as little as 12 months earlier.

50. For Cladders there is a third dimension to the problem. The present chief executive of Cladders only took office in about April 1985. The persons previously engaged in the administration of the company are no longer with the organisation. The success of the present chief executive in rapidly bringing Cladders from a loss situation to one of substantial profitability is not only attributable to his efficiency and organisational skills, but also suggests that those who preceded him were incompetent and, therefore, perhaps not persons who observed in their organisation of the affairs of the company the same standards as applied in more recent times.

51. Despite those difficulties I am satisfied that what is called for in assessing the available material is a practical judgment in the way of making findings of fact. Accordingly, I have proceeded about the task in hand by describing what I am satisfied was the general practice of each company throughout the period of its present administration. In the case of Cladders, I have further made the judgment that, despite whatever deficiencies there may have been in the previous administration of Cladders, the differences were not such as to touch on any matter material to the present issues. I so find as matter of fact.

52. In the case of Boundaries, having heard the evidence of John; of his son (``B'') called as a fencer on behalf of the applicant; and two other former, short-term fencers called on behalf of the Commissioner, I have proceeded to make the findings of facts detailed herein. (I note to the credit of those witnesses that they had not falsified their identities in dealing with Boundaries. Whether they had freely disclosed their earnings to the Commissioner, I do not know.) I hold those findings to have been of universal application, except where otherwise indicated.

53. In relation to Cladders, I have reached the same conclusion. In doing so, I recognise that I have not heard the evidence of any salesman or fixer who worked in the interests of Cladders during the material period, but only the evidence of the chief executive; a manager; an experienced salesman who has worked interstate and who has for many years been employed by his own company which in turn contracts with organisations such as Cladders; and the evidence of a fixer. As to the latter, I note that as a result of these initiatives of the Commissioner, he has now taken advice and reorganised his affairs so as to not only be no

88 ATC 1047

longer subject to the PAYE system in his dealings with Cladders.

The law

54. Social and industrial policy has required that ``workers'' be protected from exploitation by those who benefit from their labour. One form of that protection is by way of industrial awards setting forth remuneration entitlements and specifying conditions of service. Another manifestation of that social development is in the provision of workers' compensation legislation. In the latter area one matter of special and recurrent difficulty has always been to identify the ``workers'' entitled to the benefit of the legislation; the circumstances in which ``workers'' are so entitled; and the persons responsible to the ``workers'' for providing the benefits of such compensation.

55. But that legislation has never denied to workers the right to be ``self-employed'', a status which could be achieved by placing themselves outside the scope of the ``master/servant'' type relationship provided for in workers' compensation legislation. If a worker chooses to be self-employed in that sense he will be his own insurer. If he converts his business to corporate status and becomes an employee of a company so formed, his own company will be his employer responsible for providing benefits. If a person who had been ``employed'' (in the strict sense) by Boundaries as a ``fencer'' or by Cladders as a ``fixer'' or ``salesman'', had chosen to go into partnership, or to establish a company which would provide his services, ordinarily his entitlement to compensation against the former employer would cease. That would seem to be what occured with the fencers in partnership or employed by companies under their own control. It happened in the case of the fixer who gave evidence. What is more the Commissioner has accepted for these purposes that, by doing so, those fencers and the fixer have exercised an entitlement which is available to them. That is so, even though in other circumstances the Commissioner commonly argues that persons who generate income wholly or principally by the provision of personal services may not so arrange their affairs as to cease to derive the assessable income generated by those services (cf. Case V62,
88 ATC 467).

56. It follows that one way of expressing the problem which now calls for solution is to ask whether an individual can achieve the same result for himself as others achieve by resort to partnerships and companies - namely a freedom to contract otherwise than on a ``master and servant'' basis and, further, thereby place himself and his debtor (as the user of his labour) outside the scope of the PAYE system.

