E LAW - MURDOCH UNIVERSITY ELECTRONIC JOURNAL OF LAW
VOLUME 1 NUMBER 4 (DECEMBER 1994)
Copyright E Law and/or authors

Review of Western Australian State Taxes 1994
Chapter 12  STAMP DUTY AND FINANCIAL TAXES IN THE 21ST CENTURY

Introduction
Stamp Duties
Financial Institutions and Debits Tax
A Fresh Proposal - A Financial Institution Transaction Tax
(The `FIT' Tax)
Proposals for the Future of Financial Taxes
Bibliography

INTRODUCTION

Part one of this chapter examines the operation of the Stamp Act 1921 (WA).
It is suggested that although comprehensive reforms to the Act have been
submitted to government, the fact these have not been acted upon is
indicative of current governmental tax policy which is primarily concerned
with revenue raised, as opposed to scrutinising the patchwork of provisions
which are often inadequate for revenue collection, and fail to satisfy the
criteria for a `good' tax.[1] It is suggested that the Act be rewritten and
that many of the proposed reforms be included.In part two, Financial
Institutions Duty and Debit Tax are re-examined and a new tax regime is
suggested that consolidates the two taxes. The review then examines
Financial Taxes in the light of changing technology in the Banking
Industry.

STAMP DUTIES

Stamp Duty is a State or Territory tax imposed on the value of certain
transactions as specified within the Act and applied at either a fixed, or
`ad valorem' rate.[2] It is generally recognised to be solely for the benefit
of raising State taxes.[3]The 1993 Review of Western Australian State Taxes
looked at several items from the Second Schedule of the Stamp Act 1921 in
the context of public finance criteria (equity, simplicity and efficiency).
It found inter alia that Part IVA of the Act, which provides for sales and
purchases of Marketable Securities by Brokers, is extremely narrowly based
in its taxing application and therefore offends the principle of equity.[4]
On this basis it was suggested that the stamp duty on transfers be
abolished and replaced by increasing the Financial Institutions Duty and
Debits Tax base.[5] Moreover, it was also suggested that cheque duty
contributes little by way of revenue, discriminates against cheque users
and, because Debits tax also applies to the cheques, amounts to "double
taxation".[6] This reiterated the conclusions of the Reform of the Stamp Act
Western Australian Final Report, (hereafter `The Final Report'), which
received submissions on this aspect of the Act, it was recommended that the
duty be abolished and revenue replaced by either broadening the Debits base
or increasing the Financial Institutions Duty rate.[7]The Final Report
proposal, along with other recommendations aimed at furthering the needs of
both Government and commercial practice, was submitted to Treasury in 1992
for consideration by Government. To date, whether through the subsequent
change of Government, differing political prioritising, or inertia, no
major reforms have been enacted.

The fact that no such rationalisation of the Act has taken place can be
seen as an indication that Government assumes a pragmatic overview in
regard to this method of revenue raising. They likely perceive the amount
raised as satisfactory[8] and the method as `tried and true' from a point of
political acceptability, therefore suggestions which could upset the
present taxing balance by increasing another tax, could be seen as
politically unpalatable.[9]On this basis, reform in the areas suggested in
the Final Report are unlikely to occur in the near future. If any major
amendments do occur it will probably only be as a result of specific
practical circumstances which cannot be ignored.

Technology and Amendments to Parts IVA and IVB of the Stamp Act

A case in point are the future amendments to Parts IVA - Sales and
Purchases of Marketable Securities by Brokers, and Part IVBA -
Miscellaneous Provisions In Respect of Marketable Securities. These
sections of the Act essentially provide the requirements to be adhered to
when recording share sales, purchases, transfers and the returns to be
remitted to The Commissioner of State Taxation.

