Guest Post: Gavin R Putland – Employers: How to scare off the tax man

If the government has deeper pockets than you, it has more to lose than it can hope to extort from you. That’s to your advantage.
Scenario 1: An employer, facing prosecution or bankruptcy for making a mistake with employees’ PAYE tax, tells the ATO that if the case goes to court, “we will argue that the obligation to collect income tax from our employees at our own expense
violates s.82 of the Constitution
, which clearly implies that the cost of revenue collection is to be charged to the Commonwealth.” Will the ATO put the biggest Federal revenue stream at risk? Or will it settle its claim out of court on generous terms?
Scenario 2: As for Scenario 1, except that the employer has apparently made a mistake with GST, and threatens to claim that the obligation to collect GST from its customers violates s.82.
Scenario 3: An employer, facing prosecution or bankruptcy for making a mistake with payroll tax, tells the State revenue office that if the case goes to court, “we will argue that payroll tax, because it feeds into prices of goods, is a duty of excise and therefore violates s.90 of the Constitution.” It adds: “On our reading of the majority and minority judgments of the High Court in Ha v. NSW (1997), the contention that payroll tax is an excise would have found support among both factions of the Court.” Will the State run the risk of having payroll tax struck down, or settle its claim out of court?
Scenario 4: An employer being harassed over some other Federal tax (not GST or PAYE personal income tax) tells the ATO that if the case goes to court, “we will argue that you owe us more in reimbursement of compliance costs under s.82 than we allegedly owe you. If a win on s.82 does not lead to reimbursement of past costs, it will reduce future costs so that we can more easily pay what we allegedly owe.” Will the ATO run the risk of having its collection processes declared unconstitutional, or will it make whatever concessions are necessary to keep the case out of court?
Scenario 5: An employer being harassed over some other State tax (not payroll tax) promises that if the case goes to court, “we will argue that the State owes us more in refunds of unconstitutional payroll tax than we allegedly owe the State. Even if the striking down of payroll tax does not lead to refunds, it will improve our cash flow so that we can more easily pay what we allegedly owe.” Will the State continue its belligerence?
Scenario 6: An employer, being prosecuted by a State or Federal authority in circumstances that call for a discretion not to prosecute, tells the prosecution: “If we are fined, we will seek to have the fine and costs deducted from the refund owed to us under the Constitution. If the court rules that the two issues cannot be linked, we will retain the right to start a separate constitutional case. If our vindication on the constitutional issue does not lead to any refund, it will still make it easier for us to pay any fine.” Will the prosecuting authority gamble more than its entire budget in an attempt to collect one opportunistic fine?

Of course, if you’re an employer, I would never advise you to do anything that would put you in any of the above situations. (Besides, I’m not a lawyer and this article isn’t advice!) But if, in spite of your best efforts, you are already in such a situation, a constitutional counterattack (or the threat thereof) might well be the best defence.

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18 Responses to Guest Post: Gavin R Putland – Employers: How to scare off the tax man

  1. Brett

    The time and cost of mounting a constitutional challenge is well beyond most businesses / people, and quite often disproportionate to the underlying issue; and the ATO knows it. If anyone took that path the ATO might well take the view that the matter must be litigated, which massively raises the downside for the taxpayer; the costs if they lost could be ruinous.

  2. EJ

    Great article…thank you for the info. It is helpful for small business & the self employed who are now facing harassment by “authorities” for so-called compliance issues & other matters and in some cases under the guise of “work safe”.Particularly in the Building Industry…you see Mr Shorten and all the Union mates HATE small business/self employed tradespeople and the philosophy is that all of them should be on wages. So now the unions feel powerful & know that they have their backing by this Government to ride with a shot-gun approached to “catch out” the Self-employed on business issues. The assumption by this Government is that all self employed are guilty. Further, small business should be allowed to charge back to the Government the time and expenses required to fulfil the job of collecting taxes on behalf of the Government. Small business is sick and tired of jumping hoops & red tape to satisfy the ATO & Governments needs on compliance & taxation. Who, as a small business owner has any power or the money to counter-attack the “authorities”….and they know it. It is no wonder why so many start-up businesses can’t even take off & fail in the first year. Mr Sinclair…any further help or advice is greatly appreciated.

