The Australian Master Tax Guide by CCH is likely to become compulsory reading for one and all State MP before the State Election of March 2007 AD.
Revenue Sharing: The GST Experiment circa 2007 ADBohemians, Iron Curtain Breakers and other mischief makers have long recognised that the study of Australian tax law is an exciting discipline. We should not use this guide as a cruch, but instead always look at it as the working tool to unlock the intricacies and complexities of Australian income tax law and practice.
The Commonwealth Parliament derives its power to enact income tax legislation from the Constitution; at the same time, the Constitution imposes restrictions on this legislative power. The empowering provision is s 51(ii) by which the parliament has, subject to the Constitution, "power to make laws for the peace, order, and good government of the Commonwealth with respect to ... (ii) Taxation; but so as not to discriminate between States or parts of States''. Other relevant provisions in the Constitution are s 53, 55, 99, 114 and 117.
TAX LAWS MUST NOT DISCRIMINATE BETWEEN STATES Section 51(ii) of the Constitution expressly prohibits any federal tax which discriminates between states or parts of states. In addition, s 99 of the Constitution provides that the Commonwealth shall not by any law or regulation of trade, commerce or revenue, give preference to any one state or any part of it over another state or any part of it.
The High Court has held that a regulation providing for the different valuation of live stock for different states violated s 51(ii) (Cameron (1923) 32 CLR 68; R & McG 40), but that an Act which imposed stamp duty in respect of Commonwealth places did not, even though the scheme of the Act might produce differences in revenue outcomes between states (Permanent Trustee 2004 ATC 4996)
REVENUE SHARING A necessary part of the 1942 uniform tax system was the sharing of revenue by the Commonwealth with the states. In the post-war period, a complex revenue sharing system has been developed to deal with what is known as "vertical fiscal imbalance'', ie the significant difference between the relative revenue and expenditure responsibilities of the Commonwealth and the states. Commonwealth funding assistance to the states takes two primary forms: specific purpose payments (sometimes referred to as "tied grants'') and general revenue assistance.
The allocation of general revenue assistance to individual states is made on the basis of a formula recommended by an independent statutory body, the Commonwealth Grants Commission. The formula used by the Commission does not result in a simple per capita allocation. The Commission uses "horizontal fiscal equalisation'' principles, which recognise that certain "donor'' states (such as NSW and Victoria) have greater relative revenue capacities and/or less significant expenditure disabilities than the other states. It should be noted that, while the Commonwealth cannot discriminate between states in levying income tax, effective discrimination may be achieved in the distribution of money under the revenue sharing arrangements (WR Moran (1940) AC 838; 63 CLR 338; 5 ATD 416).
At the request of the states, the Commonwealth introduced legislation in 1998 to protect the states' tax base from any potential erosion resulting from the Allders International 96 ATC 5135 decision (1-080). The legislation provides for "mirroring'' of stamp duty, pay-roll tax, financial institutions duty, bank account debits tax and any other state taxes that may become at risk, and the return to the states of any revenue collected through the mirror legislation. The validity of the Commonwealth Places (Mirror Taxes) Act 1998 was upheld by the High Court in Permanent Trustee 2004 ATC 4996.
The commencement of GST on 1 July 2000 caused radical changes to Commonwealth/state revenue sharing. GST revenue collected by the Commonwealth is channelled to the states and territories, in return for their agreeing to abolish certain taxes and charges (1-115). The distribution of GST revenue is also conditional on the states applying horizontal fiscal equalisation principles. The Commission continues to determine the equalisation formula and also proposes an equitable allocation of GST revenue. The allocation reflects the capabilities and needs of each state, as well as the fact that not all states levy the whole range of taxes to be eliminated.
... WITH RESPECT TO ... TAXATIONFor the valid exercise of power under s 51(ii) of the Constitution, the legislation in substance must be "with respect to ... Taxation''. When is a law one which deals in substance with taxation? The High Court of Australia has not laid down a definitive test of what is "taxation'' for the purposes of the section. In one important case, however, Menzies J said that the court would not look at the economic consequences of legislation or even the motives of the parliament in determining whether or not legislation dealt with taxation. The key criterion was to look at the "true character'' of the legislation and to see if its true character was one dealing with taxation (Fairfax (1965) 14 ATD 135). In concluding that the Acts which made up the FBT legislation were laws with respect to taxation, the High Court noted that it did not matter that the legislation may be intended to achieve some other purpose such as discouraging the provision of fringe benefits ( State Chamber of Commerce and Industry v Commonwealth of Australia 87 ATC 4745).