As of the first of July 1994 the Australian Stock Exchange (ASX) will
implement CHESS, the Clearing House and Electronic Subregister System, a
new electronic system providing for the register and transfer of
securities. It is said to bring about significant cost savings and
increased efficiency to the ASX.[10] Concomitant to this will be the
introduction in May 1994 of the new Bill into Parliament incorporating
amendments to make the Stamp Act compatible with electronic share transfer
and enable the remittance of duty on electronic transactions to be
forwarded by disc.[11]This is likely the beginning of another `modernising'
of the Stamp Act 1921, making it electronic transaction based, while still
providing for instrument type transactions. It is possible that in the
future, in conjunction with like technology being implemented into the
Department of Land Administration, Financial Institutions will be able to
record mortgages electronically and remit Stamp Duty returns in a similar
way.

However, in the haste to accommodate new technology it is important not to
lose sight of other provisions within the Act which offend the criteria for
a "good" tax.

Practical Operation of Section 27(1) of the Stamp Act

Section 27(1) of the Act states, generally, that if Stamp Duty is not paid
on a dutiable instrument then it cannot be used in evidence in a civil case
by either party to the transaction. Many Western Australian cases
illustrate the inequity of this provision.[12] To use sale of land as an
example,[13] the Act does not differentiate between a purchaser with the
liability to pay the duty who wants to plead or give the contract in
evidence, and the vendor. In the case of the purchaser, the Act can be said
to operate fairly in the circumstances, but when it is a vendor who wants
to rely on the contract in court, they can be penalised unfairly by the
section.[14]The purpose of this provision was to protect Government revenue.
In the past it was `self-policing' in that parties to transactions ignored
`voluntary' stamping at the peril of not being able to use their contract
in court.[15] Since 1979 legislation has enabled the imposition of fines for
non-compliance, made failure to pay an offence and given the Commissioner
power to sue for unpaid stamp duty.[16] Besides the unfair operation of the
Act towards the `innocent' party who may not want, nor have the means, to
chance paying the duty and then attempting to recover it from the purchaser
whose liability it was - it is suggested that the provision, as it stands,
to some extent defeats revenue raising.

At present, where a non-liable party wishes to enforce a transaction but
fails for want of contractual evidence because of unpaid duty, no revenue
is received. Whereas, if the unstamped instrument could be admitted into
court and found enforceable, then its lack of stamping in breach of s.39
could be highlighted with the possibility that stamping could also be
enforced, and revenue received.

In 1991, a proposal for reform of s.27 was put to Government by the
Commissioner of State Taxation.[17] It was in line with similar provisions in
the New South Wales and Tasmanian Stamp Acts[18] whereby an `innocent' party
can inform the Commissioner of State Taxation of the name of the person
liable for the duty, and lodge either the instrument or a copy with the
Commissioner for assessment before then being able to use it in evidence.
Unfortunately, such an amendment is yet to be enacted.

Rulings

From the perspective of business, one way of streamlining the operation of
the Act is through a comprehensive system of rulings. These are essentially
information provided by the Stamp Office detailing the Commissioner's
interpretation of certain provisions and schedules within the Act. The New
South Wales Office of State Revenue has issued approximately two hundred
rulings, Victoria, less, and Western Australia, nine. The policy of the
Department of State Taxation in Western Australia amounts to a belief that
the release of rulings generally, will promote tax evasion in the area
under discussion.

An Overview of the Act

In conclusion, it seems the Stamp Act is in grave danger of remaining a
complex patchwork of past and future amendments. It is suggested that it is
time to re-write the Act, with consideration given to problems identified
in past reform proposals. With both large and small, more specific
provisions (s.27) being given equal priority. If at all possible it should
be written in such a manner as to accommodate future technological changes.
Finally, the re-written Act should be as readable and accessible to the lay
person as can be achieved, after all a `good' tax is one that is
understandable to the taxpayer.[19]

FINANCIAL INSTITUTIONS DUTY AND DEBITS TAX

Structure of FID and Debits Tax

Financial Institutions

Duty is levied in Western Australia under the Financial Institutions Duty
Act 1983 (`the FID Act') which came into operation on 1 January 1984. FID
is imposed at the low rate of 0.06% upon the receipts (ie. deposits to) of
registered financial institutions.[20] FID of 0.06% is also imposed under
s.12 of the FID Act on depositors transacting with unregistered Financial
Institutions.[21] A concessional FID of 0.04% or 0.05% applies under section
11 of the FID Act to the short term money market dealings of short term
dealers. Under the FID Act, the financial institutions and the short term
dealers are made liable for the duty (s.10 and s.11), and also must furnish
monthly returns to the State tax department (s.23 and s.27).

