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  • ARTICLE - Australia

    Taking Vanderstock: The Constitutional Validity of State Payroll Taxes?

    01 Nov

    Vanderstock - Introduction

      In a  ruling handed down by the High Court of Australia, the decision in Vanderstock & Ors v the State of Victoria [2023] HCA 30  has raised more than a few eyebrows.   It could be said that Vanderstock has been a Vander-shock (I’ll get my coat.)  

    What has caused these awful puns?

      This judgment calls into question the constitutional validity of State-imposed payroll taxes.   The implications of the decision are far-reaching and impact anyone currently paying payroll tax in Australia.   It is crucial for individuals or entities currently paying payroll tax or engaged in ongoing related disputes to understand the decision.   Further, Vanderstock opens the door to challenging the constitutionality of payroll tax.  


      In the case, the majority of the High Court determined that the Victorian Low Emission Vehicle Distance-based Charge (ZLEV Charge) was, in essence, an excise imposed by the State of Victoria.    Under the Australian Constitution (section 90), states are prohibited from imposing excises.    The consequence of the ZLEV Charge being classified as an excise is that it is now deemed constitutionally invalid.   Justice Edelman, in his minority decision, raises a pertinent point that should send alarm bells ringing for those connected to payroll tax. He highlights that the majority's rationale in Vanderstock may potentially categorize payroll tax as a State-based excise, rendering it constitutionally invalid.   If this legal reasoning is applied, it could mean that any payroll tax assessments may be considered invalid, potentially entitling taxpayers to a refund of payroll tax paid to date, or at the very least, for the past five years.  

    The High Court's Decision and its Implications

      Vanderstock represented a constitutional challenge to the validity of the Victorian ZLEV Charge, with the argument being that it constituted an excise. Section 90 of the Australian Constitution prohibits states from imposing excises.   Previously, the High Court had laid down certain criteria for identifying an excise, including its direct effect in the market and its connection to the production or manufacture of goods. This had come to be known as the supply-side and directness constraints.   The majority decision in Vanderstock marked a significant shift in this approach. It simplified the criteria for identifying an excise to anything considered a tax on goods or one that could have an indirect effect on the price of goods.    This simplification eliminated the previous supply-side and directness constraints. Justice Edelman pointed out that the consequence of this change could potentially classify payroll tax as an excise, stating:  
    "An example is a payroll tax with a direct economic effect in the market for the sale of labor that is used to produce goods. A payroll tax with a reasonably anticipated direct effect in the market for the sale of labor, rather than goods, has never been an excise. But if a reasonably anticipated indirect economic effect is sufficient, then the payroll tax could be an excise, at least in some of its applications, merely because of its anticipated indirect effect in the separate market for the sale of the goods produced with that labor."
      In essence, this change in approach now means that State-based taxes that indirectly impact the value of goods have the potential to be classified as excises. And if State-based payroll taxes are deemed excises, then the States would be constitutionally barred from imposing them.   The application of the High Court's reasoning from Vanderstock to payroll taxes could potentially trigger claims for refunds by anyone who has paid payroll tax for the past five years or more.  


      The Vanderstock decision has introduced a significant level of uncertainty concerning the constitutional validity of payroll tax in Australia.    This ruling offers every payroll taxpayer the opportunity to question the legitimacy of their payroll tax assessments, potentially opening the door for refunds.    Furthermore, ongoing disputes and enforcement actions related to State payroll tax may be derailed as taxpayers explore the constitutional validity of these assessments as a threshold issue.    The full implications of this decision are yet to unfold, but it has undeniably set in motion a significant legal debate with far-reaching consequences.   If you have any queries about the Vanderstock decision, or any other Australian tax matters, then please do get in touch.

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