ISSUES, PITFALLS AND POTENTIAL PROBLEMS FOR REAL ESTATE BUSINESSES IN NSW
As many in the industry are aware, there have been several legal cases in recent years surrounding the issue of independent contractors. One such notable case involves the McGrath group, which last year received assessment notices from the Office of State Revenue (OSR) for $6,072,810 (comprising payroll tax, interest and penalties).
It has become common practice in the industry for offices to engage sales staff (particularly their top performing agents) as contractors rather than employees due to the potential benefits to both parties – for example:
- the principal is not responsible for employee entitlements such as annual leave, personal leave or superannuation provided that the contractor pays these amounts as required, otherwise the principal may be held liable
- the contractor may be able to take advantage of the various tax benefits available via company and trust structures
- added flexibility for both the principal and the contractor, who is effectively operating an independent business
In 2012, industry bodies such as the Property Sales Association of Queensland (PSAQ) and the Real Estate Association of NSW (REANSW) began calling for an investigation by the Fair Work Ombudsman and the ATO into contractor arrangements for real estate agents due to a large number of complaints from agents who claimed that they were being “forced” into these arrangements by unscrupulous principals.
As of 1 March 2014, the PSAQ and the REANSW have been amalgamated into the Australian Property Services Association (APSA), the registered trade union for the real estate industry. On its website, the APSA claims to have been closely involved in “closing the door on bogus and sham contracting”. Its website has a dedicated page entitled “Sham Contracting” linking to the Fair Work Ombudsman’s website.
Around the same time, the OSR in NSW began focusing on the real estate industry and conducting audits in relation to underpayment of payroll tax by real estate businesses who engage contractors.
The industry should also be aware that the ATO’s compliance program lists real estate businesses as high risk employers, meaning the industry will continue to be scrutinised for the purposes of PAYG, leave entitlements and superannuation.
What does this mean for you?
On its website, the Real Estate Institute of New South Wales (REINSW) encourages principals and directors of real estate businesses to conduct a review of their work arrangements and contracts to ensure that they have correctly assessed the basis upon which they pay tax, including payroll tax in New South Wales.
There is no definitive test (the 80/20 rule does not apply as some people believe) and each case is decided according to its particular facts.
The degree of control which the principal has over the worker is important, but it is not the sole criterion. As set out below, you must take into consideration the totality of the relationship.
- Control – Whether or not the ultimate authority in the performance of the work resides with the worker or with the principal, in practice as well as in theory (if a right exists for the principal to exercise control in any way over which the worker performs the work). A clause which requires the contractor to undertake work in a certain manner or in accordance with the policies and procedures of the principal would likely be indicative of an employer/employee relationship.
- Integration or own business – Whether or not the worker is operating their own business or enterprise, or only serving the business of the principal and is highly integrated into the principal’s business.
- Remuneration – Whether or not the contract sets out remuneration of the worker on a ‘results’ or commission basis, rather than for a fixed fee or an hourly rate.
- Authority to delegate or subcontract – The power to delegate or subcontract is a significant factor in deciding whether a worker is an employee or independent contractor. If a worker is contractually required to personally perform the work, they are likely to be an employee.
- Risk – Where the worker bears little or no risk of the costs arising out of injury or defect in carrying out their work, they are more likely to be an employee. An independent contractor has their own insurance and indemnity policies and bears the commercial risk in carrying out the work.
- Provision of equipment and place of work – This may also be an indicator of an employment relationship if the principal provides all materials and a place of work for the worker.
- The Courts have also recognised a number of other factors, including the obligation to work, setting regular hours, deduction of income tax and provision of superannuation and leave entitlements.
In ACE Insurance Limited v Trifunovski  FCAFC 3, the Full Court of the Federal Court held that five insurance sales agents were in fact employees, despite having been engaged as contractors. Justice Buchanan held that the five agents were employees because:
- the company exercised some control over how the agents performed their work
- the agents could not carry on other businesses due to the hours worked for the company
- the agents were not conducting their own business but were instead enhancing the goodwill of the company
- the high degree of organisational control exerted by the Company over the agents (for example, the agents were organised into hierarchical teams, were subject to training and development programs developed by the Company and had incentives for advancement through the organisation).