  3. twostix

    Gavin’s “solution” to this problem in the linked submission sends alarm bells clanging:

    Require wages and salaries to be paid into ADIs [Approved banks],

    Require each personal taxpayer to have a single ADI account into which all taxable income is initially paid, and

    Require the ADI to deduct and remit PAYE tax.

    Instead of employers being tax collectors he wants banks to be forced to be tax collectors:

    Then, to guarantee compliance with s.82, the Commonwealth can offer to pay the ADIs for their services according to a specified formula. ADIs should be free to reject the offer, in which case accounts with those ADIs will simply not be eligible to accept direct deposits of taxable personal income.

    AND he wants the government to “easily” force everyone to place their all of their income into one single automatic tax-deducting account!

    And to top it off and start down the slippery slope before he even finishes he throws out the idea that the banks, now having this control over employees pay slips, might as well then also become responsible for deducting Super as well:

    ADIs can be made responsible for compulsory superannuation contributions;

    Makes this governments totalitarian tendencies look positively libertarian!

  4. .

    This is worth considering but only if you know they will take legal action and you know you can make it not worth their while.

    Most of the time I suspect it might just be rational to pay out a small agreed sum.

  5. Chris M

    Interesting but of course they don’t give a rats that these things are unconstitutional. Indeed they keep passing new laws such as the mining tax knowing full well that this is the case. They have unlimited funds to fight any challenge and our legal system is largely a monetary based one when it comes to matters like this.

    Our councils are not constitutional but yeah, I still can’t avoid paying rates. In the USA paying income tax is not legally required (it was never ratified into law by all states) but try not paying that too.

  6. Gavin R. Putland

    Dear twostix,

    If it’s not acceptable to impose all those burdens on banks, why is it acceptable to impose them on employers? – other than because banks are privileged while employers are not?

    And why is it so onerous to require an individual to designate a tax-related account, given that the same requirement would eliminate the need for most individuals to submit tax returns?

    Anyway, if you don’t like the above proposal on income tax, you might consider this one instead. And if you don’t like the carbon tax mentioned therein, you can roll it into the retail tax. There’s more than one way to make the tax system constitutional.

  7. papachango

    So when can we expect to see Slater & Gordon or Maurice & Blacburn launching a class action against the ATO on behalf of small businsses?

  8. Rococo Liberal

    We haven’t had PAYE for nearly 12 years now.

  9. TerjeP

    Yeah they changed the name to PAYG. Maybe that is what they regard as tax reform.

  10. Rococo Liberal

    There was far more than a name change Terje. PAYG, unlike the old PAYE (more commonly known as group tax) is collected on a lot more than salary and wages.

    I made the comment about the demise of PAYE, because I wanted to point out that the paper linked to in this post cannot be taken too seriously.

    As a tax lawyer, I have been involved in some very ingeniously argumented cases. But the idea that the High Court would read sec 82 of the Constituion in the way suggested here is ludicrous. The one simple argument that shoots the whole thing down is that PAYG is not a tax, it is an amount equivalent to a tax. Anybody who doesn’t understand this distinction has no business commenting on tax affairs.

    The Government will never give up PAYG, as it forms the vast majority of the Government’s cash-flow.

  11. jtfsoon

    We should get rid of witholding. You should have to front up and pay your tax bill in one lump sum every year. Only way to destroy this ‘fiscal illusion’ that our taxes are value for money.

  12. Sinclair Davidson

    You should have to front up and pay your tax bill in one lump sum every year.

    In cash.

  13. Rococo Liberal

    Some of us alread pay a lump sum every quarter, and realise that our taxes are not value for money.

  14. jtfsoon

    Not enough do, otherwise there wouldn’t be this complacency with high taxes.

  15. jtfsoon

    it’s not clear that all of Milton Friedman’s good work made up for the sin of inventing witholding …

  16. .

    The one simple argument that shoots the whole thing down is that PAYG is not a tax, it is an amount equivalent to a tax. Anybody who doesn’t understand this distinction has no business commenting on tax affairs.

    This is patently dishonest. You and the rest of the legal community ought to be ashamed. It is a tax net of allowable deductions.

  17. grputland

    Rococo Liberal: Whether Dot is right or wrong, my argument does not depend on the premise that PAYE/PAYG is a tax. It depends on the observation that PAYE/PAYG is a means of collection of consolidated revenue.

    (Yes, I’ve changed my nickname – because of “technical difficulties”.)

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