Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 5 - Regulation Impact Statement (RIS)
Commonwealth Places Mirror Tax and Windfall Tax
The Commonwealth Places Mirror Tax is intended to restore to the States the benefit of levying certain taxes in relation to Commonwealth places from 6 October 1997 following the decision in the Allders case. In that case the High Court found that the States were precluded by section 52(i) of the Constitution from levying certain taxes with respect to Commonwealth Places within a State because that section gives the Commonwealth exclusive powers to make laws with respect to Commonwealth places.
The Windfall Tax is intended to protect State taxes collected with respect to Commonwealth places before 6 October 1997.
On 6 October 1997 the Treasurer announced that a legislative solution would be developed and that taxpayers should continue to make payments to State revenue authorities as if State taxes were still valid. Such pre-payments would be credited against the liability for Commonwealth mirror taxes.
2. Identification of implementation options
The Inter-Jurisdictional Taxation Agreement (IJTA), agreed between the Commonwealth and all State and Territory governments in September 1997, committed the Commonwealth to protecting State and Territory government revenues from the implications of the Allders decision . Subsequently, all States requested that the Commonwealth specifically apply stamp duty, payroll tax, financial institutions duty and debits tax in and in relation to Commonwealth places.
The intended outcome is that each of the States will collect from 6 October 1997 the same amount (assuming previous compliance) that they would have received as State tax had their laws applied validly in and in relation to Commonwealth places in that State and that revenues already collected by the States before 6 October 1997 in and in relation to Commonwealth places be protected. It is also an essential element of the solution that the Commonwealths involvement in the ongoing administration of the mirror tax law be kept to a minimum.
The Treasurer instructed officials to consult widely when settling the terms of the legislative response. That process of consultation, together with input from Office of Parliamentary Counsel, has resulted in the development of an approach which involves enacting Commonwealth law to allow State laws to be applied as Commonwealth law, subject to possible modification by Commonwealth regulation and by the States to modify that Commonwealth law by published instrument. A 100% windfall tax will also apply to refunds of State taxes paid before 6 October 1997 and claimed on the basis of the constitutional invalidity of the tax.
The Act will provide specifically for stamp duty, pay-roll tax, financial institutions duty and debits tax to be applied in and in relation to Commonwealth places as Commonwealth law. (Other State taxes may be added by regulation.) The Commonwealth legislation will mirror the current State legislation in relation to these taxes so that all businesses in the State will be subject to taxes as if none of their business related to a Commonwealth place. The States will continue to collect these taxes with respect to all of the State, but will pay into Commonwealth Consolidated Revenue the proportion of the collections which relates to Commonwealth places. These collections will then be returned immediately to the States under special appropriations. The applied provisions will vary as related State tax law is changed to ensure that the incidence remains identical. Should other taxes become ineffective, they will be able to be added to the mirror tax system by Commonwealth regulation.
State taxes being mirrored may need some modifications so that mirror tax will apply with the correct effect. Modification can be done by Commonwealth regulation or by the relevant State Treasurer publishing the changes in the Commonwealth Gazette but will be limited to changes that are necessary or convenient to enable the applied State law to operate effectively, or that are necessary or convenient to ensure that a taxpayer's total liability under the mirror tax and its State counterparts is as nearly as possible what it would be if State taxes could be applied directly. Modifications required by constitutional matters will be undertaken only by the Commonwealth, in regulations.
A taxpayer paying one of these mirror taxes will not necessarily know whether the payment is made under a State law or an applied provision of a Commonwealth law. The taxpayer's total liability should be the same no matter which law applies. An act done under either law will be validated by the other so there will be no gap between their operation. Should one of them be found to be inoperative in a particular case, the other will apply.
The mirror tax legislation will apply only to the extent that the relevant State law cannot be directly applied because of section 52(i) of the Constitution and only to the extent that the taxes became first due for payment on or after 6 October 1997. Payments made before that date will be subject to the windfall tax legislation if a claim for refund is made.
Precedent for this drafting approach is the Commonwealth Places (Application of Laws) Act 1970 which deals with all other matters except taxation. The Mirror Tax legislation has been loosely modelled on this Act.
The Windfall Tax imposes a 100% impost on refund claims made for taxes paid before 6 October 1997 on the basis that the tax(es) were unconstitutionally applied.
3. Assessment of impacts (costs and benefits) of implementation option
The effect of the Allders decision is that there are two tax jurisdictions within each State - Commonwealth places within the State and the rest of the State. However, businesses operating within any State should not be greatly affected by this structure they will continue to pay their liabilities to the State and it will be the State that bears the administrative costs of identifying the correct legislation to apply.
The States will also incur costs in maintaining the legislation and publishing amendments. There will also be an accounting function to be performed which will largely be borne by the States.
The Commonwealth will be responsible for making modifications regarding constitutional matters in relation to the mirror taxes and for accounting for receipts and outlays to and from Consolidated Revenue.
Those impacted by the Windfall Tax legislation will be those taxpayers who paid State taxes in relation to Commonwealth places before 6 October 1997 and who may wish to claim a refund on the grounds that the tax was constitutionally invalid.
The Commonwealths role in the ongoing maintenance of this legislation will be minimal and the costs to the Commonwealth associated with it will be absorbed in existing general administrative funds. Accounting costs to the Commonwealth will also be absorbed.
The States may incur increased systems and staffing costs to deal with allocating tax collections between State and Commonwealth accounts and for accounting to Commonwealth Consolidated Revenue. It is not known how much these additional administrative costs will be. The Commonwealth will not be increasing State appropriations to cover these costs so they must be met from existing State revenues.
The Commonwealth and the States will work closely to ensure that the terms of the bilateral agreements relating to revenue collection minimise the compliance costs on taxpayers, subject to legal and constitutional requirements.
The benefit of this exercise is that the States will be able to collect and retain revenue from taxpayers from whom collection of State taxes is otherwise impossible due to constitutional invalidity. This will ensure that State governments continue to determine the taxes applying in Commonwealth places in their State.
The Australian Taxation Office has undertaken extensive consultation with the Treasury, State Revenue Offices and State Treasuries. The Attorney Generals Department has also been heavily involved in developing the proposals. Advice has also been obtained from the Australian National Audit Office and the Department of Finance and Administration. Early consultations were undertaken with a number of other Commonwealth departments.
Taxpayers have not been formally consulted but a Press Release announcing the change to the law was released on 6 October 1997.
The approach being suggested for the implementation of this policy objective has been developed after extensive consultation between the Commonwealth and the States and is considered to be the only viable implementation option for achieving the Government's policy objectives. It is a combined Mirror Tax/Windfall Tax approach which will protect past receipts by the States and ensure future collections of taxes which mirror State taxes with minimum compliance costs to taxpayers operating in or in relation to Commonwealth places.
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