They were held to be employees even though they engaged their own staff, were paid a commission rather than a salary and were allowed to offer their services to the general public.
The Courts have consistently demonstrated that they will look behind any documentation or characterisation of the relationship in order to determine the true nature of the relationship.
Payroll Tax in New South Wales
Even if you determine that a person or company is an independent contractor based on the above tests, they will still fall foul of the Payroll Tax Act if there is a “relevant contract” between you and the contractor. This means that the person would be treated as an employee and their wages included in your calculation of payroll tax. This could impact your payroll tax threshold and the amount of payroll tax you pay.
A “relevant contract” is a contract under which a person, in the course of a business carried on by that person, supplies to another person services for or in relation to the performance of work.
There are however, 9 exemptions for independent contractors under the Payroll Tax Act, including the following 2 which are particularly relevant to real estate businesses:
- If the Chief Commissioner is satisfied the contractor provides services to the public generally within a financial year. This will involve making a submission and providing evidence which satisfies the Chief Commissioner.
- Contracts under which the contractor engages additional labour (two or more people) to fulfil the terms of the contract. The test is as follows:
- If the contractor is a company, it must engage two or more persons to undertake the work
- If the contractor is a partnership of natural persons, it must engage the partner plus at least one other person, or two persons who are not the partners
- If the contractor is a sole trader, it must engage the sole trader plus at least one other person, or two persons, none of whom is the sole trader
- The contractor must be carrying on a business (includes a trade, profession, or any other activity generally provided for a fee, gain or reward, carried out in systematic and repetitive manner)
- The contractor must have the overall responsibility to fulfil the terms of the contract in the course of the contractor’s business
- The person(s) performing the work under the contract must be engaged directly by the contractor and not the principal, even though the principal may also benefit from those services.
- The services supplied by the person(s) performing the work must be a necessary part of and are supplied in the course of the contractor’s business.
Traditionally, real estate businesses have relied on exemption 2 by ensuring that the contractor is a company or partnership, or a sole trader who engages additional labour to undertake the work undertaken by the contractor.
This may include a spouse or their family members provided that they were genuinely working for the contractor (and not the principal) which the contractor evidenced by way of accounts, payslips, employment agreements and similar documentation.
In relation to exemption 2, if the contractor is listing properties for sale as a conjunction agent and is using his/her/its own business name (and also offers their services to the public generally) this may also assist in treating them as contractors. However the terms of their contractor agreement ought to be reviewed to ensure they are not restricted from doing so.
Also, it is our view that payment of the contractor directly from trust money (rather than the principal’s general account) would be required. The contractor must have their own ABN, real estate licence (especially if a company) and professional indemnity insurance.
Principals should be aware that an exemption will not automatically apply simply because the contractor is a company or trust, or has a separate ABN, real estate licence or professional indemnity insurance. It will depend on the totality of the relationship.
Even if you determine that an agent may be a contractor, they will still be an employee for payroll taxes if there is a contract for services between you unless they fall under one of the exemptions under the Payroll Tax Act.
Furthermore, section 32(2A) if the Payroll Tax Act sets out that a contract will not be exempt if the Chief Commissioner considers the contract or arrangement was entered into with the intention of avoiding payroll tax. If the contractor engages a person who is also is a former employee of the principal to undertake the work, the Chief Commissioner would take that into account as part of the anti-avoidance provisions.
As recommended by REINSW, you should conduct a complete review of all your independent contractor agreements and tax payments to ensure that all taxes have been correctly paid (including payroll tax).
You should also be aware that the OSR is able to access data from sources such as the ATO and WorkCover.
In the event that an underpayment is detected, you should contact the ATO and/or OSR immediately as penalties and interest may be reduced if the underpayment is voluntarily disclosed rather than exposed as a result of an audit.
The focus on the real estate industry is likely to continue, so if you have any doubts about your current arrangements, please contact us as set out below.
For further information, please contact:
Catherine Vincent Senior Associate Phone: (02) 9267 6263 Email: Catherine@jemfish.com.au
Greg Jemmeson Partner Phone: (02) 9267 6263 Email: email@example.com
Disclaimer: The information in this article is correct as at 30 January 2015. This information is not to be taken as legal advice and at all times we recommend you seek independent legal advice regarding your own individual circumstances from your legal representative.