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Case Update: New South Wales (NSW) Supreme Court holds Uber not liable for payroll tax on amounts paid to drivers, as payments are not deemed to be wages
On 6 September 2024, the NSW Supreme Court ruled in favour of Uber in the case Uber Australia Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 1124.
The case examined the application of the "relevant contract" provisions under thePayroll Tax Act 2007 (NSW)(The Act) to payments made by Uber to drivers and riders. Like other recent cases involving multi-party business models,1 the case explored:
- Whether there was a service provided to Uber that gives rise to a 'relevant contract' under section 32(1)(b);
- Whether any of the exemptions in section 32(2) applied; and
- Whether the payments by Uber were 'for or in relation to the performance of work' (as required under section 35 of the Payroll Tax Act for payroll tax to apply).
While the first two questions were largely decided in favour of the Commissioner, Uber's assessments were ultimately overturned as the third (and critical) question was decided in favour of Uber. While there was held to be relevant contracts that were not exempt, payroll tax was held not to apply as there was no 'payment for or in relation to the performance of work' under the relevant contract.
The Chief Commissioner has 28 days from the date orders are handed down to file an appeal to the NSW Court of Appeal.
Key Takeaways
- Uber was successful in its challenge of payroll tax assessments totalling approximately $81.5 million.
- The decision concluded that the payments made by Uber were not taxable wages as Uber was a 'mere collection agent' and the requirements of section 35 of the Act were not satisfied. This is contrary to the conclusions reached in other recent decisions, in particularThomas and Naaz Pty Ltd v Chief Commissioner of State Revenue2 (Thomas and Naaz), concerning medical practices, and the position of the Revenue Offices in public rulings3.
- Other businesses that collect payments on behalf of others may consider reviewing their arrangements and the current payroll tax treatment adopted. This may include other participants in the gig economy, medical practices and certain financial services businesses. Subject to careful consideration of the applicable contracts in place, it may be similarly arguable that the payments fall outside of payroll tax where there is insufficient reciprocity between the payments and services received.
- However, caution should be exercised. It is anticipated that the decision will be appealed by the Chief Commissioner of State Revenue, and so it's possible the decision could be overturned. If you are seeking to rely on the Uber decision to support your current payroll tax treatment, it is strongly recommended that your position is thoroughly considered and documented in written advice.
- The decision also demonstrates that it's difficult to argue that a relevant contract does not exist pursuant to section 32(1)(b) of the Act, when there are any services identifiable in a contract. Taxpayers will more likely achieve success by evidencing that one or more exemptions apply or demonstrating that there are no payments that enliven section 35(1).
- Taxpayers relying on exemptions should also be particularly mindful of the 'carve-out' in section 32(2B) which denies the application of an exemption if additional services are provided by the contractor that do not qualify for the exemption.
Please contact us if you would like to discuss the potential implications of the decision for your business, or the application of the relevant contract provisions more broadly.
Background
Uber operates a 'rideshare' system through two apps—the Driver App and the Rider App—which serve as a platform connecting drivers (operators of vehicles) and riders (customers). Riders are charged a fare by the driver based on time, distance and tolls. Payments are collected by Uber and paid to the driver, after deducting a service fee (typically between 20-25 percent of the fare).
The NSW Chief Commissioner of State Revenue assessed Uber for payroll tax under the relevant contract provisions. The payments collected and paid to the drivers were treated as taxable wages subject to payroll tax. The assessments totalled approximately $81.5 million for six financial years between 2015 and 2020. Uber's objection to the assessments was disallowed and, accordingly, Uber sought a review of the decision in the NSW Supreme Court.
The contracts between Uber and the drivers contained the following common terms (among others):
- That Uber does not provide transportation services and is not a transportation carrier, but that its business is to provide access to its lead generation services rendered via the apps for a service fee;
- an acknowledgement that in providing services to riders, the driver or partner has a legal and business relationship with the rider and not Uber;
- requirements for drivers to exercise due care and skill when transporting riders, and to comply with Uber's policies and terms;
- policies that include an incentive program under which drivers are paid referral fees for introducing new Uber drivers; and
- that the driver is entitled to charge the rider a fare for each completed trip and that Uber is a limited payment collection agent and will collect the fare on behalf of the driver.
Invoices issued to riders include the driver's details and Australian Business Number (ABN) as supplier. The apps also feature a rating system, allowing drivers and riders to rate each other, with Uber collecting this feedback.
The Decision
Was there a relevant contract?
In its analysis, the Court focused on three distinct but related services provided by drivers to Uber, as put forward by the parties. These services included:
- Drivers transporting riders (i.e., "driving");
- Drivers giving feedback about riders (i.e., "rating"); and
- Drivers referring individuals to Uber to become drivers (i.e., "referring").
Hammerschlag CJ was critical of this 'trichotomy analysis' and said that separating the individual obligations may be artificial. He was of the view that a 'holistic approach' would be preferable, as adopted by Leeming JA in Thomas and Naaz. However, this was strongly opposed and Hammerschlag CJ ultimately proceeded using the trichotomy analysis.
The Court held that the contracts between Uber and its drivers constituted "relevant contracts" under section 32(1)(b) for payroll tax purposes. This determination was based on the finding that Uber was supplied with the services of individuals for or in relation to the performance of work, and that these services were provided under a contract.
The Court found that the driving services clearly constituted the performance of "work." It was unnecessary to determine whether the rating and referring services also qualified as "work."
