Is the federal tax system unconstitutional?

If you are an employer, you must calculate and remit your employees' PAYE tax. For this work, the Australian Taxation Office does not pay you an hourly rate, or a piece rate, or even a commission-only rate; it merely threatens you with penalties for non-compliance.

Under the New Tax System with the GST, not only employers but also sole traders and volunteer fundraisers have been drafted into the ATO's chain gang, to work without pay for an organization whose annual revenue is more than $160 billion and rising, and whose costs are about 1 percent of revenue.

The morality of this arrangement is not worth discussing. The legal and constitutional implications, however, are more interesting.

NO RESIDUAL POWER

The Federal Parliament does not have any power that is not explicitly or implicitly given to it by the Constitution. The absence of a constitutional prohibition is not enough. For example, in last year's Wakim case [163 ALR 270], the High Court struck down the Jurisdiction of Courts (Cross-Vesting) Acts because the Constitution is silent as to whether the Federal Parliament can consent to the vesting of State jurisdiction in Federal courts; even the dissenting Justice Kirby agreed that "Because [the Federal] Parliament is a legislature of limited powers, it requires a constitutional source of power to sustain the validity of any law made by it.''

Therefore the new tax system needs a constitutional "head of power'' under which the Parliament can compel one person to assess and remit another person's tax, and such compulsion must not be repugnant to overriding provisions of the Constitution or other laws. With these requirements in mind, let us consider the new tax system under five headings.

1. "Matters incidental''

The Constitution gives Parliament the power to tax (s.51(ii)) and to do things incidental thereto (s.51(xxxix)).

It may appear prima facie that compliance burdens are matters incidental to taxation and consequently within the power conferred by s.51(xxxix) or a broad interpretation of s.51(ii). To the contrary it may be argued that compliance burdens are unnecessary because the Government itself can assess tax liability; "self-assessment'' and "pay as you go'' are comparatively recent innovations by which governments have turned their citizens into unpaid public servants. According to the latter view, the taxation power and the "matters incidental'' power give the Commonwealth the right to take our money, but not the right to waste our time.

2. "Civil conscription''

If a person cannot afford to hire an accountant, any law making that person responsible for assessing and remitting another person's tax is a clear case of CIVIL CONSCRIPTION, which is not mentioned in the Constitution except by way of prohibition: s.51(xxiiiA) of the Constitution empowers the Parliament to make laws with respect to the provision of medical and dental services, "but not so as to authorize any form of civil conscription''.

In British Medical Association vs. Commonwealth (1949), the High Court held that the Pharmaceutical Benefits Act 1947-1949 was unconstitutional because it required doctors to write prescriptions on Commonwealth forms, which requirement amounted to civil conscription [79 CLR 201-295]. By that standard, the work associated with the new Business Activity Statement forms is also civil conscription.

In BMA vs. Commonwealth, four out of five Justices held that the prohibition of civil conscription applied to the provision of "medical and dental services'' and not to the rest of s.51(xxiiiA). The main reason they gave was that "medical and dental services'' were the only heads of power in s.51(xxiiiA) under which the fear of civil conscription might arise [79 CLR 261, 282, 286-7].

The High Court was not required to rule on whether the prohibition of civil conscription applies outside s.51(xxiiiA), but there are two reasons for believing that it does. First, it is absurd that there should be one rule for doctors and dentists and another for the rest of us, and equally absurd to suggest that the drafters of s.51(xxiiiA), or the electors who ratified it in the referendum of 1946, intended to protect doctors and dentists but not anyone else. Second, the Parliament only has such powers as are conferred on it by the Constitution, and nowhere does the Constitution explicitly or implicitly confer a power of civil conscription.

While concurring with the 1980 decision of the High Court in General Practitioners Society vs. Commonwealth [145 CLR 532], Justice Murphy remarked:

"The prohibition on imposing any form of civil conscription in laws with respect to the provision of medical and dental services is not confined to protecting medical or dental practitioners. It was introduced to give a specific protection in regard to the provision of medical and dental services. Even without it, the Constitution would not, in my opinion, authorize Parliament to make laws providing for civil conscription (in general, or other than in very limited circumstances).

The Constitution makes no reference to different classes of society and its terms are inconsistent with slavery, serfdom or similar vestiges of a feudal society. It contains an implication of a free society which limits Parliament's authority to impose civil conscription."

3. "Just terms''

Subsection 51(xxxi) of the Constitution requires compensation on just terms for the compulsory acquisition of property by the Commonwealth.

Does the time spent on compliance with tax laws constitute property? It would be incongruous if the Government were forbidden to take peoples' real property without compensation and yet permitted to take away part of their lives without compensation.

