Floorplay Pty Ltd v Commissioner of Taxation

[2013] AATA 637

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(Decision by: Deputy President P E Hack SC)

Floorplay Pty Ltd
v Commissioner of Taxation

Tribunal:

Member:
Deputy President P E Hack SC

Subject References:
TAXATION
SUPERANNUATION
Whether liable to pay superannuation guarantee charge
Whether employees or independent contractors
Quantum of superannuation guarantee charge
Decision under review set aside and remitted

Legislative References:
Superannuation Guarantee (Administration) Act 1992 - s 11(1)(ba); s 12(1); s 12(3)

Case References:
Hollis v Vabu Pty Ltd - [2001] HCA 44; (2001) 207 CLR 21
On Call Interpreters and Translators Agency Pty Ltd v Commissioner of Taxation (No 3) - [2011] FCA 366; (2011) 279 ALR 341

Hearing date:
Decision date: 6 September 2013

Brisbane

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Decision by:
Deputy President P E Hack SC

REASONS FOR DECISION

Introduction

1. In each of the years ending 30 June 2010 and 30 June 2011 the applicant, Floorplay Pty Ltd, engaged masters and deckhands (collectively "crew members") to crew four commercial fishing vessels owned by another entity related to Floorplay and operated in the Coral Sea off the coast of Cairns. In early 2012, following an audit, the respondent, the Commissioner of Taxation, took the view that the crew members were not independent contractors as Floorplay had contended but were employees with the consequence, according to the Commissioner, that Floorplay was liable to pay superannuation guarantee charge in relation to those crew members.

2. The Commissioner gave effect to that view by notices of assessment dated 19 January 2012. Floorplay objected to the assessments. On 12 September 2012 the Commissioner allowed the objection in minor respects in the case of five of the eight quarterly assessments but maintained the view that the crew members were employees of Floorplay.

3. Floorplay seeks a review of the Commissioner's objection decision.

The legislation

4. By virtue of the Superannuation Guarantee (Administration) Act 1992 (Cth) an employer is obliged to make a superannuation contribution at a prescribed level for the benefit of all employees. If the employer fails to make that contribution, in whole or in part, any shortfall is collected by way of a superannuation charge levied against the employer. Neither the mechanism for the imposition nor the rate of the levy is in issue; what is in issue is whether Floorplay was the employer of the crew members (and, necessarily, whether the crew members were employees of Floorplay). That issue is determined by s 12(1) of the Act. It provides:

(1) Subject to this section, in this Act, employee and employer have their ordinary meaning. However, for the purposes of this Act, subsections (2) to (11):

(a)

expand the meaning of those terms; and

(b)

make particular provision to avoid doubt as to the status of certain persons.

It is only necessary to have regard to s 12(3) of the following subsections. It provides:

(3) If a person works under a contract that is wholly or principally for the labour of the person, the person is an employee of the other party to the contract.

5. The amount of the superannuation charge is determined by reference to the employee's "salary or wages", a term defined in s 11(1) of the Act in expansive terms including, relevantly, as,

(ba) payments under a contract referred to in subsection 12(3) that are made in respect of the labour of the person working under the contract.

The factual background

6. It must be said that Floorplay's case was not well-presented. No evidence was led from any of the crew members. Shortly before the hearing Floorplay lodged a statement of one of its directors, Mr Robert Lamason. That statement was somewhat terse and neither explained, nor made reference to, the documentary material that had earlier been provided to the Commissioner in the audit and objection processes, or to the Tribunal in the pre-hearing processes.

7. Despite those difficulties I do not understand what follows to be in issue. Mr Lamason is the controlling mind of Floorplay and of another related entity, Seeter Pty Ltd. Seeter is the owner of the four commercial fishing vessels on which the crew members worked in the two years in issue in the proceedings. Seeter carries on business as Great Barrier Reef Tuna Qld. To undertake commercial fishing an operator must hold a licence issued by the Australian Fisheries Management Authority. Mr Lamason, or entities controlled by him, held (and hold) licences that allowed each of the four vessels owned by Seeter to operate as commercial fishing vessels. Additionally, and as at present, there is a quota on the permissible annual catch of various species that attachs, in a manner not clear to me, to particular vessels. It would seem not to matter for, as I understood Mr Lamason, there was no quota in place in the 2010 and 2011 income years.