In Giris 69 ATC 4015, the taxpayer challenged the constitutional validity of ITAA36 s 99 and 99A which, at the relevant time, gave the Commissioner a wide discretion in taxing certain income of trust estates. The High Court rejected an argument that the discretion conferred by those sections contained such an element of uncertainty that they could not be regarded as valid laws with respect to taxation.
The revenue received by the states and territories from the Commonwealth under the revenue sharing system is insufficient to pay for their basic spending requirements. Consequently, the states and territories have traditionally relied on a variety of taxes and duties to raise additional revenue, in particular stamp duty, pay-roll tax, land tax and business franchise licence fees imposed on tobacco, alcohol and petrol.
In
Ha & Hammond 97 ATC 4674, a majority of the
High Court (4:3) held that business franchise licence fees imposed by New South Wales on tobacco were in reality excise duties and were constitutionally invalid (under s 90 of the Constitution, only the Commonwealth has the power to levy "duties of excise''). By implication, this meant that similar business franchise licence fees imposed by the states and territories on alcohol and petrol were also constitutionally invalid. To minimise the potentially serious impact on state and territory revenues, the federal government increased the rate of duty imposed by the Commonwealth on tobacco, alcohol and petrol and returned the additional revenue raised to the states and territories (less the Commonwealth's administration costs).
These arrangements ceased when the GST commenced on 1 July 2000 and the states and territories were required to progressively eliminate certain state taxes (and the federal government eliminate wholesale sales tax). In return, GST revenue collected by the Commonwealth would be channelled to the states and territories. State taxes such as financial institutions duty, debits tax, "bed taxes'' and stamp duty on listed marketable securities have now been abolished, with the remaining business stamp duties (eg on credit and rental arrangements, leases and mortgages) to be phased out by 2010/11.
This is the case that got me hooked on the complexities of tax laws as at the time of this judgement I was the Clerk to the Public Accounts Committee who was on long service leave in Prague. On my return in September 1997 Michael Egan, the State Treasurer at the time, made sure I read it back to front and up side down inside out ;-)
HA & ANOR v STATE OF NEW SOUTH WALES & ORS; WALTER HAMMOND & ASSOCIATES PTY LIMITED v STATE OF NEW SOUTH WALES & ORS Full High Court, 5 August 1997
Constitutional law - Duties of excise - Exclusive power of Commonwealth Parliament - New South Wales law imposing licence fees on retail and wholesale sale of tobacco - Fees calculated upon basis of tobacco sold in an earlier monthly period - Assessments issued in respect of unpaid licence fees - Whether fees or amounts payable duties of excise - Whether duties of excise are confined to taxes which fall selectively on locally produced and manufactured goods - Whether fees or amounts payable merely fees for licences to carry on business - Business Franchise Licences (Tobacco) Act 1987 (NSW), sec 41 - The Constitution (under cl 9 of the Commonwealth of Australia Constitution Act 1901) sec 90.
The two plaintiffs in the first action conducted a duty free store in suburban Sydney and sold, by retail, tobacco products to the public. Neither held a retailer's licence under the Business Franchise Licences (Tobacco) Act 1987 (NSW) ("the Act"). The plaintiff in the second action carried on the business of selling tobacco for resale in New South Wales and appeared to have held a wholesaler's licence at the relevant time.
Under the Act, each of the plaintiffs was prohibited under penalty from selling tobacco, whether by wholesale or retail, without a licence. Licences were issued on application, for periods of not more than a month. The fee payable for a retail or wholesale licence under sec 41 of the Act was a specified percentage of the value of the tobacco sold by the applicant for the licence in an earlier monthly period (from June 1995 onwards the specified percentage was 100%). The penalty imposed for selling tobacco without a licence was the licence fee which would otherwise have been payable by the holder of a licence plus a penalty of twice that amount.
The Chief Commissioner for Business Franchise Licences (Tobacco) in New South Wales issued notices of assessment to the plaintiffs in the first action claiming over $2m under the Act. A notice claiming over $20m was issued to the plaintiff in the second action.
The plaintiffs contended that the provisions of the Act which purported to impose a liability to pay the amounts claimed by the Commissioner and calculated in accordance with sec 41 were duties of excise which New South Wales was not empowered to impose. Under sec 90 of the Constitution, the Federal Parliament has the exclusive power to impose duties of customs and of excise.