Be that as it may, if a proprietor is obliged to hire staff and purchase equipment in order to comply with tax laws, the equipment and the salaries and on-costs of the additional workers are effectively sequestered by the Commonwealth for a "purpose in respect of which the Parliament has power to make laws'' [s.51(xxxi)], in which case the "just terms'' provision applies.

It might be said that if employers can claim "just terms'' compensation for compliance costs, they might as well claim similar compensation for tax paid, with the result that they pay no tax! To the contrary, it may be observed that taxes go into consolidated revenue (see s.81 of the Constitution), while compliance costs, like property resumed by the Commonwealth, do not; in this respect compliance costs are analogous to resumed property rather than taxes.

4. Slavery

Unpaid tax collectors are slaves or bonded labourers of the Government. Although slavery and bonded servitude are not forbidden by the Constitution, they are forbidden by various international agreements to which Australia is a signatory.

5. Policy aspects

Compliance burdens divert limited resources from productive uses to unproductive uses, reducing the national income out of which all wages are paid, causing unemployment and economic inequality. Compliance costs are also inflationary because they are built into prices of goods and services.

If the High Court finds that the compliance burdens of Federal taxes are the responsibility of the Commonwealth, the Federal Government will have a new incentive to minimize the compliance cost of every tax, to prefer forms of taxation which by their nature have low compliance costs, to resist the temptation to complicate the tax system with politically-motivated concessions, and to prefer forms of taxation that do not harm the economy, thus minimizing the need to complicate the system with economically-motivated concessions. The result will be more wealth creation and a more equal distribution of wealth without additional inflationary pressure.

When deciding whether a particular interpretation of the Constitution is reasonable, the courts routinely consider what the consequences for public policy would be if that interpretation were pursued to its logical conclusion. In this case the policy arguments strongly suggest that governments, not taxpayers, should be responsible for the compliance costs of the tax system.

THE REMEDY

If you are required, as a condition of carrying on your work or business, to collect and remit tax for the Commonwealth, you should be entitled to

(a) remuneration at an hourly rate or piece rate if you do any part of the work yourself,

(b) reimbursement of expenses reasonably incurred in getting someone else to do any part of the work, and

(c) reimbursement for the cost of equipment acquired for the sole purpose of complying with tax laws.

These proposals meet all legal requirements: (a) means that you are not a slave; (b) means that you are not forced to do the work yourself, so that you are not a conscript or bonded labourer, and (c) covers the "just terms'' requirement.

Together, the proposals satisfy the policy objective of making the Commonwealth responsible for the compliance costs of its own tax system, and neutralize the issue of whether the taxation power or the "matters incidental'' power includes a power to impose compliance burdens.

Of course, the remedy requires the Commonwealth to raise enough revenue to cover compliance costs. This does not add to the total tax burden, but merely puts a visible dollar value on the previously hidden compliance component of the tax burden; indeed, it tends to REDUCE the total tax burden by giving the Government an incentive to minimize the compliance component.

IN COURT: Round 1 to the ATO

In Halliday vs. Commonwealth [FCA 950, 14 July 2000], Justice Sundberg of the Federal Court ruled:

"The validity of the GST laws ... depends on whether they are laws with respect to taxation within s.51(ii). If they are, the fact that they may impose "civil conscription'' ... is irrelevant."

In other word, contrary to the opinion of Justice Murphy, the prohibition of civil conscription does not apply outside s.51(xxiiiA) of the Constitution. Justice Sundberg continued:

"The attack is limited to the withholding tax provisions in the PAYG Act. ... The power to make laws with respect to taxation is not restricted to laws dealing with the imposition and collection of tax. It extends to measures that will enable the system of taxation to function effectively. It extends to measures intended to prevent the evasion of taxation ... The withholding provisions are designed to prevent the avoidance of tax by a payee who does not quote an ABN. In my view the provisions fall within the core of the subject matter of s.51(ii). ... If they do not, they are provisions that fall within the implied incidental power, as matters which are necessary for the reasonable fulfilment of the legislative power. ... The claim that the GST laws are invalid because they impose civil conscription has no prospect of success. Because they are valid laws under s.51(ii), it is not necessary to decide whether they do impose civil conscription."

Indemnity costs were awarded against the applicants.

Concerning the numerous specific arguments in this article that are not addressed in the judgment, I can only surmise that those arguments were not put before the Court. In so far as the judgment conflicts with the general direction of this article, it is of limited scope. It addresses the issues of "matters incidental'' and "civil conscription'' only, and in so doing does not address aspects of the new tax system other than the withholding provisions. It does not consider "just terms'', slavery under international conventions, or the policy arguments in favour of simplification. Thus, even if the judgment is not overturned by any subsequent decision of the High Court, it does not follow that the new tax system is valid.