Paid under protest: How to sink payroll tax

By Gavin R. Putland

It is my longstanding contention that the payroll taxes charged by the Australian States and Territories are unconstitutional.

Under s.90 of the Constitution, only the Federal Parliament can impose duties of excise. If an excise is “an inland tax on a step in production, manufacture, sale or distribution of goods”, as held by the majority of the High Court in Ha v. NSW (1997), I submit that paying the workers is such a “step”. If “A State tax which fell selectively upon goods manufactured or produced in that State would be an excise duty”, as held by the minority in the same case, then a domestic payroll tax is indeed selective in that way, because it is levied on the labour content of locally produced goods but not imported goods. If an excise is a tax whose “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”, as held by Justice Kitto in the Dennis Hotels case (1960), then again I submit that paying the workers is such a “step”. By any of these definitions, a State payroll tax is unconstitutional in so far as it affects goods. And the mischief done by its effect on goods is not undone by the fact that it also affects services and real estate.

That doesn't mean employers should challenge payroll tax in the High Court, unless they have very deep pockets. Such a challenge would be expensive, at least in the short term. It would also involve a non-negligible risk, because the Court sometimes (although rarely) changes its mind.

Neither does it mean they should do nothing. If you're an employer, you should at least notify the State revenue office — and make sure you can prove that you have notified the State revenue office — that all subsequent instalments of payroll tax are “PAID UNDER PROTEST”. There are five reasons for doing this:

• It's cheaper and less risky than going to the High Court.

• It maximizes your chances of recovering your payroll tax instalments if the tax is subsequently found unconstitutional. The State could argue that past payments of an unconstitutional tax, if made without protest, were voluntary gifts and therefore not recoverable. Paying “under protest” cuts off that line of argument.

• It's a thinly veiled warning that if the State gives you any trouble over payroll tax or anything else, you might make a counterclaim that raises the stakes.

• Every instalment of payroll tax paid “under protest” is another instalment that might have to be paid back if the tax is ever found unconstitutional. Thus it adds to the pressure on governments to pre-empt the whole issue by abolishing payroll tax.

• Even if payroll tax is eventually abolished without a fight, having paid it “under protest” in the mean time will remain a useful ace to keep up your sleeve in case of any trouble.

I have suggested several alternatives to payroll tax, any one of which would be less damaging to your business.