Gavin R. Putland, BE PhD

Wednesday, December 26, 2012

(Comment)

Whether Section 82 of the Australian Constitution means what it says

Woe unto him that buildeth his house by unrighteousness, and his chambers by wrong; that useth his neighbour's service without wages, and giveth him not for his work...
— Jeremiah 22:13.

The literal meaning
Policy implications
The Canadian precedent
Whether the precedent is applicable to Australia
Merits of the precedent
Conclusion

1. The literal meaning

Section 82 of the Australian Constitution says in part:

82. The costs, charges, and expenses incident to the collection, management, and receipt of the Consolidated Revenue Fund shall form the first charge thereon...

Taken literally, those words would make it unconstitutional to require employers, at their own expense, to collect personal income tax payable by employees, or to require vendors, at their own expense, to collect GST payable by customers. It is not sufficient that the expenses in question are deductible against taxable income; they must be fully chargeable to the Commonwealth. Furthermore, it's hard to assign separate meanings to “costs”, “charges” and “expenses” unless one of the three includes the opportunity cost of time. The words “incident to” further support a wide construction of “costs, charges, and expenses”.

2. Policy implications

Even on the widest construction of “costs, charges, and expenses”, compliance with s.82 could be guaranteed simply by keeping all tax collectors (not to be confused with payers) on the public payroll, as indeed they were when our Constitution was written. If tax collectors are salaried public servants, they are indeed compensated for the opportunity cost of their time. But if they are not directly employed by the Commonwealth, the fair alternative is that they be compensated by the Commonwealth for their “costs, charges, and expenses”, including the value of their time.

If the Federal Government is responsible for the full cost of collecting personal income tax, it has a strong incentive to reduce or avoid the cost. It could reduce the cost by shifting the responsibility from employers to the financial institutions into which wages and salaries are paid, thereby reducing the number of collection points from over a million to under 200, exploiting economies of scale and specialization, and simplifying the treatment of taxpayers with multiple jobs. It could avoid the cost by allowing employers to retain the PAYG income tax that they deduct from wages and salaries and to pay (rather than collect) some other tax in lieu. The “other tax” would not raise prices in the aggregate, because it would be paid out of the retained PAYG tax. If the “other tax” were on anything but labour, there would be a massive reduction in employers' labour costs with no reduction in workers' take-home pay, hence a massive expansion of employment.

A consumption tax would comply with the literal meaning of s.82 if it were implemented without tax invoices — for example, as a “cash-flow tax” (proposed in Section D1 of the Henry Report) or as a retail sales tax. Either of these options would have lower compliance costs than the existing GST, making it easier to set up a business and create jobs.

These reforms would be highly desirable in their own right, even if they were not dictated by s.82. So the question is not whether the legislators could deal with the consequences of the High Court endorsing a literal interpretation of s.82. Rather, the question is why it takes a constitutional challenge to persuade the legislators to do what they should already have done.

3. The Canadian precedent

The Supreme Court of Canada, in Reference re Goods and Services Tax (1992), held that s.103 of Canada's Constitution Act, 1867 (also called the British North America Act) does not mean what it says. The question before the Court, in so far as it concerned s.103, was:

Having regard to section 103..., are suppliers entitled to charge and to collect from the Consolidated Revenue Fund of Canada all costs, charges and expenses incidental to collecting and paying a remittance under the GST Act?

Here is the relevant section in context:

102. All Duties and Revenues over which the respective Legislatures of Canada, Nova Scotia, and New Brunswick before and at the Union had and have Power of Appropriation, except such Portions thereof as are by this Act reserved to the respective Legislatures of the Provinces, or are raised by them in accordance with the special Powers conferred on them by this Act, shall form One Consolidated Revenue Fund, to be appropriated for the Public Service of Canada in the Manner and subject to the Charges of this Act provided.

103. The Consolidated Revenue Fund of Canada shall be permanently charged with the Costs, Charges, and Expenses incident to the Collection, Management, and Receipt thereof, and the same shall form the First Charge thereon, subject to be reviewed and audited in such Manner as shall be ordered by the Governor General in Council until the Parliament otherwise provides.

104. The annual Interest of the Public Debts of the several Provinces of Canada, Nova Scotia, and New Brunswick at the Union shall form the Second Charge on the Consolidated Revenue Fund of Canada.

