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19 October 2023

Is payroll tax constitutionally invalid? The High Court has had something to say.

Authored by: Fletch Heinemann and Tom Walrut
Yesterday’s High Court decision in Vanderstock & ors v the State of Victoria [2023] HCA 30 (Vanderstock) has called into question the constitutional validity of State-imposed payroll taxes.

What do I need to know?

The decision in Vanderstock affects anyone currently paying payroll tax in Australia as it explicitly calls into question the constitutional validity of State-imposed payroll taxes.

Anyone currently paying payroll tax or in a current payroll tax dispute needs to know that the rationale of the majority decision of the High Court can be extended to the imposition of payroll tax.

In Vanderstock, the majority of the High Court held that the Victorian Low Emission Vehicle Distance-based Charge (ZLEV Charge) was an excise imposed by a State. The consequence of the ZLEV Charge being an excise was that it was constitutionally invalid.

Edelman J, in his minority decision, points out that the majority’s rationale may mean that payroll tax is now deemed a State-based excise, and therefore also constitutionally invalid.

If the reasoning applies, this means any payroll tax assessments may be held to be invalid and a refund may be due for payroll tax paid to date (or at the least for the past five years).

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

Vanderstock was a constitutional challenge to the validity of the Victorian ZLEV Charge on the basis it was an excise.  States are not entitled to impose an excise under section 90 of the Constitution.

Previously the High Court had held that (amongst other indicia) an excise was limited to taxes or imposts on goods with some connection to home production or manufacture that forms part of the price paid by a consumer for the goods. Further, an excise needed to have a direct effect in the market in which it was imposed rather than an indirect effect on a different market. These together are known as the supply-side and the directness constraints.

The majority decision in Vanderstock simplified the test for identifying an excise to something that was a tax on goods or which could have an indirect effect on the price of goods. This removed the previous supply-side and directness constraints. Edelman J points out in his minority judgement that a consequence of this change in approach is making payroll tax an excise. Specifically, His Honour stated:

An example is a payroll tax with a direct economic effect in the market for the sale of labour that is used to produce goods. A payroll tax with a reasonably anticipated direct effect in the market for the sale of labour, 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 labour.

The consequence of the High Court decision is now that State-based taxes that have an indirect effect on the value of goods have the potential to be an excise. If State-based payroll taxes are an excise, then the States are constitutionally barred from imposing them.

If the High Court majority’s rationale from Vanderstock is held to apply to payroll taxes, then anyone who has paid payroll tax could be due a refund (for at least the past five years but potentially longer).


The consequences of the change in approach from the High Court in Vanderstock are potentially wide ranging and are yet to fully play out. What this case has done is to:

  • introduce a significant level of uncertainty regarding the constitutional validity of payroll tax
  • give every payroll taxpayer the opportunity to consider whether they could challenge the validity of their payroll tax assessments for at least the last five years
  • potentially derail any current State payroll tax enforcement actions and ongoing disputes as taxpayers consider whether to raise the constitutional validity of their payroll tax assessments as a threshold issue.

If you would like to discuss the Vanderstock decision and its impact on your current payroll tax assessment or your current payroll tax disputes, please contact a member of our team.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.

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Fletch Heinemann
Sarah Lancaster
Tom Walrut
Senior Associate

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