Division 2 - Pt VI

57. The Commissioner will be entitled to succeed in these proceedings if I am satisfied that the payments made are payments of ``salary and wages'' which, ``unless the contrary intention appears... means salary, wages,... paid (whether at piece-work rates or otherwise) to an employee as such...'' (sec. 221A(1)). I am not so satisfied. Having regard to the findings I have made as to the terms of the contractual relationships and the nature of the task undertaken by the fencers; the salesmen; and the fixers. I find that the relationship of ``master and servant'' OR ``employer and employee'' did not exist, but rather that there was no more than a series of contracts whereby they undertook to produce or, in the case of the salesmen, seek to procure, particular results.

58. However, the Commissioner will also be entitled to succeed if he can establish that the amounts paid constituted ``salary or wages'' by reason of the extension of the definition of ``salary or wages'' as the concept was defined by sec. 221A(1) prior to September 1983. Without limiting the generality of the foregoing definition of ``salary or wages'' as meaning ``salary, wages commission... paid (whether at piece-work rates or otherwise) to an employee as such...'', the section extended the concept to include:

``any payments made:

(a) under a contract that is wholly or principally for the labour of the person to whom the payments are made,...''

If those were the only words to be considered I would have no hesitation in concluding that that test is not satisfied either. The contract entered into was not one calling for the services or labour of any particular person - let alone the payee (cf.
Neale v. Atlas Products (Vic.) Pty. Ltd. (1955) 10 A.T.D. 460). That phrase might have been apt to describe a contract whereby a surgeon or barrister was retained to personally

88 ATC 1048

provide his services, but in my view that was not the case in any of these instances.

59. However, there are yet further aspects of the concept of ``salary or wages'' which need to be considered. They were introduced in 1983 by way of amendment to sec. 221A(2). The definition of ``salary or wages'' in sec. 221A(1) was amended to exclude ``prescribed payments within the meaning of Division 3A'' of Pt VI. A counterpart to that provision is to be found in the definition of ``payment'' in sec. 221YHA(1) of Div. 3A. In addition sec. 221A(2) was amended to provide that (inter alia):

``For the purposes of the definition of `salary or wages' in sub-section (1) -

(b) a payment made to a person under a contract that is wholly or principally for the labour of any person shall be taken to be a payment made under a contract that is wholly or principally for the labour of the person to whom the payment is made if -
(i) in the case of a payment that is made in respect of labour that has been performed, in whole or in part, before the time when the payment is made - the whole or principal part of the labour that was performed before the time when the payment is made was performed by the person to whom the payment is made; and
(ii) in the case of a payment that is made in respect of labour the whole of which is to be performed after the time when the payment is made - the person making the payment can reasonably be expected to believe that the person to whom the payment is made will perform the whole or principal part of the labour in respect of which the payment is made;
(c) a reference to a contract that is wholly or principally for the labour of a person shall be read as including a reference to a contract that is wholly or principally -
(i) for the performance or presentation by a person of, or the participation by a person in, any music, play, dance, entertainment, address, sport, display, promotional activity, exhibition, or any similar activity (being a similar activity that involves the exercise by the person of intellectual, artistic, musical, physical or other personal skills) or for the performance of any services in connection with any such activity; or
(ii) for the performance of service by a person in, or in connection with, the making of any film, tape or disc or of a television or radio broadcast;

60. The words of the definition are so potentially comprehensive that in my view they must be critically considered and strictly construed - avoiding, on the one hand, a failure to give effect to a meaning clearly expressed and, on the other, giving effect to some interpretation of the Act not to be discerned from its terms (cf. Gibbs C.J. in
Cooper Brookes (Wollongong) Pty. Ltd. v. F.C. of T. 81 ATC 4292 at pp. 4295-4296; (1980-1981) 147 C.L.R. 297 at pp. 304-305). What has to be considered is not only a taxing statute; and not only the penal provisions of a taxing statute touching the tax obligations of the persons subject to penalty; but the penal obligations of a person relating to the tax affairs of another - commonly a person beyond the control of the person to be penalised.