8. The vessels generally operated with four crew members - a master (or skipper) and three deckhands. Floorplay engaged crew members, initially at least, by means of a document described as a "Share Fishing Contract". That agreement was expressed to be between a crew member, described as "the Fisherman", and Floorplay, described as "the Operator". It is convenient to set out the operative parts of the document in full.

1.

The fisherman will from time to time participate as a share Fisherman on such fishing vessel or vessels ("the vessel") the Operator has under its control or management and from time to time nominated, for such periods of time and of such place or places as the Operator in its sole discretion determines.

2.

The Fisherman must:

2.1

Be available at all reasonable times to crew any vessel nominated by the Operator

2.2

Provide his own personal accident, sickness and public liability insurance cover.

2.3

Comply with and observe all State and Federal laws which apply in respect of the vessel and/or all activities conducted on or from the vessel (including but not limited to maintenance and completion of all statutory records).

2.4

Strictly comply with and observe all fishing and vessel licence or survey conditions weather State or Federal.

2.5

Indemnify the Operator from and against any loss or damage (whether to the person or property of the Fisherman) suffered by the Fisherman howsoever arising from any sickness or accident whatsoever occurring on or in connection with a vessel during the course of his engagement under this Agreement.

3.

The Fisherman must bear the proportion of operating expenses of the nominated vessel for each fishing trip set out in Item 3 of the schedule, including:

3.1

The cost of regularly maintaining the vessel in good and seaworthy condition;

3.2

The cost of fuel, oil & bait;

3.3

The cost of maintenance and repair of fishing equipment;

3.4

General provisions for the sustenance of the crew of the vessel;

4.

The Fisherman shall not be responsible for;

4.1

The costs of the annual refit of the vessel; or

4.2

The cost of repairs to or the replacement of any item of plant, equipment or machinery of a capital nature or the vessel itself.

5.1

By way of remuneration the fisherman shall be entitled to that proportion of the earnings by the Operator from the Owner of the nominated vessel from the proceeds of the sale of the fish caught on any particular fishing trip as set out in Item 4 of the schedule.

5.2

The Fisherman shall not be entitled to any remuneration whatsoever other than that provided by clause 5.1.

6.

Not withstanding [sic] that there are no proceeds of sale of fish in respect of any particular fishing trip or that the proceeding[sic] sale of fish do not equal or exceed the operating expenses the fisherman must pay his proportion of the operating expenses of the nominated vessel for that particular trip.

7.

This Agreement may be terminated upon not less than TWO (2) days notice [sic] by any party to the other; or forthwith by any party in the event of a breach of any of the terms of this Agreement.

8.

Nothing in this Agreement shall be construed to grant or convey to the Fishermen any interest of any kind in the nominated vessel, or in the Owner of the nominated vessel (if the Owner is a Corporation) nor shall the Agreement be construed so as to constitute the relationship of partners, joint venturers, employer/employee, principal/agent between the Operator and the Fisherman. The parties admit and acknowledge that for all purposes associated with the Agreement the Fisherman is an independent contractor to the Operator.

9.

The Fisherman hereby authorises the Operator to deduct from the Fisherman's entitlement under this Agreement such amount as the parties from time to time agree for the purpose of making PAYG Withholding Tax payments to the Australian Tax Office in respect of income tax which may accrue against or be payable by the Fisherman.

9. According to Mr Lamason, clause 5.1, read with Item 4 in the Schedule, does not represent the complete picture regarding remuneration. The standing arrangement between Floorplay and the crew members was that 40% of the net proceeds of sale of a vessel's catch less a deduction of 7% representing voyage expenses (detailed in paragraph 10 below) was payable to that vessel's crew members and was distributed amongst them in proportions determined by the master. There is no reason to doubt Mr Lamason's evidence on the point.

10. Despite the text of clause 3, no proportion of operating expenses is set out in Item 3 of the Schedule on any of the examples in evidence. That was so, according to Mr Lamason, because, notwithstanding clause 3, no attempt was ever made to ascertain the operating expenses of vessels for individual trips. Instead, experience led to the decision to make a deduction of a standard amount, equal to 7% of the net proceeds of sale of the catch, from amounts payable to crew members. The result was that 33% of the net proceeds of sale of the catch were distributed to crew members. Thus remuneration was tied to the success of the catch however contrary to Mr Lamason's evidence ^[1] it could never be the case that the crew members would be indebted to Floorplay. What he said on the point could only be correct if Floorplay had calculated operating expenses for each voyage, as clause 3 contemplated. But that mechanism was not used by Floorplay which instead applied the standard 7% deduction. The share fishing "contract" was, to that extent at least, varied.

