Glambed v. Federal Commissioner of TaxationJudges:
This case has its origin in the relationship between the provisions for collection of tax by instalments under what is known as the PAYE system pursuant to Div. 2 of Pt VI of the Income Tax Assessment Act 1936, and the more recent provisions of Div. 3A of the same Part constituting what is known as the prescribed payments scheme. The applicant is the proprietor of a painting and decorating business in which he employs some 20 or 30 workmen. In the months of July, August, and September 1985, and it would appear at other times not relevant to this case, he also engaged seven men to do work upon jobs in respect of which he was a contractor, but he did not regard those seven men as employees. Accordingly, he dealt with the payments made to them under the prescribed payments scheme. The Commissioner of Taxation took the view that that was not correct. He considered that all of the men were employees, and that all of the payments were payments of wages made to them as such. Accordingly, deductions not having been made by Mr Glambed under sec. 221C(1A), a penalty had been incurred under sec. 221EAA(1)(a) equal to the amount ``required to be deducted'' which Mr Glambed had ``failed to deduct''. A further penalty was involved under para. (b) of the same provision ``equal to 20% per annum of so much of the undeducted amount as remain[ed] unpaid'' from the relevant dates fixed by the paragraph. Under sec. 221N, it became necessary for the Commissioner to consider the exercise of his discretions in respect of these penalties. The Commissioner did not exercise his discretion in favour of Mr Glambed in respect of the penalty under para. (b), but he exercised his discretion in respect of the penalty under para. (a) so as to reduce that penalty to a flat rate of 40% of the amount he assessed as the amount Mr Glambed had failed to deduct.
When the Commissioner exercises a discretion under sec. 221N(2) (the provision dealing with para. (a) of sec. 221EAA(1)) adversely to the person liable, he is required by
ATC 4262sec. 221N(3) to ``give notice in writing of the decision''. The purpose of this requirement, clearly enough, is to enable the person to exercise his right under sec. 221U(1) to lodge, within 60 days after service of the notice, ``an objection in writing against the decision stating fully and in detail the grounds on which the person relies''. Subsection (2) of sec. 221U then provides:
``The provisions of Division 2 of Part V (other than section 185) apply in relation to an objection made under sub-section (1) in like manner as those provisions apply in relation to an objection against an assessment.''
Amongst the provisions of Div. 2, of course, is sec. 190, by which, if the matter has to be taken to the Court or the Administrative Appeals Tribunal, and assuming sec. 221U(2) achieves its apparent purpose of assimilating proceedings upon an objection under sec. 221U(1) to proceedings by a taxpayer upon an objection, the objector has the burden of proof, and is limited to the grounds stated in his objection, unless the Court or Tribunal makes an order having the effect of expanding the grounds. In this situation, I think it is the duty of the Commissioner to ensure that the notice is intelligible, so that the recipient has a real opportunity to make the response ``in detail'' which the Act requires of him. In the present case, the notice was both obscure and wrong. It commenced with a general statement that Mr Glambed ``had not made tax instalment deductions from employees'' for the period in question. There is no doubt that Mr Glambed had made correct deductions, subject to an error of 90 cents only, in respect of a large number of employees. The real question, which no one could have gleaned from the terms of the notice, was whether he had been in error in treating seven other persons as falling within the prescribed payments scheme on the basis that they were not employees. Any prospect of understanding was, however, obfuscated still further by the statement in the second paragraph:
``Sub-section 221C(1A) provides for tax instalment deductions to be made from all payments of salary... 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.''
There was no person to whom Mr Glambed had made payments in the period in question in respect of whom the last statement applied. That is because of the express exclusion from the definition of ``salary or wages'' in sec. 221A(1), effected by para. (q) of that definition, of ``prescribed payments within the meaning of Division 3A''. It was conceded that, by virtue of the definition of ``payment'' in sec. 221YHA, Div. 3A would catch any payments made by Mr Glambed in the relevant period ``under a contract that is wholly or principally for the labour of the person to whom the payments are made''.