In total, FID collected in Western Australia represents between 6-7% of
total taxation revenue. In the financial year ending 30 June 1993, FID
collected was $96 million or 6.97% of total taxation receipts. Debits tax
receipts in the same period were $41 million or 2.97%.[22]The power to impose
a tax on debits was transferred from the Commonwealth to the States from 1
January 1991. Debits tax has been levied in Western Australia from that
date under the Debits Tax Act 1990 (`the Debits Act') and the Debits Tax
Assessment Act 1990 (`the Act'). This tax only applies to debits or
withdrawals not less than $1, from accounts as defined in s.3(1) of the
Act. This definition effectively limits the tax to cheque rather than
saving accounts.[23] The rates on which the tax is calculated are set out in
Schedule 1 of the Debits Act. As pointed out by last year's review [24] this
tax rate is regressive as the larger the withdrawal, the smaller the
proportion of attendant tax.

The 1993 Review of FID and Debits Tax - Briefly stated

Last year's tax policy elective found FID and Debits tax satisfactorily
simple. They are taxes that are easy to understand, calculate and collect.
There are only a few collection points as financial institutions and short
term dealers collect the tax on behalf of the State (thereby also rendering
the tax easy to regulate). FID was also found to be efficient or
economically neutral in impact as it was broad based and imposed at a rate
low enough to discourage avoidance. FID was also equitable due largely to
its broad based nature. Debits tax, on the other hand, was inefficient in
that it encouraged the use of savings rather than cheque accounts to avoid
the tax, it was horizontally inequitable due to the same cheque/savings
account demarcation and vertically inequitable due to the regressive rate
of the tax.

The following is a summary of the recommendations which flowed from that
analysis:

- that uniformity of the FID and Debit tax regimes between all States be
pursued;

- that all exemptions to FID and Debits tax based on solely political
reasons be scrapped;

- that Debits tax be imposed at a flat rate;

- that FID and Debits tax be linked together, or alternatively that Debits
tax be calculated on an aggregate basis whereby the sum total of each
month's transactions are taxed;

- that the provisions for short term money market dealers be substantially
revised;

- that the limit on the maximum Financial Institutions Duty and Debits tax
payable be abolished and

- that the categories of transactions taxed under the Debits Act be
broadened.

However, while it can be conceded that political exemptions to these taxes
offend the criteria of simplicity and equity, they are politically
entrenched so that their abolition is unlikely and would in any event
result in only a small revenue increase. Furthermore, while uniformity
between the States would be desirable on FID and Debits tax matters, it is
unlikely given the poor record on harmonisation of taxation matters between
the States in the past. With these reservations in mind we have ventured to
propose the following reform of the existing taxes.

A FRESH PROPOSAL - A FINANCIAL INSTITUTION TRANSACTION TAX

(THE `FIT' TAX)

A summary of the features of this proposed tax, which we envisage replacing
FID's and Debits tax, follows:

- It is a `transaction' tax based on the making of any withdrawals or
deposits.

- It would be imposed at a flat rate of 0.06%.

- It would apply to `accounts' in Western Australia of
`financiainstitutions'. The definition of `account' would encompass any
interest bearing deposit with a financial institution notwithstanding that
financial institution's classification of it. Both cheque, saving,
quasi-cheque/saving and term deposit accounts would therefore be caught.
The FIT tax would retain the comprehensive definition of `financial
institution' that exists within the Financial Institutions Duty Act and
also the benchmark requirement of $5 million total dutiable receipts in a
year or $416 666 in one month. It is our proposition that any institution
receiving less than this amount is not really a commercial organisation and
people would be reluctant to switch to them simply to avoid the new FIT
tax.[25] - The new FIT tax would retain the provisions in regard to short
term money market dealings.[26]- The FIT tax would not impose a ceiling on
the maximum amount of tax payable.- The entrenched political exemptions
will remain.SimplicityThe FIT tax would therefore retain the simplicity of
FID and Debits tax in that there would be few collection points. The new
tax would be simpler to understand and calculate.