Moreover, the Court concluded that, despite drivers and partners having the right to decide when to provide services (e.g. by using the Driver App or referring new drivers), the obligations they undertook when exercising that right were governed by the terms of the contracts. Therefore, the services provided were considered to be supplied to Uber under contract.
Applicability of the Exclusions Under the Act
The Court also considered several exclusions under section 32(2) of the Act, and with a few exceptions, held that the statutory exclusions relied on by Uber were either not applicable or insufficiently supported by evidence.
Services ancillary to the use of a vehicle (32(2)(a)
Ubersought to argue that the services provided to Uber were ancillary to the use of a vehicle that is the property of the driver. It was accepted that 'rating' was ancillary but the services of 'driving' and 'referring' were not. Accordingly, the exemption was not available.
Service provided on less than 90 days
Uber sought to argue that the '90 day' exclusion should be satisfied where the total hours of annual driving divided by a notional 'day' of 7.6 hours came to a result of less than 90 days. This is contrary to the longstanding approach adopted by the Commissioner that treats any services performed on a day as a 'day' in the context of the exemption. Hammerschlag CJ rejected Uber's proposed approach. He held the Chief Commissioner's construction accorded with the plain English meaning of the exemption and that the selection of 7.6-hour days is random and imports ambulatory operation.
Services provided to the public generally
Uber argued that drivers that held taxi licenses and hire car licenses should be exempt on the basis this evidences that the drivers provide services of the same kind "to the public generally" under section 32(2)(b)(iv) of the Act. However, this was rejected as there was no evidence led by Uber as to the frequency of taxi or hire car driving by those drivers, to enable the Court to conclude that they ordinarily engaged in that activity.
Services performed by two or more persons
Uber was able to partially rely on the exclusion under section 32(2)(c)(i) of the Act. The Chief Commissioner conceded that the exclusion applied for partners who supplied two or more drivers.
'Carve-out' in section 32(2B) of the Act
His honour also considered the application of section 32(2B) of the Act, which is a provision that effectively denies the application of an exemption where additional services are provided that do not qualify for the exemption. This provision was inserted into the Act following the decision in Smith's Snackfood Company Ltd v Chief Commissioner of State Revenue4.
The provision was recently applied to the detriment of another taxpayer inBSA Ltd v Chief Commissioner of State Revenue5.
The Court found that the "rating" services provided by drivers toUberwas for or in relation to the performanceofwork that was "ancillary" to the useofgoods/vehicles which were the propertyofthe driver or partner. However, the Court held that the driving and referral services were not ancillary to the use of the vehicle. As a result, the statutory carve-out under section 32(2B) was triggered, excluding Uber from the ancillary services exemption.
Hammerschlag CJ also considered submissions from the Chief Commissioner that the 'additional services' contemplated by the carve-out could be provided by either party to the relevant contract (i.e. that services provided by Uber to the drivers could invalidate the application of exemptions.) However, this was rejected. The additional services must be provided by the same party that is supplying the services to which the exemption is being applied.
Whether amounts paid or payable by Uber to drivers were "for or in relation to" work
Whilst Uber had been largely unsuccessful with respect to all prior arguments, critically the Court found that there was an insufficient connection between the payments made by Uber to the drivers and the work performed under the Driver Contracts and Partner Contracts to classify those payments as being "for or in relation to" that work. Consequently, the payments did not fall within section 35(1) of the Act and were not considered wages for payroll tax purposes. This meant payroll tax did apply, and Uber's appeal was successful.
The Court took a narrower interpretation of this phrase compared to that inThomas and Naaz Pty Ltd v Chief Commissioner of State Revenue6 (regarding medical centres). In the present decision, the Court required "some form of reciprocity or ascertainable calibration between the money paid and the work done". Hammerschlag CJ had regard to the statutory context of Part 7 of the Act, noting the overall intention of the relevant contract provisions was to capture schemes that disguised employer-employee relationships to avoid payroll tax.
Crucially, regarding the driving services, the Court highlighted that, according to the express terms of the contracts, it was the rider who paid the driver, not Uber. Uber was merely acting as a "mere collection agent" with respect to these transactions. In this respect, the Court concluded that there was:
"No elementofreciprocity or calibration between the driver andUberor the rider andUberwith respect to the money paid by the rider. Those elements exist only between the driver and the rider. The payment here is made pursuant to an obligation to account, and no more. What the rider pays the driver is for or in relation to the work done by the driver. WhatUberpays the driver is in relation to the paymentUberhas received, not in relation to the work itself."
Therefore, the amounts paid or payable by Uber to the drivers were not held to be "for or in relation to the performance of work" relating to a relevant contract and not deemed to be wages for payroll tax purposes.
Hammerschlag CJ's analysis with respect to section 35 was relatively brief, particularly given the potentially far-reaching consequences of this view. His analysis also did not dissect and contrast the Courts' approach to section 35 adopted in earlier payroll tax decisions, though the decisions inLoan Market7 and Optical Superstore8 were cited briefly.
While this aspect of Hammerschlag CJ's decision is a welcome development for taxpayers, we expect the Chief Commissioner will appeal the decision in order to further test whether this is the proper application of section 35. Unfortunately, we may need to wait a little longer for certainty with respect to the application and scope of these complex provisions.
Footnotes
1 For example, recent cases concerning medical practices and mortgage aggregators/brokers.
2 [2023] NSWCA 40
3 For example, PTA041
4 [2013] NSWCA 470
5 [2023] NSWCATAP 159
6 [2023] NSWCA 40
7 [2004] NSWSC 390
8 [2019] VSCA 197.
Originally published 05 October 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
