Decommissioning of HMAS Torrens

Changing the GST was always intended to be hard and is getting harder by the week. Under the so-called intergovernmental agreement on implementation of the GST, any change in the rate or the base required the unanimous approval of the Federal, State and Territory governments. Although that “agreement” can be unilaterally abrogated by Canberra, neither the Government nor the Opposition will admit it now, just as Peter Costello wouldn’t admit it then. Kevin Rudd declared that the GST would be increased over his dead body. The terms of reference of the Henry Review and the Business Tax Working Group excluded any increase in the GST rate or broadening of its base. In the face of persistent calls to raise more revenue from the GST, either to eliminate inefficient State taxes or to improve essential services, the present Government and Opposition continue to rule it out. We can expect those promises to become more emphatic as the election approaches, because if either side equivocates, the other will pounce. Remembering that a broken promise is now classified as a lie, I conclude that increasing the GST, in spite of the formidable forces behind it, is politically impossible.

None of this prevents the GST from being dumped altogether. The Henry Report exploits that loophole in Chapter D (especially ss. D1 & D3-3), where it proposes a “cash-flow tax” (CFT) to replace the GST and payroll tax. As the CFT targets consumption, it should satisfy those who are agitating for expansion of the GST. Yet Chapter D, like Henry’s recommendations for getting rid of conveyancing stamp duty, has so far remained a dead letter.

I conclude that the only way forward is to pull the rug under the existing GST and the “inefficient State taxes” that GST supporters want to replace. When the old taxes are gone, the legislators will choose the replacement(s) from the candidates that happen to be on the table at the time. The CFT is obviously a candidate. Others that have been mentioned include land tax, capital-gains tax, a general super-profits tax, a progressive expenditure tax, combinations of the above, and of course (for Tea Party types) cuts in spending.

Let us therefore consider how the existing taxes can be scuttled.

Conveyancing stamp duty can be hobbled by telling people how to avoid it. If you’re a home owner, you don’t have to pay stamp duty just because you change your address. If you put tenants in the home you own, and rent your new address, there’s no change of ownership, hence no stamp duty, no conveyancing fees, and no agent’s commission; and you can claim “negative gearing” on your old address if the interest and other outgoings exceed the rent (a common situation, although I don’t recommend it). You might pay land tax and rental management fees; but that’s all tax-deductible too, unlike the costs of selling and buying your principal residence. You might eventually pay capital gains tax, but only if you actually make a capital gain (a big “if”). No such safeguard applies to stamp duty, conveyancing fees or agents’ commissions.

Payroll tax can probably be sunk in the High Court. Under s.90 of the Constitution, only the Federal Parliament can impose duties of customs or excise. State payroll tax, in so far as it applies to the value of labour embodied in goods, is in substance a duty of excise on the affected goods.

In Ha v. NSW (1997), the High Court held by a 4-3 majority that an excise is “an inland tax on a step in production, manufacture, sale or distribution of goods”. I submit that paying the workers is such a “step”. The minority preferred a narrower definition, arguing that the purpose of s.90 was to “prevent impairment by the States of the common external tariff,” so that “A State tax which fell selectively upon goods manufactured or produced in that State would be an excise duty…” A domestic payroll tax on labour embodied in goods falls selectively on locally produced goods because it is not levied on the corresponding labour embodied in imported goods. The court unanimously agreed that a tax which is unconstitutional in substance cannot be made constitutional by its form. It is therefore immaterial that payroll tax is levied on labour rather than goods per se. Even the “criterion of liability” test formulated by Justice Kitto in the Dennis Hotels case (1960) would not salvage payroll tax just because it is levied on labour. In Kitto’s words, “a tax is not a duty of excise unless the criterion of liability is the taking of a step in a process of bringing goods into existence or to a consumable state, or passing them down the line which reaches from the earliest stage in production to the point of receipt by the consumer.” Again I submit that paying the workers is such a “step”. To defend payroll tax, one would have to argue that payroll tax is not a tax on goods because it affects both goods and services. I’d rather settle out of court. (But I’m not a lawyer and this article isn’t advice.)

On importation of goods, the GST is a duty of customs. On all other purchases of goods, except perhaps retail purchases (see below), it is a duty of excise according to the majority definition. On services and property, it is neither. None of this offends s.90, because the GST is a Federal tax. But a problem arises under s.55, which says:

Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect.

Laws imposing taxation, except laws imposing duties of customs or of excise, shall deal with one subject of taxation only; but laws imposing duties of customs shall deal with duties of customs only, and laws imposing duties of excise shall deal with duties of excise only.

On account of s.55, the assessment of the GST is in a separate act from the imposition, and the imposition is split into three acts: a customs-imposition act, an excise-imposition act, and a general-imposition act purporting to impose all aspects of the GST that are not customs or excise. But if the general-imposition act is to comply with s.55, all aspects of the GST other than customs and excise must be a single “subject of taxation”. That’s a big call for the following reasons:

(1) The subject of the GST is not simply final consumption, because some entities are input-taxed, so that the GST buried in their prices is not reclaimed by their GST-registered customers, and because the base includes (e.g.) monopoly rights and releases from obligations.

(2) The subject of the GST is not simply value added, for the reasons given in (1), and because input credits for imports are disallowed, and because the taxable value of real property includes the pre-existing value of a natural resource (land).

(3) In the text of the assessment act, the only candidate for the subject of the GST is “supply”, which is first defined as “any form of supply whatsoever” but is then said to include, without limitation, a list of categories which look suspiciously like separate subjects of taxation — the more so because not all of them fall within the common meaning of supply.* From this many-headed concept called “supply”, we are invited to carve out customs and excise, thus destroying any unity that the concept might have had, and to conclude that what is left is a single subject!