Efficiency

The FIT tax would be more efficient than the current taxes as its base is
broader and the `ceiling' of maximum tax payable would be removed. The tax
also retains the proven `efficient' low tax rate.

Equity

Due to the broadening of the base, the FIT tax would be more horizontally
equitable. The replacement of the regressive Debits rate with a flat tax
rate and the abolition of the `ceiling' of a maximum amount of tax payable
would also increase the vertical equity of the proposed tax.

PROPOSALS FOR THE FUTURE OF FINANCIAL TAXES

The Context

At present our finances are intimately tied up with banks, be it through
cheques issued by the banks or via a visit to the ATMs or even the use of
EFTPOS. The future of banking is to have even less bank interaction than at
present. Even with our present system it is necessary to have access to the
bank for loan applications, credit extensions and other services. In the
future all such dealings will be done with the use of a `Smart Card' and
`Home Banking'. Smart Cards are like a present card except that they have a
microprocessor on the back. This enables the card to store and calculate
far more information that can currently be achieved. All purchases will be
paid for with this card and all other banking will be done using this card
and your personal computer connected to the bank.

What does all this have to do with taxation? Its relevance lies in the
connection to the bank that is necessary. Different states have different
levels of FID and Debit Tax (Queensland has no FID). Despite the savings
that could be achieved by locating an account in a different state, at the
moment this manoeuvre has the problem of access to the bank. However, the
introduction of Smart Cards will mean that people can have an account
interstate without any disadvantages. The potential result of this is that
the State Government could lose about 10% of its annual revenue.[27]This is
where FIT Tax comes into play. It is designed to be a preparatory step
towards a tax designed to compensate for the loss of revenue from FID and
Debits Tax. Eventually a new tax, Financial Electronic Liability Tax
(FELT), would be calculated on the same basis as FIT Tax, a flat rate
applied to all debits and credits to the account. However FELT might be
applied at the point of sale on the use of the electronic transfer
facilities. The Smart Cards themselves could keep track of the tax
liability which could then be paid at the end of each period using the home
computer.

The Constitutional limitations and FELT

As is so often the case with State taxes, Constitutional limitations are a
relevant concern to the validity of the tax. The first of these potential
limitations is based on s.2 of the Australia Act relating to the
territorial limitations faced by the states in their taxing activities.
This issue is covered best by the Stamp Duty cases of Millar v Commissioner
of Stamp Duties (N.S.W.)[28] and Broken Hill South Ltd v Commissioner of
Taxation (Qld),[29] which laid down the requirements of connection for a
valid tax. They held:...It is also within the competence of the legislature
to base the imposition of liability on no more than the relation of the
person to the territory. The relation may consist in presence within the
territory, residence, domicil, (sic) carrying on business there, or even
remoter connections...[30]FELT would be based on the payee residing within
the state and also conducting an electronic transfer within the state. It
is submitted that this establishes the connection required by the case law.

The second limitation is based on s.92 of the Constitution, relating to
Freedom of Interstate Trade. This issue arises from the view of taxing
people having their money outside W.A., especially when neither the
debiting or crediting account is located within W.A. In early cases on the
section the free trade aspect was emphasised. In Fox v Robbins,[31] a
licensing fee which was lower for hotels selling W.A. beer was held
invalid. At later stages however the interpretation changed such that any
legislation dealing with interstate trade was viewed as unconstitutional.
In W.A. McArthur Ltd v Queensland,[32] a tax which applied equally to both
interstate and local goods was held invalid. In the recent case of Cole v
Whitfield[33] the free trade aspect of the section was again reinforced. As
such, provided there is no disadvantage to interstate trade, which there is
not here, because the tax applies equally to people holding accounts in
W.A., the tax will be valid.

