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What’s Emerging: NSW Supreme Court decision concludes Uber not liable for NSW payroll tax on payments to drivers

23 September 2024

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On 6 September 2024, Hammerschlag CJ (in Equity) handed down his decision in Uber Australia Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 1124.

This case concerns the application of the Contractor Provisions in Division 7 of the Payroll Tax Act 2007 (NSW) (the Act). Those provisions seek to treat payments made by a principal, to an independent contractor, as “wages” provided that there exists a “relevant contract” between the parties (subject to exclusions), and provided that the payment under that “relevant contract” is “for or in relation to the performance of work”.

In determining that Uber Australia Pty Ltd (Uber) was not subject to NSW payroll tax on payments it made to drivers, the Court concluded that, under Uber’s contracts with drivers and riders, Uber made payments to drivers as a “payment collection agent” in respect of a rider’s obligation to pay the driver. The amounts were not paid by Uber to drivers “for or in relation to the performance of work” provided by the driver to Uber.

Pertinently, Hammerschlag CJ reasoned that a “relevant contract” exists between Uber and the driver. However, notwithstanding that a “relevant contract” exists, the payments made to the drivers by Uber are not wages given that the payment it makes is done in its contractual capacity as a “payment collection agent”.

Subject to any appeal proceedings, the outcome from this decision is significant, particularly in the context of recent decisions in other industries which could be viewed as somewhat parallel. For example, common across the medical industry are arrangements where patients channel payments to medical practitioners through the medical centre at which the services were supplied. In this regard, the approach of the Court in Uber will likely be evaluated by many in considering their own circumstances.

Key facts

Uber has developed two software “apps”, one for drivers and one for riders. When a rider makes a trip request through the rider app, the ride is generally passed on to the nearest driver via the driver app (through a batched matching process). When a driver accepts a trip, at the end of the trip, the rider pays the fare electronically, which is calculated on a base fare, plus time and distance basis. Uber deducts a service fee from the rider’s payment and pays the balance to the driver.

The contracts between drivers and Uber require, amongst other things, that the driver perform trip requests once accepted, and provide that the driver will be asked to provide a rating for the rider. The contracts expressly note that the driver is entitled to charge the rider a fare and that Uber is appointed as a “limited payment collection agent” for the driver, where Uber will remit the monies less any service fee. There was also a referral program whereby drivers were paid for successful referrals of potential new drivers.

The contracts between riders and Uber provided, amongst other things, that the use of third party provider (i.e. the driver) services by the rider may incur charges and that Uber will facilitate the rider’s payment of those charges on behalf of the third party provider as a “limited payments collection agent”. The contracts noted that payment in this matter is considered the same as payment made directly by the rider (and not Uber) to the third party provider (the driver).

Key principles

“Relevant contract”

To be considered a “relevant contract” under section 32(1)(b) of the Act, it is required that Uber is supplied with “services” of drivers “for or in relation to the performance of work” under a contract.

In this regard, the Chief Commissioner of State Revenue argued that the three activities of driving, rating and referring, either on their own or in combination, are “services” provided by drivers to Uber - the “trichotomy analysis”. The Court expressed reservations that this approach is correct, noting that the activities of the drivers should be seen “as a whole” and, on this holistic approach, if “what the drivers do is to supply services to Uber, it is not because some part of what they do might constitute a service, but because what they do as a whole, does”.

Notwithstanding this, Hammerschlag CJ ultimately proceeded with the “trichotomy analysis”. In doing so, he concluded that the term “services” is of “wide import” and as such, driving, rating and referring are each “services”.

With respect to whether the “services” are “for or in relation the performance of work”, Hamerschclag CJ concluded that driving is “undoubtedly work” because it makes “the (Uber) system work”, and rating and referring is “sufficiently connected” to the driving to make those “in relation to” work. On this basis, the threshold test for the existence of a “relevant contract” was met.

The “ancillary” exclusion

Section 32(2)(a) of the Act provides an exclusion to a “relevant contract” where the “services” supplied to Uber by a driver are “ancillary” to the use of goods (in this case, the vehicle), where the goods are the property of the driver.

The Court observed that the term “ancillary” means “supplemental or auxiliary or accessory”, however does not require that the services are “subordinate or subservient” or “minor in quantitative terms”, and can include services which “tend to assist, go naturally with, or are in substance bound up with the use of the goods”.

Hammerschlag CJ concluded that driving cannot be viewed as “ancillary” to the use of the vehicle, as driving and use of the good (the vehicle) are one and the same. Rating, however, is “ancillary” as a driver cannot rate a rider if they have not used the vehicle. With referring, he concluded that this is not ancillary to use of any vehicle, given the referred person may never drive. As such, rating, as an individual “service” in the “trichotomy analysis”, comes within section 32(2)(a).

However, section 32(2B) of the Act provides that the “ancillary” exclusion does not apply to a contract where there are “additional” services or work (of a kind not covered by the exclusion) supplied or performed under the contract. Given his finding that referring was not “ancillary” to the use of the vehicle and therefore represented an “additional” service, section 32(2B) was enlivened to deny the exclusion.

The “90-day” exclusion

Section 32(2)(b)(iii) of the Act provided an exclusion to a “relevant contract” where the “services” supplied to Uber by a driver are supplied for less than 90 days during the financial year.

Uber argued that the meaning of “day” must have a de minimis threshold, with a comparator being the Passenger Vehicle Transportation Award 2010 which provides that a full-time employee in the industry works an equivalent of five 7.6-hour days. Therefore, a 90-day threshold means 90 x 7.6 hours.