105. Unless altered by the Parliament of Canada, the Salary of the Governor General shall be Ten thousand Pounds Sterling Money of the United Kingdom of Great Britain and Ireland, payable out of the Consolidated Revenue Fund of Canada, and the same shall form the Third Charge thereon.

106. Subject to the several Payments by this Act charged on the Consolidated Revenue Fund of Canada, the same shall be appropriated by the Parliament of Canada for the Public Service.

The first part of s.106 makes it clear that ss.103–105 are exceptions to the rule that the Consolidated Revenue Fund “shall be appropriated by the Parliament”. The exceptions are listed immediately before the rule, and are not mixed with or separated by unrelated provisions. Not surprisingly, the Court concluded:

It is clear... that the scheme of ss. 102 through 106 was intended to insure that the federal government could carry on at least certain aspects of the business of government without the necessity of annual appropriations by Parliament. It was intended, for instance, that the salary of the Governor General should not be at the mercy of annual votes in the House of Commons. Similarly, it was recognized that if annual votes were required for the payment of interest on the public debt it would rapidly have become impossible for the government to raise funds through borrowing. Equally, it was recognized that without the authority to expend funds for the collection of taxes, the entire operations of the government could be brought to a standstill.

Clearly, therefore, the purpose of s.103 was to immunize the revenue collecting machinery of the federal government from the uncertainties of annual appropriations by Parliament...

On that reasoning, the Court answered in the negative.

4. Whether the precedent is applicable to Australia

The sections of Australia's Constitution corresponding to Canada's ss.102–106, together with other sections required to show the context, are as follows:

3. There shall be payable to the Queen out of the Consolidated Revenue fund of the Commonwealth, for the salary of the Governor-General, an annual sum which, until the Parliament otherwise provides, shall be ten thousand pounds.

The salary of a Governor-General shall not be altered during his continuance in office.

⋯

66. There shall be payable to the Queen, out of the Consolidated Revenue Fund of the Commonwealth, for the salaries of the Ministers of State, an annual sum which, until the Parliament otherwise provides, shall not exceed twelve thousand pounds a year.

⋯

81. All revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue Fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution.

82. The costs, charges, and expenses incident to the collection, management, and receipt of the Consolidated Revenue Fund shall form the first charge thereon; and the revenue of the Commonwealth shall in the first instance be applied to the payment of the expenditure of the Commonwealth.

83. No money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law.

But until the expiration of one month after the first meeting of the Parliament the Governor-General in Council may draw from the Treasury and expend such moneys as may be necessary for the maintenance of any department transferred to the Commonwealth and for the holding of the first elections for the Parliament.

⋯

87. During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, of the net revenue of the Commonwealth from duties of customs and of excise not more than one-fourth shall be applied annually by the Commonwealth towards its expenditure.

The balance shall, in accordance with this Constitution, be paid to the several States, or applied towards the payment of interest on debts of the several States taken over by the Commonwealth.

⋯

94. After five years from the imposition of uniform duties of customs, the Parliament may provide, on such basis as it deems fair, for the monthly payment to the several States of all surplus revenue of the Commonwealth.

⋯

96. During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit.

The second clause in s.82 has no counterpart in Canada's s.103. It might be argued that the words “expenditure of the Commonwealth” in the second clause of s.82 are meant to exclude the compliance expenditure of private tax collectors. But if that were the case, the second clause would not only contradict the literal meaning of the first clause, but would also render any residual meaning redundant, because the “costs, charges, and expenses” incurred directly by the Commonwealth for “collection, management, and receipt of the Consolidated Revenue Fund” are the most obvious and inevitable examples of “expenditure of the Commonwealth”. It is more natural to understand the “expenditure of the Commonwealth” as being in contrast to the grants to the States under ss. 87, 94 and 96, but as including all the “costs, charges, and expenses” in the first clause of s.82.

The word “Treasury” does not appear anywhere in Canada's Constitution Act, and does not appear in the Australian Constitution except in s.83. So, what exactly is the Treasury? I can suggest four possible definitions:

(1) the Treasury contains the Consolidated Revenue Fund (CRF); or

(2) the Treasury contains what is left of the CRF after the Tax Office has covered its own costs; or

(3) the Treasury contains what is left of the CRF after the “first charge thereon”; or

(4) the Treasury contains what is left of the CRF after all expenditures therefrom that are explicitly prescribed by the Constitution.