I was told the reason for the error was the use of a form of letter which would be correct in cases involving employers not affected by Div. 3A. Since, however, a large number of employers are affected by Div. 3A, it is to be hoped this form has been corrected. The statement in the letter is simply wrong, so far as those employers are concerned - and wrong anyway, when put so unqualifiedly.
The notice specifies the gross wages paid for the period at a figure of $31,480, which is far below the wages paid in that period by Mr Glambed, but is, according to the evidence, the total of amounts paid in that period to the seven men, details of whom were furnished in these proceedings but not in the notice. An amount of $5,939.10 was shown as ``tax not deducted'', without any indication whether this is the total tax which should have been deducted if the PAYE scheme had applied, or whether it is the difference between that total and the amount in fact deducted by Mr Glambed on the footing that Div. 3A applied. There is also no indication of the basis on which the gross figure of ``tax not deducted'' had been calculated - that is, whether amounts paid were assumed to represent weekly wages, or monthly wages, or wages payable for some other period, in order to assess the correct rate of deduction. There was no statement of any allowances made in assessing the amounts which should have been deducted. This turned out to be important as it was conceded during the hearing by an officer of the Commissioner who gave evidence that the nature of the work performed required an adjustment in respect of a $32.50 per week travelling allowance to which each of the men involved was entitled.
In the circumstances, it seems almost accidental that Mr Glambed's objection was
ATC 4263able to be accepted by counsel for the Commissioner without demur as sufficiently putting the whole amount of the penalty in issue and disputing all the facts essential to support it. Had there been any difficulty about this, I am satisfied that, in view of the obscurity of the notice, it would have been appropriate to exercise my discretion under sec. 190(a) in such a way as to permit the grounds discussed in these reasons to be raised. It is, in the circumstances, unnecessary to set out the details of the objection.
The objection having been disallowed, and Mr Glambed having invoked the application of sec. 187 in its then form, and by virtue of the transitional provisions which became applicable, the matter came before this Court. At the outset, a question was raised as to the applicability of sec. 190(b), which provides that ``the burden of proving that the assessment is excessive shall lie upon the taxpayer''. It was pointed out that the present case involves neither an ``assessment'' as defined in sec. 6(1), nor a ``taxpayer'' as defined in the same provision. However sec. 221U(2) was cited by counsel for the Commissioner. He contended that the provisions of Div. 2 of Pt V must have been intended by the legislature to be applied mutatis mutandis, since any other construction would tend to make nonsense of sec. 221U. He relied, by analogy, on the views expressed by Starke J. in
Williams v. The King (No. 1) (1933) 50 C.L.R. 536 at p. 543, by Rich, Starke and Dixon JJ. (Gavan Duffy C.J., Evatt and McTiernan JJ. contra) in
Williams v. The King (No. 2) (1934) 50 C.L.R. 551 at pp. 558, 560-562, and by the majority in
Peel v. The Queen (1971) 125 C.L.R. 447. The ultimate result of those cases was to confirm the broad effect produced by the conferral, by sec. 68 of the Judiciary Act 1903, on State courts exercising jurisdiction with respect to trial and conviction on indictment of offenders charged with offences against the laws of the State and with respect to determination of appeals arising out of any such trial and conviction, of ``the like jurisdiction with respect to persons who are charged with offences against the laws of the Commonwealth committed within the State''. As Rich J. put it in Williams v. The King (No. 2) at p. 558:
``I take the object of the provision to be to assimilate criminal procedure, including remedies by way of appeal, in State and Federal offences. The policy upon which the provision is based is that the administration of the criminal law should be uniform in any given State although some of the offences are created by Federal legislation and the others exist under State law.''
Dixon J. (with whom Starke J. agreed) said in the same case at pp. 559-560:
``Thus, the method pursued is, so to speak, to take up and adopt `with respect to persons who are charged with offences against the laws of the Commonwealth' all the jurisdiction of the State Court to hear and determine appeals which answer the description `appeals arising out of the trial or conviction on indictment, or out of any proceedings connected therewith, of offenders or persons charged with offences against the laws of the State'.''