The State of New South Wales, with the support of all the other States and Territories, who intervened, submitted that the fees to be paid for licences and the amounts payable by those who sold tobacco without a licence were not duties of excise within sec 90 of the Constitution for either of two reasons:
(1) the Act did not prescribe production or manufacture of tobacco within Australia to be a "discrimen of liability". It was submitted that so long as the tax was imposed on the sale of tobacco generally, it could not be said to be a tax on the production or manufacture of tobacco in Australia and therefore could not be said to be a duty of excise; and
(2) the imposts were merely fees for a licence to carry on the business of selling tobacco and were not a tax on the tobacco sold.
Held (by majority): the relevant provisions of the Act were invalid as imposing a duty or duties of excise within the meaning of sec 90 of the Constitution.
Per Brennan CJ, McHugh, Gummow and Kirby JJ
1. It was clear that an objective of the movement to Federation was "inter-colonial free trade on the basis of a uniform tariff". That objective could not have been achieved if the States had retained the power to place a tax on goods within their borders. The States yielded up and the Commonwealth acquired to the exclusion of the States the powers to impose taxes on goods which, if applied differentially from State to State, would necessarily impair the free trade in those goods throughout the Commonwealth. If accepted, the defendants submission would frustrate whatever purpose might be attributed to sec 90.
2. Duties of excise are taxes on the production, manufacture, sale or distribution of goods, whether of foreign or domestic origin. Duties of excise are inland taxes in contradistinction from duties of customs which are taxes on the importation of goods. Both are taxes on goods, that is to say, they are taxes on some step taken in dealing with goods. Parton v Milk Board (Vic) (1949) 80 CLR 229 applied.
3. Alcohol and tobacco were commodities which could not be placed in a special category for sec 90 purposes. Philip Morris Ltd v Commissioner of Business Franchises (Vic) (1989) 167 CLR 399 and Coastace Pty Ltd v New South Wales (1989) 167 CLR 503 overruled.
4. An amount equal to 75 or 100 per cent of the value of tobacco sold during a relevant period is levied by the Act. That amount could not conceivably be regarded as a mere fee for a licence required as an element in a scheme for regulatory control of businesses selling tobacco. The imposts which the Act purported to levy were manifestly duties of excise. The challenged provisions of the Act were beyond power.
5. Once a State tax imposed on the seller of goods and calculated on the value or quantity of goods sold cannot be characterised as a mere licence fee, the application of sec 90 must result in its invalidity.
Per Dawson, Toohey and Gaudron JJ (dissenting)
1. A duty of excise is a tax which falls selectively upon the local production or manufacture of goods. The purpose of making the power to impose excise duties exclusive to the Commonwealth was to prevent impairment by the States of the common external tariff. A tax upon the manufacture or production of goods increases the cost of those goods without effecting a corresponding increase in the cost of imported goods of the same kind. Any protection afforded by customs duties imposed upon the imported goods is thereby reduced. But a tax imposed upon a step in the distribution of goods which falls indiscriminately upon locally produced and imported goods does not have that effect.
2. In the present cases, the licence fees, regarded as taxes upon goods, fell indiscriminately upon tobacco products regardless of whether they were locally manufactured or produced or were imported.
Per curiam
1. The Court has no power to overrule cases prospectively.
Andrew Lumsden, a partner with legal firm Corrs Chambers Westgarth, writes: Like Arthur’s knights, the Commonwealth Government has sent a taskforce off after the Holy Grail of “”
alleviating the compliance burden on business from Commonwealth Government regulation James Surowiecki wrote recently in The New Yorker
poor regulations can and do have significant effects inflicting what economists call “social costs” on the economy as a whole. Look at the distortions caused in the builders’ insurance market by HIH’s unsustainable market practices. We accept that regulation has a role not just to punish fraud but to prevent it from happening in the first place and that in a lot of cases the law’s costs are a lot more visible than its benefits. It’s all a question of balance.
Sources: “A vow to cut red tape? It's just a pink elephant” Katey Lahey The Age 13/12/05
The Regulatory Balancing Act ; “The Regulatory Balancing Act” Senator Helen Coonan Address to the Financial Services Accountants Association Annual Conference 17 May 2004; Sarboxed In?
The World Bank Doing Business 2004 and 2005 ; reports on
“Understanding Regulation” (PDF version) ;
Office of Regulation Review Taskforce on Reducing the Regulatory Burden on Business;
The Boardroom Report Volume 3, ; Issue 24, December 16th, 2005.
One-stop-shop will cut red-tape burden says NIA 20/12/2005 ;
AICD submission ;
BCA submission ;
Red tape reduction: long, bloody and fruitless quest or noble adventure?