11. The evidence of Mr Lamason was not as clear as one might have hoped however, as I understood him, crew members were not at liberty to deal with the catch as they chose; the catch was required to be processed through, and sold by, one or other of Mr Lamason's entities.

Consideration

12. The proper characterisation of the relationship between Floorplay and the crew members is to be decided by a consideration of "the totality of the relationship" ^[2] . And the way in which the parties choose to describe the relationship, in this case the acknowledgment in clause 8 of the Share Fishing Contract that the "Fisherman is an independent contractor to the Operator", cannot be determinative because the parties cannot deem their relationship to be something that it is not ^[3] . Both parties made reference to the decision of Bromberg J in On Call Interpreters & Translators Agency Pty Ltd v Commissioner of Taxation (No 3) ^[4] (On Call), a decision involving the same legislation. At [188] his Honour identified the need to make an "objective assessment of the nature of the relationship" to determine whether the relationship is one of employer and employee or independent contractor and client. As his Honour observed, that question is often not easy to answer but the present case is one where I regard the answer as clear. The crew members were employees and Floorplay was the employer of them.

13. In Hollis v Vabu Pty Ltd ^[5] (Hollis) the plurality referred to the distinction earlier drawn by Windeyer J that the difference between an employee and an independent contractor is,

... rooted fundamentally in the difference between a person who serves his employer in his, the employer's, business, and a person who carries on a trade or business of his own. ^[6]

As with the bicycle couriers considered in Hollis, the notion that the crew members were running their own enterprise "is intuitively unsound" and quite contrary to the evidence.

14. In On Call, after an extensive analysis of the authorities, Bromberg J said this ^[7] :

Simply expressed, the question of whether a person is an independent contractor in relation to the performance of particular work, may be posed and answered as follows:

Viewed as a 'practical matter':

(i)

is the person performing the work an entrepreneur who owns and operates a business; and,

(ii)

in performing the work, is that person working in and for that person's business as a representative of that business and not of the business receiving the work?

If the answer to that question is yes, in the performance of that particular work, the person is likely to be an independent contractor. If no, then the person is likely to be an employee.

His Honour then set out a series of indicia of a business ^[8] on which Floorplay placed much reliance. Given that reliance, I will address the questions posed by his Honour in turn.

Do the economic activities of the putative business involve the taking of risk in the pursuit of profits?

It is difficult to find a clear answer on the evidence. There is no possibility of a loss although there is, at least, the theoretical possibility of no return, and thus no profit, from a voyage. Whether, as a matter of fact, that the theoretical possibility ever eventuated was not explored in the evidence.

Does the putative business engage in a repetitive and continuous manner with purchasers of its services?

There is only one purchaser, Floorplay, however the evidence is not clear about the repetitive and continuous manner. It appears from the material that there were in excess of 180 persons engaged as crew members during the two year period, a figure suggestive of the engagement of casual labour rather than the retaining of independent businesses.

Does the putative business employ or engage persons other than the owner/operator to carry out its economic activities?

Plainly the answer is no. The evidence is that it is open to a master to engage a deckhand when necessary but, in doing so, as the "Share Fishing Contract" makes plain, Floorplay is the contracting party and the master is acting as the agent of Floorplay in engaging a deckhand. Mr Lamason made reference to masters obtaining a signed agreement from any new deckhand prior to them undertaking a voyage.

Is goodwill (name, brand and reputation) being created by the economic activities of the putative business?

Again, the answer is plainly no. At best, crew members might develop a reputation for skill at locating and catching fish but that skill could not conceivably translate into goodwill.

Is the putative business promoted as a business to the public through advertising or other promotional means?

It is not on the evidence before me.

Does the putative business have tangible assets such as buildings and equipment which are utilised to support its economic activities?