At p. 561 he said that the provision ``recognizes that the adoption of State law must proceed by analogy''.
In the same way, I think the object of sec. 221U(2) is to assimilate the provisions applicable to the contesting of an objection in respect of tax, and the provisions applicable to objections in respect of a penalty of the kind here in question, so as to achieve uniformity in the treatment of such objections. The method is to take up and adopt the provisions of Pt V Div. 2 for the purposes of an objection under sec. 221U(1), and that adoption must proceed by analogy. The result is that, although Mr Glambed is not relevantly a taxpayer, and the dispute does not concern an assessment, sec. 190(b) does impose on Mr Glambed the burden of proving that the penalty against which he objects is excessive.
The fundamental issue is whether the seven men were in receipt of ``salary or wages'' paid to them as employees within the meaning of sec. 221A. The definition of ``salary or wages'' in that section commences by stating that the expression:
``means salary, wages, commission, bonuses or allowances paid (whether at piece-work rates or otherwise) to an employee as such...''
I do not think anyone who reads the definition with care would doubt that the words ``as such'' mean, as Latham C.J. (in
F.C. of T. v. J. Walter Thompson (Aust.) Pty. Ltd. (1944) 69 C.L.R. 227 at p. 234)
ATC 4264indicated the same words in a virtually identical definition in the Pay-Roll Tax Assessment Act 1941 meant: ``paid... to an employee as a reward for his services as an employee'', or, to put it another way, the definition refers to a payment to an employee to the extent to which that payment is attributable to the employment. But the words ``an employee as such'' seem to have been treated by the author of the explanatory memorandum circulated by authority of the then Minister for Finance, when the Income Tax Assessment Amendment Bill 1983 was before the House of Representatives, as a compound expression identifying a particular kind of person, to be distinguished from ``a person who is not an employee as such'' (see p. 103 of the memorandum). This confusion in reading the section has been repeated in para. 38 of Taxation Ruling IT 2129. However, it is quite clear that the ruling is correct in denying any application of para. (a) of the definition of ``salary or wages'' to a payment that is a prescribed payment. That must follow from para. (q) of sec. 221A(1), to which I have already referred, read with the definition of ``payment'' in sec. 221YHA(1).
The question then is simply whether, in respect of the disputed payments, the seven men were employees paid as such.
Mr Glambed, who bore the onus of showing that each of the men was not an employee, gave evidence himself and also called two of the men as witnesses. One of the men called was Mr Concannon, whose evidence clearly showed that he was in business on his own account as a painter and decorator; that he was invited to submit a quotation in respect of a particular job to Expert Decorative Services, Mr Glambed's firm; and that he quoted a lump sum of $500, which quotation was accepted. The work took some five days, but not continuously, since it was apparently part of a contract let to Mr Glambed the job schedule of which did not permit continuous work on the paper hanging the subject of Mr Concannon's sub-contract. Mr Concannon had never previously done any work for Mr Glambed, nor did he do so afterwards. On this evidence, counsel for the Commissioner conceded it was ``hard to see that he is an employee''. I think the concession was properly made, and that Mr Glambed must succeed in respect of so much of the amount involved as relates to Mr Concannon.
As regards the other six men, a different situation emerged from the evidence. One of them, a Mr Mistridis, who worked under the firm name C & M, performed duties regularly for Mr Glambed from late in 1983, carrying out work requiring particular expertise, and also acting as supervisor in relation to the 20 or 30 men who were undoubtedly employees as well as the remaining five men. All of the work he did during the relevant period was at a daily rate agreed between him and Mr Glambed. That was generally the basis on which he worked, though he may have done some work on some occasions for a lump sum.
