Gavin R. Putland,  BE PhD

Thursday, December 13, 2012 (Comment)

An open letter to Australian Treasurers

The Treasurer,
Cth, NSW, Vic, Qld, SA, WA, Tas, NT, ACT.*

Cc: The Australian, The Age, Australian Financial Review, The Drum (ABC), Business Spectator, Crikey.

Dear Sir/Madam,

Abolish payroll tax or face the consequences

Under s.90 of the Australian Constitution, only the Federal Parliament can impose duties of 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 those goods.

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), then 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, then a domestic payroll tax is indeed selective in that way, because it is not levied on the labour embodied in imported goods.

Under the “majority” definition, it is immaterial that payroll tax affects services as well as goods, because the same can be said of the GST, which is partly an excise under that definition. Indeed, the legislation imposing the GST is split into three acts, one of which purports to impose the GST in so far as it is a duty of excise!

That payroll tax affects services is also immaterial under the “minority” definition, which holds that the purpose of s.90 is to let the Federal Parliament decide the question of protection or free trade. That question is no less relevant to services than to goods, especially in this age of global digital communication.

By either definition, the mischief done by an unconstitutional tax on goods is not undone by extending the offending tax to services. It can be undone only by removing the offending tax on goods.

In Ha v. NSW, 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. The emphasis on substance is usually taken as a repudiation of the “criterion of liability” test formulated by Justice Kitto in the Dennis Hotels case (1960). But even that test would not excuse 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.

(On whether the Territories can impose duties of excise, see

A constitutional challenge to payroll tax could arise in many ways:

  • Administrators of insolvent companies that allegedly owe payroll tax to a State would be derelict in their duties to other creditors if they were to pay any part of a debt that is not actually owed. The same applies to directors of companies that are still trading but under threat of bankruptcy due to unpaid payroll tax. (But I'm not a lawyer and this letter isn't advice.)
  • Criminal convictions for non-compliance with an unconstitutional tax (as distinct from fraudulent accounting) are and always were null and void, together with the associated charges, arrests and indictments. For an individual, the burden of a criminal record is such that even a small chance of relief is worth a try. For a State, the consequences of having a tax declared unconstitutional are such that it might be prudent to grant pardons and ex-gratia compensation rather than let the issue go to court.
  • Any employer big enough to pay payroll tax, especially if it sells goods, and especially if it is trade-exposed, would have standing to challenge the tax. For a large employer, the sums at stake are worth litigating.
  • Any citizen who buys any of the affected goods or who supplies any of the affected labour — that is, any citizen at all — would likewise have standing to challenge the tax. If the challenge were unsuccessful and costs were awarded to the other side, the citizen would probably be bankrupt. But the reason for the bankruptcy would look good on the citizen's tombstone and would be highly marketable in the mean time.

If payroll tax is indeed unconstitutional, how can the revenue be replaced? In many ways! Here's a modest proposal which can be implemented at State level and which replaces not only payroll tax but also the existing State property taxes: Here's a wider-ranging reform that can be imposed from Canberra: Here's a more limited proposal that replaces payroll tax and GST and incorporates a novel solution to vertical fiscal imbalance: And as a matter of interest, the total revenue from payroll tax and the existing selective land tax could be replaced by an all-in land tax at a rate of about 0.8% per annum. Any of these proposals, but especially the second, would create jobs, reduce compliance costs (and therefore reduce prices), and improve Australia's international competitiveness.

Wherefore, by authority of s.90 of the Constitution, I demand that payroll tax be abolished. If this lawful demand is not met in my own State in the 2014-15 Budget, then, in the unlikely event that no other interested party has taken legal action to have payroll tax struck down, I shall be minded to take such action myself!


* Sent Dec.13, 2012, 9:52pm. Posted here Jan.18, 2013.

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