Hammerschlag CJ rejected this argument as “untenable”, reasoning that “no foundation for it can be found within the words of the Act”. The implication of this was that, where Uber is supplied “services” in a day, that day counts as a whole day (and not a partial day) for the purpose of the 90-day calculation.

Amounts paid or payable for or in relation to the work

Having concluded that the threshold test under section 32 was satisfied and subject to the application of exemptions, the remaining matter in question was whether an amount was paid by Uber which could be taken to be a “wage” under section 35. Under section 35, the amounts paid or payable under the “relevant contract” are taken to be payroll tax wages where it is “for or in relation to the performance of work”.

Hammerschlag CJ noted that Uber’s argument, that the term “for” requires that the payment is in the character of remuneration, has force. In this regard, he concluded that the payments made by Uber do not have that character.

With respect to the term “in relation to”, he observed that, whilst it is of “wider ambit” than “for” and does not have to have the character of remuneration, “some form of reciprocity or ascertainable calibration between the money paid and the work done is required”. In this regard, the Court observed that the overall intention of the Contractor Provisions, is “to capture several means of disguising the employer-employee relationship by contractual arrangements which had been increasingly resorted to by persons seeking to defeat the objects of the Act”. Hammerschlag CJ noted that this was not the case for Uber and drivers.

Further, Hammerschlag CJ referred to the High Court decision in CFMEU v Personnel Contracting Pty Ltd (2022) 275 CLR 165, which in His Honour’s view, compelled that the characterisation of the payments must proceed by reference to the written contracts which “reflect and govern the legal relationship between the contracting parties and by reference to the rights and obligations to which the contracts give rise”. In this regard, from the written contracts in place, the Court observed that: “It is not Uber who pays the driver. The rider does that. Uber is a mere “payment collection agent””.

As noted, the terms of the contract can be referenced as being relevant to this conclusion, as they specify payment by a rider to Uber “shall be considered the same as payment made directly by the rider to the third party provider”, and that “Uber will facilitate the rider’s payment of the applicable charges on behalf of the third-party provider as the provider’s limited payment collection agent”.

Having made these findings and returning to the question of whether payments by Uber to drivers were “for” or “in relation to” work performed under the contract, Hammerschlag CJ acknowledged that there is some form of relationship between the payments and the work performed under the contract. However, in the context of his earlier commentary regarding the purpose of the Contractor Provisions, and having focussed his analysis on the written terms of the contract, his Honour concluded: “I do not consider that that relationship [between the payment and the work] is one which can fairly be described as being “in relation to” the work, in the context in which that phrase appears in s 35(1) and with the objects of Division 7 squarely in mind. There is no element of reciprocity or calibration between the driver and Uber or the rider and Uber with respect to the money paid by the rider. Those elements exist only between the driver and the rider”.

On this basis, it was determined that payments made by Uber to drivers ought not be viewed as ‘wages’ under section 35, meaning while a relevant contract existed, there were no ‘wages’, and no payroll tax liability arose.

Key takeaways

One of the key guiding principles in Hammerschlag CJ’s approach was to have regard to the intended objective of the ‘Contractor Provisions’ within Division 7; seemingly, being to ensure disguised employer-employee relationships are brought into the tax net. Observing that Uber’s relationship with drivers did not represent such a disguised relationship, he considered that what section 35 requires is a reciprocation between the payment and the work performed under the “relevant contract”. This requires a review of the written contract, which in this case supported a characterisation of the payments in question being paid by Uber, in its capacity as a “collection agent”.

The Uber judgment, in particular the approach to characterising payments under section 35, may appeal to some as applicable to industries and business structures involving similar tri-party arrangements, whereby an intermediary collects payments from an end user and remits those payments (often less their service charge) to the relevant service provider. However, one should proceed with caution in assuming that the Uber outcome precludes the application of payroll tax in all such arrangements, particularly should the decision be appealed.

For example, in the recent judgment of the NSW Court of Appeal in Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue [2023] NSWCA 40, Leeming JA seemingly cautioned against a perspective that only tax avoidance arrangements came within the scope of the Contractor Provisions - “I do not accept this submission. It amounts to the assertion that the scope of the Division is confined to “tax avoidance”. Even assuming that concept had some precise legal meaning, to accept the applicant’s submission amounts to placing a gloss on the statutory text”.

Similarly, in the Victorian Supreme Court’s decision in Commissioner of State Revenue v The Optical Superstore Pty Ltd [2018] VSC 524, Croft J concluded that the phrase “in relation to” did not require a relationship that is “direct and immediate”, nor did it require that payments “must be in the nature of consideration for the performance of work”. A similar conclusion was reached by Richmond J in the matter of Loan Market Group Pty Ltd v Chief Commissioner of State Revenue; Loan Market Pty Ltd v Chief Commissioner of State Revenue [2024] NSWSC 390, a decision in which His Honour found “the phrase “relating to” or “in relation to” requires no more than a relationship, whether direct or indirect, between two subject matters..”. Notably, Hammerschlag CJ made direct reference to Richmond J’s approach in his judgment, preferring an interpretation which requires a degree of connection, for the purpose of the facts before him.

What is clear is that the Contractor Provisions and their interpretation continues to evolve, and remains a particularly active issue for industries with similar tri-party/intermediary arrangements. If you have any questions regarding the Uber decision, how this may impact you, or the state of the Contractor Provisions more broadly, please reach out to your PwC Employment Taxes specialist for assistance.