The final issue relates to s.90 of the Constitution and the limitations to
the states imposing excises. The purpose of s.90 is arguably to prevent
taxes on goods other than those set Federally. The tax does not need to
relate to the quality or value of the goods, Matthews v Chicory Marketing
Board.[34] Taxes on the production or on the distribution of a good are also
an excise, Parton v Milk Board (Vic.).[35] The High Court made it clear that
a tax on the final sale to the consumer was an excise in W.A. v Hammersley
Iron Pty Ltd[36] and W.A. v Chamberlain Industries Pty Ltd.[37] Both of these
cases considered a receipts tax. Under the invalidated legislation, any
payment required a receipt to be issued, and duty applied to these
receipts. The court declared that a tax on the receipt of the purchase
price was a tax on a step of the movement of goods into consumption. It was
also held irrelevant whether the tax impacted on goods specifically or
incidentally.

FELT - A viable option

We consider the tax to be distinguishable from the receipts tax on the
basis that it is the use of the electronic transfer device that is being
taxed not the actual purchase. The tax liability arises on all uses of the
device, whether for the repayment of loans, the purchase of services or the
acquisition of goods. It is not the purchase of the goods which is being
taxed since a payment by way of cash would not attract the tax.

In conclusion the face of banking is changing and even if this proposal is
not in the final analysis the preferable one, the State government will
need to consider options to protect its income base in the face of
technological advancement.

BIBLIOGRAPHY

AUSTRALIAN TAX RESEARCH FOUNDATION, STATE TAXATION: Assessing the New South
Wales Tax Force Report, Conference Series No. 9, 1988. [Discusses the
proposals put forward by the NSW Task Force - a good overview of tax reform
policy.]

CARSON, J.B, "A Legislative Review of Section 31B", Stamp Duty Extra
Territoriality, Stamp Duty Seminar, 198, Perth. [The paper concentrates on
sections 16(3) and 31 B of the Stamp Act 1921 (WA).]

CCH 1994 Australian master Tax Guide. [A helpful introduction to Stamp Duty
legislation.]

FOX B, "Towards the intelligent credit card", New Scientist, v. 121. [Gives
a good overview of current banking technology.]

LAW SOCIETY OF WESTERN AUSTRALIA, Stamp Duty Legislation in Western
Australia, 1983, Park Printing Co., Victoria Park WA. [Good background
history to the Stamp Act 1921 (WA).]

MUSGRAVE R.A. & MUSGRAVE P.B, Public Finance in Theory and Practice, 5th
ed., McGraw-Hill Book Company, 1989. [Helpful introduction to public
finance theory principles and taxation.]

O'BRYEN, D., "Financial Taxes in Australia", 5 Australian Tax Forum.
[Useful background to the taxes.]

PEEK, I.G., "Vendors' Difficulties with Unstamped Contracts: Proposals for
Reform," 23 Western Australian Law Review 152, 1993. [This article
succinctly describes the current problems with s.27(1) of the Stamp Act
1921 (WA) and proposes that it be totally repealed.]

PEEK, I.G., "Stamp Duty: The Meaning of "Instrument of Security" In Theory
and Practice," 22 Western Australian Law Review 375, 1992. [Discusses the
current meaning given to the words "instrument of security" in item 13 of
the Second Schedule of the Stamp Act 1921 (WA).]

TAXATION POLICY ELECTIVE, 1993 Review of Western Australian State Taxes,
Murdoch University: School of Law. [Provided the starting position for
taxation policy covered in this chapter.]

WESTERN AUSTRALIAN GOVERNMENT WORKING GROUP, Reform of the Stamp Act and
Its Administration, (Final Report) 1992. [A very good discussion of various
sections within the Act and comprehensive proposals for reform.]

WESTERN AUSTRALIAN TAXATION DEPARTMENT, Annual Report 1992-1993, WA State
Printer. [Provided figures used.]

Notes:

[1] Among other things, a "good" tax system should "permit fair and non
arbitrary administration and it should be understandable to the taxpayer."
R. Musgrave & P. Musgrave, Public Finance in Theory and Practice, 5th Edit.
McGraw-Hill Book Company, 1989, p.216.

[2] Australian Master Tax Guide, CCH para. 37-000.

[3] Reform of the Stamp Act and its Administration. Final Report of the
Western Australian Government Working Group, July 1992 (hereafter "The
Final Report"), p.v.