The other five men are also specialists in particular areas in the painting and decorating trade, such as painting requiring special skills and granotex work. Quite commonly, if Mr Glambed was asked to give a quotation for a relatively small job, he would send one of these men out to estimate how long it would take. On the basis of the estimate thus obtained, he would prepare his own quotation for the job. If he won the contract, he would then give it to the man in question at a negotiated daily rate which would apply, not only for that job, but for all such jobs until a renegotiation. If the job took longer than the estimate, Mr Glambed would lose money, since he would have quoted for the job on the basis of a mark-up on the daily rate for the period estimated, and he would continue to pay the workman. If, on the other hand, the workman was able to do the job more quickly than he had estimated, he would still be paid for the contemplated period. Mr Glambed's profit in that case, and where the job took the estimated time, would be in the nature of a mark-up above the cost of materials and labour which he would have allowed for in his own quotation to the client.
Although Mr Glambed could not point to any example in the relevant period, except in the case of Mr Concannon, it was his evidence that on some occasions, at other times, there were small jobs where he engaged one of these men for a lump sum fee.
None of the men received holiday pay or sick pay, except that Mr Glambed said if one was away for a day or two during a job he would continue to pay the daily rate. He would not pay for an extended period of sick leave, such as five days.
The only other evidence called in Mr Glambed's case was the evidence of Mr
ATC 4265Koulizakis. Mr Koulizakis has, since 1981, carried on his own business, in partnership with his wife under the name A & K Angelo and Company, in the painting and decorating field. From time to time, he has periods of two or three weeks, or a month or two, between contracts, when he looks for work to fill in the slack in his business activities. As he put it in answer to a question from Mr Glambed: ``I cannot afford this when I have not got any work, and I come to ask you for work, or I look for work with somebody else.'' He regarded himself as doing this work as a sub-contractor, and paid his earnings into the partnership account. During the relevant period, he worked for Mr Glambed for a period which he thought may have been about a month or less. He remembered that he painted roller doors of some garages, which was difficult work because stripping was required and then preparation of the surfaces. He did not remember whether he had done other work on this occasion for Mr Glambed. He did the work at a daily or hourly rate. Mr Koulizakis was, I think, probably working for Mr Glambed for a period of about five weeks during the relevant three months. During that time, the only things he contributed, other than his skill and labour as a painter, were his own scraper and a duster brush; everything else required was provided by Mr Glambed. Mr Koulizakis was asked whether on occasions he ``would be contacted by Con Mistridis and told where to go to do work'', to which his somewhat garbled reply, as I understood it, was that if Mr Glambed had an emergency with another job, he would be transferred to it, but otherwise he would stay with the particular job (that is the garage doors) to finish it. Mr Mistridis would come from time to time to look at all jobs. Asked specifically about sick leave and holiday pay, he said that they were never discussed.
For the Commissioner, two taxation officers who interviewed Mr Glambed were called. In the course of the evidence of the senior one of them, Mr Darmanin, it was conceded that assumptions were made in the calculations of tax which should have been deducted, on the Commissioner's case, about the period in respect of which particular sums of money had been earned. No justification for these assumptions was proffered. In particular, the $500 earned by Mr Concannon appears to have been treated as if it was the wage for one week's work, although it was not known, assuming it really was a wage rather than a payment under a lump sum contract, whether the wage was for one week or one month. Also, it was conceded that Mr Darmanin was ``aware that the building industry carries a mandatory travel allowance component that is not taxable'', which at the time was $32.50 per week. This was accepted in relation to the wages records of all of the employees who were acknowledged to be employees by Mr Glambed. In fact, the practice, it was acknowledged, was that the $32.50 did not even have to be on the group certificates. On this basis, Mr Darmanin agreed that the calculations concerning the tax which should have been deducted were all incorrect; they should all have been lower, since the travel allowance should have been allowed in each case. He made it clear that if Mr Glambed had specifically pointed out this aspect of the matter to him, when objecting, ``for sure we would have adjusted the penalty... most definitely''.
Another piece of evidence to which I should refer is the evidence, given by both taxation officers, that Mr Glambed co-operated fully with them in their investigation. There was no suggestion that the dispute was other than a genuine dispute concerning the correct category into which the seven men fell. This, I think, is a significant matter from the point of view of the discretion which the Commissioner is called upon to exercise by the terms of sec. 221N. It is particularly so in relation to a matter upon which different minds may reasonably reach different conclusions. In this case, as I have already indicated, the Commissioner reached what is now virtually admitted to have been the wrong conclusion in relation to one of the men. Whether or not Mr Glambed was wrong about the others, there was material upon which he could reasonably have taken the view which he did.
