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Saturday, January 19, 2013:

Is the GST unconstitutional?

Any State government that wants to broaden the GST should first consider whether the drafting of the GST legislation breaches s.55 of the Constitution, and whether the GST collection mechanism breaches s.82, says Gavin R. Putland.*

Under s.90 of the Constitution, only the Federal Parliament can impose duties of customs or excise. 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”. 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...”

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. 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 neutralize the constitutional uncertainty over whether a direct tax on consumption is an excise. Either method 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.


* This is an abridgment of an article first published at prosper.org.au. The original article also impugns payroll tax, which, like the GST, has a propensity to feed into prices. The author is not a lawyer. This article is not advice.

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.]

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.]

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