[4] Tax Policy Elective, 1993 Review of Western Australian State Taxes,
Murdoch University 1993, Chapter 3 `Stamp Duty', pp.36-53 at p.41. But
note, the 1993 Tax Policy Elective group referred to horizontal equity,
that is, that people with equal capacity should pay the same, whereas a
better description would be that its application is inequitable because
"each taxpayer should contribute his or her fair share to the cost of
government". See supra, n. 1 at p. 218.

[5] Id p.41.

[6] Id. p.45.

[7] Id. p.46., and The Final Report, supra, n. 3 at p.x.

[8] Western Australian State Taxation Department, Annual Report, p.23
Financial Statements for Year Ended 30 June 1993. Stamp Duty revenue was
$432,156,132, which is approximately 35% of Consolidated Revenue Fund
Receipts.

[9] The 1993 Tax Policy Elective Review alluded to this, see supra, n. 4 at
pp.41, 48.

[10] Report of Australian Payment System Council 1991-92, p.26.

[11] As per discussion with representatives at the W.A. State Taxation
Department. Also note, this was an area of the Stamp Act that the 1993 Tax
Policy Elective group considered should be abolished - instead it is being
up-dated for an new era.

[12] See Re Exbea Pty Ltd; Ex parte M & W Holdings Pty Ltd (1989) 1 WAR 287;
Re Odin Inns Pty Ltd; Ex parte Greenpark Pty Ltd 89 ATC 4931; and more
recently, Ioannou v Silver Royal Pty Ltd (1993) State Reports (Western
Australia) 9 Part 4 at 200.

[13] See ss.74(1), 39(1) and item 4(1) of the Second Schedule to the Act.

[14] See I G Peek, "Vendors' Difficulties with Unstamped Contracts: Proposals
for Reform", Western Australian Law Review 23, p.153.

[15] Stamp Duty Legislation in Western Australia, The Law Society of Western
Australia, 1983, pp. 4, 5.

[16] See ss. 20(1), 39 generally, and 39A; also I G Peek supra, n.14 at
p.155; and The Law Society, Id. p.6.

[17] See The Final Report, supra, n. 3 at p.ix.

[18] Section 29(4) of the Stamp Duties Act 1920 (NSW); Section 28(2) of the
Stamp Duties Act 1931 (Tas), cited in I G Peek, supra, n. 14 at p.155.

[19] Public Finance in Theory and Practice, supra, n. 1 at p.216; See also
The Final Report, where it was submitted that there was a need for a manual
detailing procedures and explanations of the Act in layman's language,
supra, n.3 at p. 92.

[20] Section 10 of the FID Act.A Financial Institution must register under
s.22 of the FID Act if its total dutiable receipts in the previous year
exceeded $5 million or $416 666 during the preceding month.

[21] An `unregistered financial institution' is one that must register under
s.22 but has not. Last year's review noted that s.12 is an anti-avoidance
provision that has not been resorted to thus far, supra, n.4 at p.55.

[22] Supra n 8.

[23] Definition of "account"; (a) kept with banks, from which cheques can be
drawn upon (i.e commonly referred to as cheque account) or (b) kept with
non-bank financial institutions from which payment orders can be drawn
upon."

[24] See, Chapter 4 `Financial Institutions Duty and Debits Tax', supra, n.4
at p.67.

[25] Depositors may weigh the benefit of avoiding this relatively small tax
with the riskiness of banking with smaller financial institutions,
particularly since recent spectacular crashes of smaller financial
institutions eg. Teachers Credit Society and Western Women.

[26] Supra, n. 7.

[27] Supra, n.8.

[28] (1932) 48 CLR 618.

[29] (1937) 56 CLR 337.

[30] Id. at p.375 per Dixon J.

[31] (1909) 9 CLR 115.

[32] (1920) 28 CLR 530.

[33] (1988) 78 ALR 42.

[34] (1938) 60 CLR 263.

[35] (1949) 80 CLR 229.

[36] (1969) 120 CLR 42.

[37] (1970) 121 CLR 201.