61. I first observe that the references to ``a payment made... under a contract...'' does not define the parties to the contract. In my view it must be understood as referring to a payment made to a person under a contract ``with that person''. Were it not so it might be that a payment in relation to a fencer representing a partnership or company might be considered to be subject to the PAYE provisions. Secondly, in my view, the extent of the definition does not overcome the need to distinguish between a contract in which the undertaking is fairly described as a contract for the services of the party working and a contract whereby there is an entitlement in the creditor to have a particular result with the other party under obligation in the other party to procure that result, even to do so by his own labour. The amendment of 1983 operated to put beyond argument some questions as to whether payments were made ``to an employee as

88 ATC 1049

such'' but they did not operate to eliminate from the requirements of the section that there had to be something in the way of an employment relationship - a relationship in which the employer was entitled to direct and control the work of the ``employee'' in an ongoing relationship.

62. Were it not so, an extraordinarily wide range of persons who have contracted with individuals for work to be done by such individuals where the work involves the personal skills and labour of the individual to the exclusion of nearly all else would fall within the definition. The engagement for a specific purpose of a distinguished portrait painter; of a champion jockey; of a gifted surgeon; and of a skilled barrister would be examples.

63. In my view the payments so made to such persons do not constitute ``salary or wages''. That is not because the remuneration is not a reward for personal services, for it most certainly is. Nor is it because the payee may be considered to be ``in business'' with the substantial amount of capital invested and considerable ongoing expenses in maintaining premises, staff and services, equipment and facilities - for persons in such categories may not incur any such expenses. Nor is it because it is not open to such persons to be ``employed''. In my view the substantial reason is that, in the absence of an ongoing retainer whereby the artist, the jockey, the surgeon or the barrister, is under obligation to render continuing service in and about matters as directed by the payer, the payee is not a person liable to the direction of the payer. The same conclusion would be appropriate if the artist were engaged as a house painter; or the barrister as a salesman - in each case to undertake specific tasks pursuant to particular contracts. In my view, if the payee is an independent person with no ongoing obligation to the payer; if he is engaged on a job-by-job basis; if he has no assurance of future retainers, and no obligation to accept them if they are offered; if he is not liable to direction as to how to perform the task he has undertaken; if his only entitlement is to be paid, and that that entitlement is to be paid in accordance with his contract, then he is not a person on ``salary or wages'' even if that phrase be given a wide construction as is undoubtedly called for by the definition. He is not ``an employee as such''. That phrase remains of critical importance for it sets the context for the construction of all that follows (cf. Gibbs J. (as he then was) in
Avondale Motors (Parts) Pty. Ltd. v. F.C. of T. 71 ATC 4101 at p. 4106; (1971) 124 C.L.R. 97 at p. 105). In short, despite the breadth of words chosen by the Parliament to express its desire to extend the scope of the obligation in payers to deduct tax from payments due to payees, I am not persuaded that the Parliament intended to abolish the distinction between a contract for services and contracts of service cf. the decision of the Privy Council in
General Accident Fire and Life Assurance Corporation Ltd. & Anor v. Commr of Pay-roll Tax (N.S.W.) 82 ATC 4407 at p. 4410; or to set aside as of no significance the question of the right of the payer to control the payee, not as to what is required to be done but as to how it is to be done. I now proceed to apply that view in relation to the matters before me.

The decision re Boundaries

64. In the matter of Boundaries I am satisfied that the employee I have identified as A was a person in relation to whom the company was obliged to conform with the PAYE requirement. As to the other ``employees'' I am satisfied that it was not so obliged. In reaching that conclusion I have been concerned as to whether the prolonged association of B with the company might have indicated that a different conclusion should be reached but, having considered the matter carefully, I am persuaded that that is not so. The fact that the association continued as it did I attribute to the father/son relationship rather than anything else. In all other respects I am satisfied that at any given time B stood in the same relationship to the company controlled by his father as did any other fencer who had no familial relationship.