I can now deal directly with the central issue in respect of the remaining six men. Was the relationship between them and Mr Glambed one of independent contract or of master and servant? Perhaps the leading case in Australia in this area of the law is
Zuijs v. Wirth Brothers Pty. Ltd. (1955) 93 C.L.R. 561. In the joint judgment of Dixon C.J., Williams, Webb and Taylor JJ. at p. 569 it was said:
``A weekly hiring for an indefinite period to do a defined task on the premises of the
ATC 4266other party as an integral portion of a spectacle under his general management and control would appear to present elements characteristic of a contract of service.''
(The case concerned the engagement of trapeze artists by a circus.) As in the present case, reliance was there placed on the independence of judgment exercised by persons having particular skills as pointing away from a contract of service. At p. 571, however, the Court pointed out that the captain who navigates a ship may be a servant, and stated:
``The duties to be performed may depend so much on special skill or knowledge or they may be so clearly identified or the necessity of the employee acting on his own responsibility may be so evident, that little room for direction or command in detail may exist. But that is not the point. What matters is lawful authority to command so far as there is scope for it.''
At p. 572, in a summary statement the joint judgment proceeds:
``In the present case what has been proved in evidence all points to the conclusion that the relation between the parties was that of master and servant. If the power of selecting the person engaged must exist in the master in order that the contract may be one of service, that element was certainly present. If the fact that the remuneration takes the form of wages is a mark of the relationship, that was the case here. If a right in the master to suspend or dismiss for misconduct is something to be looked for, then again there could be little doubt that the appellant was subject to that discipline. If a right to superintend and control the manner in which the servant fulfils his obligation must exist in some degree, a little consideration will show that the daily relations of a performer playing a regular part in the work of such an organization as a travelling circus would demand a large measure of control and superintendence. With reference to the Act itself there are many subsidiary matters.''
(They referred to elements indicating the integration of the appellant's performance into the activities of the employer.)
It seems to me, making allowance for the difference between the activities carried on by Mr Glambed and those carried on by Wirth's circus, each of these points applies in the present case to the employment of the six men. It is particularly noteworthy that Mr Koulizakis conceded he could be sent by Mr Mistridis, as supervisor for Mr Glambed, to another job if there were some emergency. So far as Mr Mistridis himself is concerned, the exercise on behalf of Mr Glambed of supervisory powers over other persons, many of whom were undoubtedly employees, points strongly to his being an employee. He was completely integrated into Mr Glambed's organisation. These inferences with respect to him are not rebutted by him, since he was not called to give evidence. I think the principle in
Jones v. Dunkel (1959) 101 C.L.R. 298 is applicable, and particularly applicable to the failure to call Mr Mistridis.
F.C. of T. v. Barrett & Ors 73 ATC 4147; (1973) 129 C.L.R. 395, Stephen J. considered that salesmen retained by a land agency, who were paid only by commission on sales, who determine generally their own hours of work and holidays, and who had very little supervision though expected to report their whereabouts each day, were employees and not independent contractors. In reaching this decision, he took into account that they were placed on a roster to attend the offices of the agency from time to time in order to handle enquiries of behalf of the agency, as well as that they were prohibited by legislation from acting as salesmen for any other agency and from acting on their own account while they represented the firm.
Stephen J. at ATC p. 4149; C.L.R. p. 400, emphasised the test most commonly adopted for employment when he said:
``An important factor on which the courts have fastened in differentiating between servant and independent contractor has been that of control.''
At ATC p. 4150; C.L.R. p. 402, he said:
``The English courts have of recent years gone rather further than merely to restate the classical tests. A new test has been applied which involves the question whether or not a man's work is done as an integral part of another's business or is only accessory to it; whether, to put it in slightly different terms, the person in question is performing the relevant services as a person in business on his own account; it suffices to refer to the
ATC 4267judgment of Pennycuick V.C. in
Fall v. Hitchen (1973) 1 W.L.R. 286...''
