Massaging the truth about GST

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LAW BRIEFS

CCH New Zealand



Businesses that use contractors to avoid some of the problems that can be associated with permanent employees could be liable for GST on the contractors' earnings.

There is a fine line between contractors who play an integral part in a business, upon whose earnings the business is liable to pay GST and contractors who operate independently and are solely responsible for paying GST on their earnings.

The distinction recently received some attention when the Inland Revenue Department assessed a massage parlour as being liable for GST on the earnings of the women working on its premises. The owners of the massage parlour had always considered the women to be independent contractors who were solely responsible for GST, and objected to the assessment.

The Taxation Review Authority considered the case to be borderline, but found that the massage parlour was not liable for the GST.

It held that the massage parlour merely provided premises for the individual workers to operate their separate businesses of providing massage and associated services to their customers.

The decision, Case U26, provides some valuable guidance on the factors that should be taken into account in deciding whether contractors are an integral part of a business or are operating independent businesses.

It is important to consider whether the customers identify more with the individual contractors or with the business itself. In this case, the judge found that the massage parlour customers attached themselves to individual women and the services they personally provided, rather than to the massage parlour itself. This was evidenced by the fact that many of the customers would have followed their preferred masseuse to other establishments without hesitation.

It is also important to consider the amount of control the business exercises over the contractors.

The massage parlour in this case was selective about the women it allowed to work on the premises, and any women who were considered to have slipped below its high standards were asked to leave. The parlour maintained a roster system that required the women to be available at specified times. Each woman was required to sign agreements, with strict confidentiality clauses, prohibiting her from working at other parlours.

Although this amounted to a substantial level of control, the authority found that it was no more than was necessary for the efficient and profitable conduct of the parlour's business of making the premises available to the workers.

The authority did not think that the massage parlour could be expected to provide a venue and amenities and abandon control completely.

It indicated that there were several factors in this case which were not relevant in considering whether the women were integral to the business and did not detract from the authority's finding:

* The massage parlour's attempts to cultivate a distinctive "corporate identity" or branding to distinguish itself from competing massage parlours. The authority did not consider these efforts to be inconsistent with the activity of the massage parlour being confined to the provision of premises.

* The use of service price menus by the establishment as a guide to prices charged for services offered by the women. The authority viewed the pricing menus as helpful as guides for both the customers and the women and did not consider them to be inconsistent with the parlour merely letting rooms to the women who, in turn, provided services to customers as private operators.

* The single all-inclusive fee charged to customers, as opposed to a door fee payable to the parlour and the cost of other services being negotiated directly with a worker. The authority did not accept that the single payment meant the massage parlour was providing the overall service to the customers rather than the women themselves.

* The initial employment application form which suggested that the workers would be subcontractors. The authority found that, despite what was recorded in the agreements, the women did not, in fact, operate their massage businesses as subcontractors of the massage parlour.

* Auckland-based CCH New Zealand is a tax, management and business law publisher. For further information telephone 0800 500 224 or visit the web site at www.cch.co.nz.

The premises and management are not always crucial to a business activity.