Let us consider the merits and implications of each definition.

Under definition (1), s.83 requires appropriations from the CRF to be authorized by law, and the first clause of s.82 is one of several such authorizations that do not depend on Parliament, the others being in ss. 3 and 66, the second paragraph of s.83, and s.87. These provisions are widely scattered, not neatly listed like Canada's ss.103–105. The change of terminology in s.83 is unexplained. But otherwise, under definition (1), the reasoning of the Supreme Court of Canada is applicable: Australia's s.82, like Canada's s.103, is one of several provisions that protect certain appropriations from the uncertainty of Parliamentary approval.

Under definition (2), the change of terminology in s.83 is explained, but the “scattered” placement of appropriation provisions is still unexplained. The first clause of s.82 is not needed to protect the said “costs, charges, and expenses” from s.83 unless the “costs, charges, and expenses” include those which are incurred by entities other than the Tax Office, and which, if they are paid out of the CRF in accordance with s.82, are also paid out of the ”Treasury” under definition (2). The expenditures authorized in the other appropriation provisions are likewise from the “Treasury” under definition (2). So if we adopt the premise of the Supreme Court of Canada — that the purpose of the independent appropriation provisions in the Constitution is to protect the said appropriations from the uncertainties of Parliamentary approval — we are led to a different conclusion on the scope of “costs, charges, and expenses” in s.82.

Under definition (3), the change of terminology in s.83 is explained while the “scattered” placement of appropriation provisions is unexplained [as under definition (2)], but the first clause of s.82 is not needed to protect the said “costs, charges, and expenses” (whatever their scope may be) from s.83. Thus we cannot apply the premise of the Supreme Court of Canada to s.82, and cannot validly draw its conclusion concerning the scope of “costs, charges, and expenses”.

Definition (4) not only explains the change of terminology in s.83, but also brings order to the “scattered” appropriation provisions: appropriations from that part of the “Consolidated Revenue Fund” which is not in the “Treasury” are authorized before s.83 (in ss. 3, 66 and 82), whereas appropriations from the “Treasury” are authorized after the first paragraph of s.83 (in the second paragraph of s.83, and ss. 87, 94 and 96). Under definition (4), the premise of the Supreme Court of Canada is not applicable to ss. 3, 66 and 82, because these do not concern appropriations from the “Treasury” and therefore do not need to be protected from s.83. Rather, ss. 3 and 66 confirm that the Governor-General and Ministers are to be paid for their services, and the first clause of s.82 invites a same conclusion concerning the tax collectors. Being deprived of the Court's premise in respect of s.82, we cannot validly draw its conclusion on the meaning of “costs, charges, and expenses”.

Definition (4) explains the most. If we accept definition (3) or (4), we cannot apply the premise of the Supreme Court of Canada to s.82, so we have no reason to conclude that s.82 means anything other than what it says. If we accept definition (2), we cannot apply the premise of the Supreme Court of Canada to s.82 unless s.82 means what it says, contrary to the Court's conclusion on Canada's s.103. Definition (1) explains the least. But only under definition (1) can we apply the full reasoning of the Supreme Court of Canada — whatever its merits may be.

5. Merits of the precedent

Even if the reasoning of the Supreme Court in Canada were equally applicable in Australia, the High Court of Australia would not be obliged to agree with it. That is fortunate, and not only because of the desirable policy implications of the literal meaning of s.82.

From “the scheme of ss. 102 through 106”, as noted above, the Supreme Court of Canada concluded:

Clearly, therefore, the purpose of s.103 was to immunize the revenue collecting machinery of the federal government from the uncertainties of annual appropriations by Parliament.

But the Court immediately added:

It was never intended to create a legally enforceable right in third parties to receive compensation for revenue-raising duties imposed on them by Parliament.

That's a non sequitur. A right to compensation for third parties is not incompatible with the purpose of protecting revenue-raising expenses from disallowance by Parliament, but merely includes third parties within the scope of the desired protection. If that inclusion is not implied by the perceived purpose of s.103, it is nevertheless implied by the actual words. If the perceived purpose does not require s.103 to mean all of what it says, it does not follow that s.103 means less than what it says.