Crew members are required to have wet weather gear, a knife and sharpening equipment. That hardly qualifies as the provision of tangible assets. In the present case the "building" in which the activity is carried out is the boat owned by a third party. Lines, hooks and bait are provided for crew members albeit that some or all of the cost of them are recovered by the 7% reduction in net proceeds of sale.

Does the putative business have the basic transactional systems that are common of a business of that kind? For instance: invoicing systems; standard rates and terms and conditions of trade; insurance coverage; payment and debt collection systems; appropriate financial records; budgeting or forecasting systems; business based arrangements with a bank or other financial institution.

There is no evidence from any of the crew members and no evidence of any transactional systems. Clause 2.2 of the Share Fishing Contract obliged crew members to provide their own personal accident, sickness and public liability insurance cover but there is no evidence that clause was complied with or, for that matter, that Floorplay took steps to ensure compliance. Crew members did not prepare and submit invoices. On the contrary Floorplay, or another of Mr Lamason's entities, accounted to crew members on a monthly and quarterly basis by preparing documents described as "invoices". The evidence is that Floorplay (or its associated entities) undertook all the work of determining crew members' entitlements. All of the crew members had bank accounts but in this day and age that is hardly surprising.

Do the services provided by the putative business involve the provision of labour of sufficient skill to be suggestive of the pursuance of a profession or trade through a business?

The answer is again plainly no. The notion of crew members operating a business, whether as skipper or deckhand, is, as I have said, intuitively unsound.

Are the regulatory requirements of a business (including business name registration, taxation, GST and ABN registration and compliance) being met by the putative business?

The evidence suggests that crew members held ABN's but nothing more is shown of regulatory compliance. Given that most payments involved a deduction for, that is, a payment to Floorplay of, an amount representing operating expenses (the 7% figure), an amount on which GST is payable, it might be thought that crew members would lodge BAS returns in order to obtain a refund of input tax credits. In the absence of any evidence on the point I infer that they do not.

15. These indicia demonstrate the complete absence of a business being carried on by the crew members.

16. On the contrary, the evidence demonstrates that the relationship is one of employer and employee. Mr Lamason's evidence referred to skippers as having,

... full control of the fishing vessel, including when it leaves port for sea, where and how it fishes, when it returns to port, unloading the catch and attending to any repair and maintenance jobs requires [sic] when in port.

Mr Lamason may permit that degree of latitude but there were only ever four masters (one of whom was Mr Lamason). Moreover, clause 1 of the Share Fishing Contract gave Floorplay the "sole discretion" to determine the duration and destination of voyages. It is the capacity to control that is important, not whether Floorplay was content to allow masters to have a free hand in deciding when and where to fish. That degree of control is underscored by the right of Floorplay (or the crew member) to terminate the agreement on two days' notice without cause, or forthwith in the event of breach.

17. The control of Floorplay extended to the catch and how it was dealt with. The crew members were not at liberty to treat the catch as the product of their endeavours which they could sell as and how they saw fit in their economic interests. Instead they were obliged to have a catch processed and sold through one of Floorplay's associated entities. It is, as well, significant that the parties agreed that Floorplay would deduct PAYG Withholding Tax payments from amounts otherwise payable to the crew members. Such an arrangement is not consistent with the notion that the crew members are operating independent businesses; it is, instead, suggestive of the relationship of employer and employee.

18. It follows that in my view Floorplay was liable to pay superannuation guarantee charge. The Commissioner's objection decision was, to that extent, correct although it was, as it is now conceded, incorrect on the quantum of the charge. The Commissioner's assessments and amended assessments were undertaken on the basis that the amount of salary or wages was the gross amount paid to crew members prior to the deduction of amounts for operating expenses. Now that it has emerged, contrary to the terms of the documents provided to the Commissioner, that the operating expenses deduction was a flat percentage, regardless of actual costs, the Commissioner accepts that the amount of salary or wages is the amount after that deduction, not the gross sum. At the conclusion of the hearing the parties had hoped to be able to agree on the consequences of that evidence so far as the quantum of the assessments is concerned. That optimism was misplaced. The parties have not been able to agree. In those circumstances, noting that the correct quantum of the assessments was not dealt with in the hearing, I propose to set aside the objection decision and remit the matter to the Commissioner for reconsideration in accordance with the direction that further assessments be made in accordance with the evidence now available to the Commissioner.