Although Stephen J. referred to doubts about this new test (but note the emphasis in the Zuijs case on the integration of the performer's activities into the conduct of the circus), at p. 405 he applied it when he said: ``these salesmen remain very much a part of the respondents' organization...'' He also referred to the control exercised by the firm, and at ATC p. 4152; C.L.R. p. 406 he said:
``They are engaged not for a limited time or to perform one specific task but as more or less permanent representatives of the firm...''
There are clearly differentiating factors between the present case and Barrett's case, but not all of them operate in favour of the applicant. In particular, the six men involved in the present case were remunerated upon a daily or weekly basis and not by commission. Although only Mr Mistridis could be regarded as employed on a permanent basis, significant periods were involved in the employment of the others. In supervising Mr Glambed's employees, Mr Mistridis must clearly have been subject to Mr Glambed's control, notwithstanding that Mr Mistridis's expertise and capacities, and the trust Mr Glambed had in him, may have rendered that control a potentiality rather than a normal incident of their dealings. As for the others, Mr Koulizakis conceded that he might be directed to go to some other job rather than continue with the work which was actually the occasion of his employment if an emergency in Mr Glambed's activities arose. The rest of the six men were not called. I think the proper conclusion from all of the evidence is that Mr Glambed had a right of control, notwithstanding that the men were more expert than he in the trades involved. At any rate, he has not discharged the onus of showing the contrary. Control has always been a crucial test. As Latham C.J. said in F.C. of T. v. J. Walter Thompson (Aust.) Pty. Ltd. (supra) at p. 232:
``The fact that the artists are skilled does not make it impossible for them to be in the relation of servants to an employer. It is a mistake to think that only unskilled people can properly be described as servants. If they are subject to detailed control in the manner in which they do their work, they may be servants.''
Queensland Stations Pty. Ltd. v. F.C. of T. (1945) 70 C.L.R. 539 at p. 550, Dixon J. referred to the fact that drovers were paid at rates per head of cattle driven, and to the obligation to carry out all lawful instructions and to use the whole of the drover's time, energy and ability in the droving, as ``consistent with a contract of service''. There was held not to be a contract of service because of other factors, including the obligation of the drover to employ men and provide horses and equipment to carry out the droving. In the present case, the men involved were not paid by results in a manner analogous to a payment per head of cattle driven, but at a daily or hourly rate. The fact that some of their arrangements involved the possibility of some extra days' payment if they finished a job early, though they would continue to get their daily rate if they finished late, points, in all the circumstances, to a sensible incentive scheme rather than to independent contract. I have come to the conclusion, taking the whole of the evidence into account, that each of the men, other than Mr Concannon, worked for Mr Glambed during the period in question as an employee and not as an independent contractor.
However, Mr Glambed must succeed in the application because the Commissioner's decision was erroneous as regards Mr Concannon and also because of the concession of the taxation officer that the calculations in respect of each of the men were made on erroneous assumptions. The penalty for which sec. 221EAA(1)(a) provides is a penalty equal to the amount ``required to be deducted'' which the employer ``failed to deduct''. It is an essential part of the calculation of the amount involved to ascertain what was required to be deducted, and then to make allowance, in a case such as the present, for the amount in fact deducted. It is clear that the whole of the sum paid to Mr Concannon must be excluded from the calculation, if the correct figure is to be arrived at, and that, in respect of each of the others, at least the travelling allowance will have to be taken into account. As regards the discretion which was exercised in remitting only so much of the penalty as reduced it to 40% of the figure then calculated, if that was the appropriate percentage to take in respect of the non-compliance with the Act, as it was then seen upon the evidence before the Commissioner's officers, it does not, of course,
ATC 4268follow that the same percentage is now appropriate in respect of the six men I have held to have been employees, in the circumstances as they now appear, and in respect of the correct figures.
For these reasons I set aside the decision of the Commissioner the subject of the objection, and I remit it to him for reconsideration in accordance with law, but only so far as concerns the payments in question other than the payment to Mr Concannon.