La Forest and L'Heureux-Dubé JJ., in agreeing with the majority of the Court, found it necessary to add that s.103

... does not impose an independent legal obligation on Canada to compensate collecting agents. Rather, it refers to costs, charges and expenses the Government of Canada is obliged to pay by statute or contract independently of s.103.

This clarifies what has been read into s.103, as well as what has been read out of it, but does not conjure away the non sequitur.

If, in spite of the non sequitur, “It was never intended to create a legally enforceable right in third parties to receive compensation for revenue-raising duties imposed on them by Parliament,” that's probably because it was never intended that Parliament would impose such duties! And if, on the contrary, the drafters had intended to allow Parliament to impose such duties, they would then have needed to decide whether the “revenue collecting machinery of the federal government” included the compliance machinery of the affected third parties. If not, I submit that the drafters would have specifically excluded the compliance costs from the scope of s.103, because a literal reading would otherwise have included those costs.

But it is more likely that the drafters of the Constitutions of Canada and Australia never envisaged private tax collection and would have regarded any such arrangement as a barbarous regression. Employers in both countries were not required to withhold federal personal income tax until 1942, when civilian employers could have been said to be diverting scarce labour from the war effort. It is therefore arguable that if the withholding requirement was valid, it depended not only on the taxation power but also on the defence power, which was interpreted generously on the ground that an Axis victory would have made the rest of the Constitution a dead letter. It does not follow that the legislators had the right to retain and extend the withholding requirements in peacetime. Now that they have indeed stooped to that level, the benefit of a literal interpretation of s.103/s.82 is that private agents who are required to collect tax are at least not required to do so at their own expense.

But the most disturbing feature of the Court's judgment is its abandonment of the moral compass. Lamer C.J., writing for the majority, without dissent from La Forest and L'Heureux-Dubé JJ., began the analysis of s.103 in these terms:

The Attorney General for Alberta's position is that s.103 of the Constitution Act, 1867 has the effect of giving all vendors of taxable supplies a right to be reimbursed out of the consolidated revenue fund of Canada for expenses they incur in collecting and remitting the GST. At the outset, I must say that if this submission is correct, it produces a startling result. The federal government would be obliged to reimburse any expenses incurred by statutory agents of the Government of Canada in the collection of taxes. I see no reason why this obligation would be limited to expenses incurred in the collection of the GST. Under ss. 153 and 227(4) of the Income Tax Act, S.C. 1970-71-72, c.63, for instance, employers are under a duty to withhold and remit income tax in respect of their employees. It has not hitherto been suspected that all such persons have a right — indeed, a constitutional right which cannot be modified or extinguished by statute — to be reimbursed for their time, effort and expenses out of the consolidated revenue fund of Canada.

It is of course encouraging that the Court recognized the nexus between the GST and personal income tax and interpreted “Costs, Charges, and Expenses” as including the value of time. But the implication that the ancient right of workers to their pay, recognized in both the Old and New Testaments, is protected by the constitution of Canada, in respect of tax collectors conscripted by the government of Canada, is here offered as a reductio ad absurdum by the Supreme Court of Canada. This, I repeat, was the opening shot in the Court's analysis of s.103. Only then did the Court get down to the “scheme of ss. 102 through 106”.

6. Conclusion

The policy arguments favour a literal interpretation of s.82 of the Australian Constitution. Such an interpretation would not limit the ability of the Federal Government to raise revenue, or even to raise revenue from any particular tax base, but would give the Government a healthy incentive to minimize compliance costs and their attendant deadweight costs.

The use of the word “Treasury” in the Australian Constitution, together with the arrangement of appropriation provisions around that word, suggests that the reasoning of the Supreme Court of Canada in favour of a non-literal interpretation is not applicable in Australia. If that reasoning is nevertheless applicable, further logical and historical arguments suggest that the High Court of Australia should not agree with it. If, in spite of those arguments, the Justices of the High Court find that the meaning of s.82 can be decided either way with reasonable legal justification, what they decide will be an expression of their morality or lack thereof.

Behold, the hire of the labourers who have reaped down your fields, which is of you kept back by fraud, crieth: and the cries of them which have reaped are entered into the ears of the Lord of sabaoth.
— James 5:4.

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[Last modified Jan.1, 2013. On whether Australia's GST violates s.55 of the Constitution, see “Want a new GST? Sink the old one!”]

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