This article first appeared in TaxVine, a members newsletter from The Tax Institute.
On 6 September 2024, the New South Wales Supreme Court delivered its decision in Uber Australia Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 1124 (Uber). The Court considered whether Uber’s payments to drivers were subject to payroll tax, ultimately deciding in favour of Uber and overturning the Chief Commissioner’s assessments of approximately $81.5 million.
The Uber case represents the first instance of judicial consideration of the application of the contractor provisions to a gig economy platform operator. As the contractor provisions are largely harmonised across all States and Territories except for Western Australia, this decision is expected to significantly impact payroll tax regulation across Australia.
Specifically, it may influence how the NSW State Revenue and other States’ and Territories’ Commissioners apply the payroll tax contractor provisions to rideshare and delivery operators with similar models to Uber, as well as gig economy platforms operating in other industries. This decision could also influence the application of payroll tax to other businesses beyond the gig economy, such as those in the financial and health services sectors.
The Chief Commissioner has 28 days to appeal the decision to the NSW Court of Appeal.
Background
Under Uber’s rideshare operations, drivers use Uber’s platform to connect with riders and provide them with transportation services. Riders pay fares through Uber’s app, from which Uber deducts a service fee before paying the balance to drivers.
The Chief Commissioner issued payroll tax assessments to Uber, asserting that the payments from Uber to drivers constituted wages subject to payroll tax under the Payroll Tax Act 2007 (NSW) (the Act).
Key issues
- Relevant contracts: The primary legal issue was whether Uber’s contracts with its drivers qualified as ‘relevant contracts’ under paragraph 32(1)(b) of the Act.
- Statutory exclusions: If Uber’s contracts were ‘relevant contracts’, whether any statutory exclusions under subsection 32(2) of the Act would apply to exempt the payments from payroll tax. The Court considered exclusions for ancillary services for the use of the vehicle, services provided for less than 90 days, services provided to the public generally, and services provided by two or more persons.
- Nature of payments: The core issue was whether the payments made by Uber to its drivers were ‘for or in relation to the performance of work’ under section 35 of the Act.
Court’s findings
Relevant contracts
The Court’s analysis was based on the services provided to Uber, including:
- driving services — the core service whereby drivers transport riders;
- rating services — drivers provide feedback about riders; and
- referring services — drivers refer potential new drivers to Uber.
The Court held that the contracts between Uber and its drivers were ‘relevant contracts’ for payroll tax purposes. The Court considered that the driving services were ‘for or in relation’ to the performance of ‘work’. Whether the rating and referring services were also ‘work’ was not critical.
Statutory exclusions
The Court reviewed the various statutory exclusions and generally concluded that, subject to some exceptions, these exclusions were either unavailable or unable to be substantiated by Uber.
- Ancillary services: The exclusion under paragraph 32(2)(a) would have applied to services that were ancillary to the use of the drivers’ vehicles. The Court found that while some services (such as rating) might qualify as ancillary, the driving and referring services did not. The statutory carve-out under subsection 32(2B) applied which prevented Uber from relying on this exemption.
- 90-day rule: The exclusion under subparagraph 32(2)(b)(iii) would have applied if the services provided by a driver were supplied for less than 90 days during the financial year. Uber was unable to meet the 90-day threshold as the Court interpreted a day of service to be any day a driver provided any service, regardless of the number of hours worked. Uber’s proposed calculation method, based on total hours worked, was rejected.
- To the public generally: The exclusion under subparagraph 32(2)(b)(iv) would have applied if Uber could have established that drivers provided services ‘to the public generally’, where a particular driver ordinarily performed taxi or hire car transport services. The Court found that Uber did not provide sufficient evidence regarding the frequency and nature of these services.
- Two or more persons: The exclusion under subparagraph 32(2)(c)(i) applied to partner operators who supplied two or more drivers. The Chief Commissioner conceded this point, leading to adjustments in the assessments for these partners, however, this exclusion was not applicable to individual drivers.
Payments not wages
The Court’s critical finding was that the payments from Uber to the drivers were not ‘for or in relation to the performance of work’ under section 35. The key reasons included:
- Payment flow: The Court found that the payments were received by Uber from riders in its capacity as a ‘payment collection agent’ and were subsequently made to drivers as merely a distribution of funds collected and were not directly related to the work performed.
- Legislative purpose: The Court acknowledged the legislative intent behind Division 7 of Part 3 of the Act (the contractor provisions) was to capture disguised employer-employee relationships. It found that Uber’s structure was not designed to evade tax obligations but to facilitate transactions between riders and drivers.
Outcome
The Court concluded that the payments made by Uber to the drivers were not wages for payroll tax purposes. Consequently, the Chief Commissioner’s assessments totalling $81.5 million were overturned and Uber was not required to pay the premium interest component on the assessments due to its cooperation and the late concessions made by the Chief Commissioner.
Implications
- Impact on gig economy: The Court’s ruling provides much-needed judicial guidance for rideshare and delivery platforms on their payroll tax obligations, potentially affecting the application of payroll tax to contractors engaged in other gig economy businesses with similar platform-based models.
- Guidance for the State Revenue Office and taxpayers: The Uber decision underscores the importance of analysing both contractual agreements and the nature of payments in determining payroll tax liabilities. This case highlights that even if there is a ‘relevant contract’ and statutory exclusions may not apply, it is still necessary to establish a connection between the payments made and the work performed.
- Future legal developments: The Uber decision demonstrates the difficulties of applying the established payroll tax principles to fit the unique contours of gig economy operations. The decision may prompt legislative reviews or reforms to address gaps in the Act and adapt them to modern business models. The Chief Commissioner has 28 days to appeal (until 4 October 2024), which could further refine these issues.
Closing comments
Overall, this decision is a significant development in payroll tax law, particularly in the context of the evolving gig economy, and sets a precedent for how such arrangements may be treated under current legislation.
