Uber, Payroll Tax and the Contractor Conundrum: What SMEs Must Learn

What makes a worker an “employee” and not a “contractor”? It’s a deceptively simple question with far-reaching consequences. For Uber, the answer could mean tens of millions of dollars in payroll tax. For SMEs, it could mean the difference between compliance and a costly audit.

The NSW Court of Appeal’s August 2025 ruling against Uber has shifted the conversation yet again. While the gig economy was the stage, the legal principles apply far beyond ridesharing, into health practices, professional services, and any business that relies on contractors.

Let’s explore how the courts reached this decision, what it says about the evolving interpretation of the Payroll Tax Act 2007 (NSW), and why SMEs must pay attention.

Division 7 of the Payroll Tax Act 2007 (NSW) introduces the concept of a “relevant contract.” Even where a worker is not a traditional employee, payments to them may still be treated as “wages” if the arrangement falls within this net.

1. Does the contract involve services provided “for or in relation to the performance of work”?
2. Do any exclusions apply (e.g. services that are “ancillary” to the use of goods, or contracts under 90 days per year)?

For years, these provisions have been controversial. Courts have wrestled with the boundary between genuine contracting and disguised employment. The High Court’s 2022 decisions in CFMEU v Personnel Contracting Pty Ltd and ZG Operations v Jamsek signalled a renewed emphasis on the written contract, unless displaced by sham arrangements.

Uber became the next test case.

In September 2024, Hammerschlag CJ in the Supreme Court accepted that Uber’s driver agreements were “relevant contracts,” but found no payroll tax liability.

His Honour reasoned that:

• Uber acted as a payment collection agent, not as an employer paying wages.
• Payments flowed from riders to drivers, merely facilitated by Uber.
• Without “reciprocity” between Uber and drivers, section 35 of the Act was not engaged.

This decision offered comfort to businesses with tri-party payment models, from medical centres to brokers, suggesting that payroll tax might not attach where the business acted as an intermediary.

The NSW Court of Appeal in [2025] NSWCA 172 took a different view, firmly closing that door.

Key findings included:

• Driving is a service to Uber. It underpins Uber’s entire business model. To suggest otherwise was untenable.
• Driving is not “ancillary” to the use of the vehicle. The two are inseparable, and the exemption in section 32(2)(a) did not apply.
• Payments remitted by Uber were “for or in relation to work.” The Court rejected the notion that acting as a payment agent insulated Uber from liability.

By aligning with previous authorities like Thomas and Naaz Pty Ltd v Chief Commissioner of State Revenue (2023) and The Optical Superstore Pty Ltd (2018), the Court signalled consistency: the phrase “in relation to” is deliberately broad. Payments need not be wages in the ordinary sense; it is enough that they bear a sufficient connection to the work performed.

The Uber ruling has implications that extend far beyond the gig economy. SMEs in healthcare, financial services, logistics, and consulting should take note. If you:

• Engage contractors who provide core business services, and
• Act as an intermediary in collecting or distributing payments,

…then the risk of payroll tax applying is high.

The case also illustrates a broader principle: substance will prevail over form. Clever contractual drafting won’t protect businesses if the practical reality resembles employment.

• Audit contractor relationships: Are they genuinely independent, or integral to your operations?
• Review contracts and practices: Do written terms reflect the real-world arrangement?
• Consider payroll tax exposure: Especially where you facilitate payments between clients and service providers.
• Stay updated on appeals: Uber may take the matter to the High Court, but waiting is not a strategy.
• Seek expert advice: Both legal and HR perspectives are critical to navigating compliance.

The Uber payroll tax decision is a turning point. It demonstrates how courts are willing to cut through contractual language and focus on economic reality.

For SMEs, the lesson is stark: if contractors look, act, and operate like employees, expect payroll tax consequences. Reviewing your arrangements now could prevent painful audits later.

At PerformHR, we specialise in helping SMEs navigate the grey zone between contractors and employees. If you’re unsure about your obligations under payroll tax or the Fair Work Act, now is the time to act.

Call us on 1300 406 005 or email info@performhr.com.au