(4) One might think that if the general-imposition act dealt with a single subject of taxation, it would be possible to determine one’s tax liability under that subject. But it isn’t. The assessment act specifies the total liability under the three imposition acts, but not the division between them. Neither does case law specify the division, because the High Court has never decided whether “excise” duties include direct taxes on consumption; and at the retail level the GST is apparently on consumption, because the tax invoice purports to collect the tax from the consumer.

(5) While the name of the GST suggests two subjects of taxation — goods and services — the taxable base also includes (e.g.) real property, intangible assets, and releases from obligations. Hence, even if the customs-imposition act and the excise-imposition act exhaust the GST liability of goods, the subject matter of the general-imposition act is not limited to services.

(6) When the GST bills were debated in the Senate, 28 out of 64 senators expressed concern that the general-imposition bill might deal with more than one subject of taxation, and 29 senators supported an unsuccessful motion to have the imposition bills redrafted to ensure compliance with s.55. The Government refused to table its legal advice on the matter, which apparently was not sought until after Senator Harradine raised s.55 in the Senate. If the High Court were bound to find that an act deals with only one subject of taxation simply because a bare majority in each house of Parliament said so (or didn’t care!), that would disqualify the High Court from adjudicating what is clearly a constitutional question.

These issues should be raised by anyone facing prosecution or appealing against a conviction for non-compliance with the GST code, especially if no false pretenses are involved. It would be less prudent to raise them in almost any other context, not least because the validity of the general-imposition act under s.55 has been upheld by a Justice of the Federal Court in O’Meara v. Commissioner of Taxation (2003). However, that judgment addresses only point (3) above. To my knowledge, the same question has not been examined by the Full Federal Court or the High Court and has not been examined in the criminal context, in which the courts are under the gravest obligation to test the validity of the law that has allegedly been breached.

Furthermore, I have long argued that requiring private entities to collect GST (and PAYG income tax) at their own expense violates s.82 of the Constitution, which says that “The costs, charges, and expenses incident to the collection, management, and receipt of the Consolidated Revenue Fund shall form the first charge thereon…” If the drafters of s.82 were thinking only of “costs, charges, and expenses” incurred directly by the Commonwealth, that’s because they never imagined that the legislators would be so backward and oppressive as to require private parties to collect tax from other private parties. If the drafters had intended to allow Parliament not only to compel private tax collection, but to do so without reimbursement of costs, I submit that they would have explicitly excluded the associated costs from the scope of s.82, lest a literal interpretation include them.

To ensure that a consumption tax complies with s.82, one could implement it without tax invoices, e.g. as a cash-flow tax or as a retail sales tax. Either method would tax consumption indirectly and thereby neutralize the constitutional uncertainty over whether a direct tax on consumption is an excise. Thus either method would simplify compliance with s.55. On the first sale of goods after importation, the tax would be a customs duty. On other inland dealing in goods, it would be an excise according to the majority definition. The third imposition act would deal with inland cash flow on non-goods (for a cash-flow tax) or retail sales of non-goods (for a retail tax).

Either method of taxing consumption without tax invoices would amount to a complete replacement of the GST rather than a marginal reform of it. Either method would be capable of replacing more than the existing GST.

But let us not forget that the same outcomes could be achieved by expanding land tax, capital gains tax and super-profit taxes, none of which raise any issues under s.90, s.55 or s.82.


* In other words, some of the provisions defining “supply” are effectively deeming provisions. According to Dawson, Toohey and Gaudron JJ., siding with the majority in the Mutual Pools case (92 ATC 4016, Feb.12, 1992), “…Parliament cannot bring legislation within power by deeming facts to be as they are not or by deeming things to have a character which they do not bear. No more, in our view, can a restriction imposed by the Constitution — as by s.55 — be avoided by deeming facts to be as they are not.” Parliament can, of course, deem things to be what they are not for the purpose of an ordinary act of Parliament, because that is equivalent to amending the act, which Parliament has the power to do. But Parliament by itself does not have the power to amend the Constitution. This point was not addressed in O’Meara v. Commissioner of Taxation. [Note added Jan.19, 2013.]

For the discussion of s.55, I am indebted to D. Cominos & T. Dwyer, “Constitutional Problems in the Goods & Services Tax”, Australian Tax Review 28:69-80 (June 1999), and C.J. Bevan, “Constitutional Aspects of the Goods & Services Tax”, Australian Tax Review 28:173-83 (Sep. 1999), both drawn to my attention by Steven Spadijer.

Moreover, requiring private entities to collect tax seems to amount to civil conscription. Opposition Leader Tony Abbott, in his efforts to hose down the leak of a draft discussion paper on “Developing Northern Australia”, said that “it would be unconstitutional to civilly conscript public servants”. The only reference to civil conscription in the Constitution is in s.51(xxiiiA), by which the Federal Parliament can legislate with respect to “…medical and dental services (but not so as to authorize any form of civil conscription)”. So Abbott evidently believes that the protection against civil conscription is not limited to doctors and dentists. And why should it be? It is more reasonable to suppose that the parenthesized words uphold a more general implied prohibition of civil conscription, which is made explicit in connection with medical and dental services to avoid doubt. That interpretation agrees with the opinion of Justice Murphy, siding with the majority of the High Court in General Practitioners Society v. Commonwealth (145 CLR 532, 1980). It is at odds with the decision of Justice Sundberg of the Federal Court in Halliday v. Commonwealth (FCA 950, Jul.14, 2000). To my knowledge, the issue has not come before the Full Federal Court or the High Court, except for the aforesaid obiter dictum of Justice Murphy. If he and Mr Abbott are right, private parties who are conscripted to collect tax are entitled (at least) to be compensated, as suggested independently by s.82. [Note added (and text last modified) Feb.21, 2013.]