65. On that basis then, the only breach is that relating to A and the question to be determined is whether any penalties at all should be maintained. All in all I am persuaded that even the penalties in relation to A should be set aside. In reaching that conclusion I have been influenced by the circumstance that there is a measure of inaccuracy on the part of the Commissioner in presentation of the alleged under-payment in relation to A; the alleged under-payments are quite small; the issue as to whether the under-payments were correctly

88 ATC 1050

calculated was not considered; there was no suggestion of any prior default in relation to A; and, on the view I have taken of the matter, there was no evidence to support any default in relation to any other person. Overall, in my view, had investigation only brought to light the under-deductions in relation to Adam, the most appropriate course would have been to impose no penalty.

The decision re Cladders


67. [sic] In so far as the relationship between Cladders and individual salesmen conformed to the pattern I have described, I am satisfied that the remuneration paid did not constitute ``salary or wages'' and that there was no obligation in Cladders to deduct and remit under the PAYE system. Those salesmen were responsible for their own tax affairs and bound by the provisional tax system. However, I am not persuaded by the evidence that the system was applied in all instances. I refer first to salesman M for whom there was substantial regularity and consistency of payment, such as is to be expected by many employees. Nor am I persuaded in relation to salesman N, although the payments are less regular in amount. I conclude that, with the exception of the total of $12,323 paid to M and N, the applicant succeeds on this part of its claim. Thus, tax not deducted in this respect falls to $4,962.75.


68. I am similarly persuaded that the applicant succeeds in relation to all fixers, other than W for whom remuneration was regular and substantially consistent. Except as to $4,830 paid to W (tax under-deducted $1,618.50), the applicant succeeds.


69. The penalties provided for by the Act are severe, for sec. 221EAA provides:

``(1) Where an employer other than a government body refuses or fails, at the time of paying salary or wages to an employee, to deduct from the salary or wages the amount required to be deducted under this Division, the employee is liable to pay to the Commissioner, by way of penalty -

(a) an amount (in this sub-section referred to as the `undeducted amount') equal to the amount that the employer refused or failed to deduct; and
(b) an amount equal to 20% per annum of so much of the undeducted amount as remains unpaid, computed from -
(i) in a case where the employee is a group employer - the expiration of the period within which the employer, had the employer deducted the amount required to be deducted under this Division, would have been required to pay the amount of the deduction to the Commissioner; or
(ii) in any other case - the day next following the last day that would have been allowed to the employer, had the employer deducted the amount required to be deducted under this Division, for affixing tax stamps of a face value equal to the amount of the deduction as required by this Division.


Section 221N empowers the Commissioner to remit penalties. In the case of Cladders, he exercised that power and remitted the penalties to 20% of what he claimed should have been deducted. Late payment penalties were claimed in relation to that figure.

70. I acknowledge the harshness of imposing any penalty by reason of non-compliance with a new law; a law obscure in its expression; and a law difficult of comprehension. I have regard to the fact that the obligation to pay tax is an obligation of the taxpayer and that the penalty imposed is a penalty exacted of others for breach of a duty to comply with laws directed to making others meet their tax obligations. I have regard to the circumstance that the rate of penalty exacted of the more sophisticated and commercially astute organisation (Cladders) was only half that levied against Boundaries. But I am not persuaded that anything further should be remitted.

The Orders

71. The order of the Tribunal will be:

(a) in the case of Boundaries that the determination of the Commissioner under review will be varied and the objection of the applicant wholly allowed; and

88 ATC 1051

(b) in the case of Cladders that the determinations of the Commissioner under review will be varied and the levies of penalty under review be respectively reduced to $992.55 together with interest thereon from 12 November 1985 until payment; and to $323.70 together with interest thereon from 10 April 1986 until payment.


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