Is the payroll tax constitutionally invalid? The Supreme Court had something to say. – Constitutional and administrative law

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Yesterday’s decision of the High Court v Vanderstock & ors v State of Victoria (2023) HCA 30 (Vanderstock) challenged the constitutionality of state-imposed payroll taxes.

What do I need to know?

The decision in Vanderstock anyone currently affecting payroll tax in Australia because its explicit payment challenges the constitutionality of state-imposed payroll taxes.

Anyone currently involved in a payroll tax dispute or current tax dispute must know that the reasoning behind the High Court’s majority decision can be extended to the imposition of payroll tax.

in Vanderstockthe majority of the Supreme Court held that the Victorian distance-based low-emission vehicle charge (Load from LEFT) was an excise tax imposed by the state. The consequence of the ZLEV charge being an excise tax was that it was constitutionally invalid.

In his minority decision, Edelman J points out that the majority’s reasoning may mean that the payroll tax is now regarded as a state excise tax and therefore also constitutionally invalid.

If the justification applies, it means that any payroll tax assessment can be treated as invalid and the payroll tax paid to date (or at least for the last five years) can be refunded.

What did the Supreme Court decide and why could it make the payroll tax constitutionally invalid?

Vanderstock was a constitutional challenge to the validity of the Victorian ZLEV levy on the basis that it was an excise duty. States are not authorized to impose consumption tax under Article 90 of the Constitution.

Previously, the Supreme Court had held that (among other indicia) excise duty was limited to taxes or charges on goods with some nexus to domestic production or production which forms part of the price paid by the consumer for the goods. Moreover, the excise tax had to have a direct effect on the market in which it was imposed, rather than an indirect effect on another market. These are collectively known as supply-side constraints and directness constraints.

Majority decision in Vanderstock simplified the test for identifying an excise tax on something that was a tax on goods or which could have an indirect effect on the price of goods. This removed the previous limitations on the supply side and directness. In his minority judgment, Edelman J points out that as a result of this change in approach, the payroll tax becomes an excise tax. Specifically, His Honor stated:

An example is a payroll tax with a direct economic effect on the market for the sale of labor power that is used to produce goods. A payroll tax with a reasonably expected direct effect on the market for the sale of labor, not goods, was never an excise tax. But if a reasonably expected indirect economic effect suffices, then the payroll tax could be an excise tax, at least in some of its applications, simply because of its expected indirect effect on a separate market for the sale of goods produced by that labor.

The implication of the High Court decision now is that state taxes that have an indirect effect on the value of goods have the potential to be excise duties. If state payroll taxes are excise taxes, then states are constitutionally prohibited from imposing them.

If the high court majority reasoning of
Vanderstock is that it applies to payroll taxes, then anyone who has paid payroll taxes could be entitled to a refund (at least for the last five years, but potentially longer).


Consequences of the change of approach from the High Court v Vanderstock they are potentially broad and yet to be fully realized. What this case did is:

  • introduce a significant degree of uncertainty regarding the constitutional validity of the payroll tax

  • to give every wage earner the opportunity to consider whether he could challenge the validity of his payroll tax assessment for at least the last five years

  • potentially derailing any current state payroll tax enforcement and ongoing litigation as taxpayers consider whether to raise the constitutionality of their payroll tax assessments as a threshold issue.

© Cooper Grace Ward Solicitors

Cooper Grace Ward is a leading Australian law firm based in Brisbane.

This publication is for information only and is not legal advice. You should obtain advice specific to your situation and not rely on this publication as legal advice. If there are any issues that you would like us to advise you on arising out of this publication, please contact Cooper Grace Ward Solicitors.

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