A recent decision of the NSW Court of Appeal in Chief Commissioner of State Revenue v Uber Australia Pty Ltd has reinforced the risks faced by businesses engaging contractors.

As a result of the decision, Uber now faces an $81 million payroll tax bill (plus interest), for payments it made to drivers during the 2015 and 2020 financial years.

While the decision may be appealed further, it sends a clear message to business owners: relying on contractor arrangements (even where contractors exhibit a high degree of autonomy) will not typically shield you from a payroll tax liability, not to mention the superannuation headaches that contractors can bring. Be warned: regulators have a constant focus on contractor-related non-compliance.

What does the Uber case mean for businesses?

The Court found that driver payments made by Uber were “for or in relation to the performance of work” and therefore taxable wages for payroll tax purposes.

This is despite the fact that fees paid by users of Uber’s service were ultimately paid to the drivers (less a service fee earned by Uber). Uber contended that they were acting as a mere “collection agent” and the drivers were providing services to riders (not Uber). However, the court ultimately found that the contractors were providing services to Uber as a critical part of its business, and that the provisions of the NSW Payroll Tax Act were sufficiently broad tax these arrangements.

Whilst each State’s Payroll tax legislation is slightly different, there are significant cross overs in respect to contractors. There are a number of “contractor exemptions” under Payroll Tax legislation, although many of these did not apply to Uber’s arrangements.
Businesses should be warned that this issue is not confined to ridesharing services. The same reasoning could be applied across any number of industries where contractors are integral to the business model, including (but not limited to):

• Professional services firms
• Medical practices and allied health practices (see our article here on the decision in Thomas and Naaz for our insights on this sector)
• Construction companies (e.g. subcontractors and tradespeople)
• Transport and logistics companies (e.g. truck drivers who are not employees)

What other risks are also relevant to businesses engaging contractors?

Payroll tax is not the only headache faced by businesses engaging contractors – superannuation continues to be a major risk for businesses who engage sole trader contractors.

Where individual contractors are deemed to be employees for payroll tax purposes, superannuation obligations commonly follow. Businesses may find themselves liable for any unpaid contributions (currently calculated at 12%), penalties (potentially up to 200% of the superannuation shortfall amount) and interest charges. None of these amounts will be tax deductible. Further, company directors may be held personally liable for unpaid superannuation amounts in some circumstances. Given that there is no amendment period for superannuation, potential exposures can go back to 1992. So, any non-compliance in respect of superannuation for individual contractors engaged over many years can blow a massive hole in a businesses’ (and potentially their directors’) balance sheet.

What should businesses do in response to this decision?

It’s not just good governance to ensure that your business regularly reviews its contractor engagements for compliance with payroll tax and superannuation laws, it’s a financial necessity. Significant and pervasive contractor issues can sink a business.

To mitigate ongoing risks, you may consider designing specific contractor engagement policies for your business.

Complex circumstances or arrangements often require expertise in both payroll tax and superannuation laws. Pilot’s advisors have experience in these areas can help businesses rectify any past errors, steady the ship and plan for the future.

The bottom line: review your contractor arrangements

The decision in the Uber case is another wake-up call to all businesses engaging contractors, particularly in service-based industries.

Both payroll tax and superannuation requirements for contractors are constantly under scrutiny by revenue authorities, and historical liabilities loom large for non-compliance. Review your arrangements now to avoid liabilities and penalties that could jeopardise your business.

Contact Pilot

To discuss taxation issues that contractors can create, contact Murray Howlett, Tom Howard or your Pilot Advisor on (07) 3023 1300.