The Australian Government is hungry for revenue and seemingly willing to introduce retrospective tax legislation to protect its tax base. But is it just a matter of time before a taxpayer mounts a successful constitutional challenge to taxes imposed retrospectively?
Taxpayers usually initiate disputes with the Commissioner of Taxation using the objection and appeal processes in the tax legislation. Alternatively, a taxpayer aggrieved by the Commissioner's behaviour might on occasion seek judicial review of his decision under administrative law.
However, there is a third possible, but rarer, avenue of attack available to taxpayers. A constitutional challenge can be mounted to taxes if the relevant tax law infringes one or more of the restrictions on the Commonwealth Government's taxing power in the Constitution. For example, a constitutional challenge can be mounted to a tax law which discriminates between the states or is not truly a law "with respect to taxation".
Depending upon the circumstances, a constitutional challenge might also be mounted where the Commissioner raises a tax assessment based on retrospective tax legislation. The example that instantly comes to mind in this case is the recently enacted transfer pricing measures in subdivision 815-A of the Income Tax Assessment Act 1997, which appear to involve substantive changes to tax laws applied retrospectively to 2004.
A potential basis for a constitutional challenge to retrospective tax legislation is if the tax can be viewed as an "arbitrary exaction" outside the Commonwealth's taxing powers.
To be valid under the Constitution, a tax law must be imposed by reference to ascertainable criteria of sufficiently general application and capable of being known in advance by taxpayers, to enable them to assess these criteria and legitimately order their affairs accordingly. Retrospective tax laws that treat taxpayers differently depending upon the way in which they legitimately ordered their affairs in the past may be viewed as arbitrary exactions. Further, the risk that retrospective tax laws treat taxpayers arbitrarily is greater the longer the period of retrospectivity. The transfer pricing measures apply from 1 July 2004, some 8 years before their enactment.
It seems self-evident that taxpayers have not been afforded the opportunity to order their affairs in accordance with the new rules from their 1 July 2004 start date. The transfer pricing measures have the potential to apply differently to different taxpayers, depending on the way in which each taxpayer legitimately ordered its affairs in the past.
The Government's response would undoubtedly be that the transfer pricing measures clarify, rather than change, the law so that they operate in the way taxpayers ought to have understood them to operate.
The Explanatory Memorandum to the Bill which introduced the transfer pricing measures certainly sows the seeds of a defence to their retrospective application based on the claim that they merely clarify Parliament's previously expressed intention. The EM contains a lengthy (but possibly self-serving) justification as to why it ought to have been clear to taxpayers that Parliament had always understood or assumed the law to operate consistently with the amendments. This commentary appears directed at heading off a constitutional challenge to the new rules.
A taxpayer seeking to question the constitutional validity of the transfer pricing measures would lead evidence that, contrary to the view in the EM, the measures do change the manner in which the law operates.
Ultimately, it will be for the Commissioner of Taxation to determine how he administers the new rules. His decisions in that regard will dictate whether the circumstances arise for a challenge to be made to the constitutional validity of the transfer pricing measures.
That said, the decision to enact the new rules with a 1 July 2004 start date sets up the very real prospect that the Commissioner will issue an assessment to a taxpayer based on a retrospective application of the rules. Interestingly, publicly available court orders in Chevron Australia's transfer pricing case currently before the Federal Court provide for the possibility of the Commissioner making a determination and issuing additional amended assessments to Chevron Australia under the new transfer pricing measures.
At the very least, the apparent willingness of this Government to introduce tax laws with retrospective effect creates fertile ground for a constitutional challenge. It seems just a matter of time before an aggrieved taxpayer with an appropriate case successfully challenges a retrospective tax law on constitutional grounds.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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