Legislative History
12 A legislative scheme which provided for deductions of tax from salary and wages was first introduced into the ITAA 36 in 1940 by the Income Tax Assessment Act (No. 2) 1940 (Cth). In the Second Reading speech, Mr Fadden, the then Treasurer explained that the provisions of the Bill were:
'To facilitate the collection of the tax from salary and wage-earners and, at the same time, to ease the burden of meeting the payment of the tax in a lump sum, the Government proposes to introduce a scheme for the deduction of the tax from salaries and wages, and earnings of that character, by instalments spread throughout the year.'
13 The legislative scheme provided for the payment of income tax by instalment deductions from the salary and wages of employees, either by the purchase of tax instalment stamps by the employer or by means of cash-instalment deductions made under approved group schemes. The scheme which was introduced required that the employer hand to the employee concerned a tax instalment stamp or stamps equal in denomination to the deductions made. The employee was required to affix the stamp to a page in his stamp book and to cancel it by writing thereon his name or initials and the date. Pursuant to s 221H, when the employee received his notice of assessment, the book of stamps was then forwarded to the Commissioner where the face value of the stamps was applied in payment of his tax and if the value was greater than the tax payable, the difference was payable to the employee.
14 Under the initial scheme, employers of large numbers of employees who did not wish to use tax stamps could obtain the Commissioner's approval for the formation of a group. Under this arrangement, the employer was required to make prescribed deductions on pay days and pay the aggregate amounts deducted to the Commissioner. When the employee received his notice of assessment he would then obtain from his employer a certificate of the deductions made. The certificate was then presented to the Commissioner and the necessary credit was given to him for the amount of the deduction paid through the group. It was therefore a system where a credit was provided by the Commissioner on presentation of a group certificate or a tax stamps sheet.
15 There were obvious vulnerabilities in a system where a credit was provided on the basis of a group certificate. Section 221H was amended by the Income Tax Assessment Act 1947 (Cth) which introduced subs 221H(7). Subsection 221H(7) was in the following terms:
'If the Commissioner has reason to believe that any group certificate produced to him is incorrect in any particular, he may retain that group certificate for such period as he thinks fit and shall not apply the amount shown in the certificate in payment of any tax, or make any payment or issue any interim stamps receipt in respect of the certificate, until he is satisfied as to the correctness of the certificate.'
16 Subsection 221H(7) was to remain in the ITAA 36 (although in a slightly amended version) for the next 48 years until 1995. The Explanatory Memorandum for the Income Tax Assessment Bill 1947 (Cth) states at cl 30:
'CLAUSE 30. APPLICATION OF DEDUCTIONS IN PAYMENT OF TAX.
The proposal to insert a new sub-section (7.) in section 221H of the Principal Act arises from cases in which employers have issued group certificates to employees for amounts in excess of the deductions actually made. Cases have occurred in which employers have advised the Department that group certificates have been issued for excess amounts and have requested the Department to ensure that credit for the excess amount is not given to the employee upon production of the group certificate. The Crown Solicitor has expressed the opinion that the Commissioner is not empowered by the Act to refuse credit to the employee for the full amount stated in the group certificate produced by him. The insertion of the sub-section which is proposed, is designed to correct this position.'
17 Division 2 of Pt VI of the ITAA 36 was repealed by the Income Tax Assessment Act (No. 2) 1947 (Cth) and replaced by a new Div 2 which remained substantially in the form in which it was substituted until 1995. Section 221H of the new Div 2 required the Commissioner to provide a credit against tax payable where he received a tax stamps sheet or a group certificate although subject to subs 221H(7) and a discretion in subs 221Q(1). Subsection 221H(7) provided that:
'If the Commissioner has reason to believe that a group certificate received by him for the purposes of this section is incorrect in any particular, he may retain that group certificate for such period as he thinks fit, and shall not deal with the certificate as required by the foregoing provisions of this section until he is satisfied as to the correctness of that certificate.'
18 In addition, subs 221Q(1) provided:
'Where the Commissioner is satisfied that an employer has made deductions from the salary or wages of an employee and has failed to issue a group certificate or to deliver a tax stamps sheet in respect of those deductions to the employee within the period prescribed by this Division, the Commissioner may -
a. apply an amount equal to the amount of the deductions in satisfaction of any tax payable by the employee; or
b. issue an interim stamps receipt or make a payment in respect thereof, in the same manner as if a group certificate in respect of the deductions had been received by the Commissioner.'
19 Until 1995 the tax instalment deduction provisions relied to a large extent upon the integrity of the group certificate to establish that a deduction had been made, although subject to the Commissioner's right under subs 221H(7) to decline to provide a credit on the basis of the certificate until he was satisfied as to the correctness of the certificate and also the discretion under s 221Q.
20 Division 2 of Pt VI was amended by the Taxation Laws Amendment Act (No. 3) 1995 (Cth). The amendment brought about the following changes:
(1) An abandonment of the tax stamps system;
(2) an abandonment of the entitlement to a credit on the basis of the presentation of a group certificate, that being considered an inappropriate basis for allowing a credit; and
(3) the introduction of a tax instalment system where an entitlement to a credit would only arise on establishment of the fact that a deduction was made.
21 In addition, consistent with the above changes, subs 221H(7) and s 221Q were repealed. The Explanatory Memorandum to the Taxation Laws Amendment Bill (No. 3) 1995 (Cth) stated as follows:
'6.15 The provision of original group certificates to the ATO necessitates amendments to the PAYE crediting provisions. At present entitlement arises from presentation to the Commissioner of a group certificate. This is no longer appropriate given the employee will only be issued with copies of the certificate and not the original. The amendments will make the basis of entitlement to credit the fact of deductions having been made. This places the PAYE provisions on a similar footing to other more recently enacted collection systems, such as the prescribed payments system. [Item 24 - new subsection 221H(2)]
6.16 Existing subsections 221F(9) to (11) provide for a situation where the Commissioner allowed credit, on the basis of what was shown in a group certificate, in excess of the tax instalments that were actually deducted from the employee's pay. The subsections allowed the Commissioner to recover the discrepancy from the employer and then the employer to recover the amount from the employee. The subsections are removed as inappropriate with the new basis of allowing credit [item 15]. Wrongly credited amounts will now be recovered from the employee who received the benefit under new subsection 221H(5). [Item 24].
6.17 The definition of 'group certificate' in subsection 221A(1) is amended to remove the reference to section 221S. Section 221S allows the Commissioner to enter into arrangements with Australian based authorities of other countries for PAYE purposes in respect of any locally engaged staff. Under such an arrangement a group certificate was not necessarily issued to an employee, however, the Commissioner was obliged to apply the crediting arrangements as if one were. This is no longer appropriate because of the basis of entitlement to credit no longer being tied to the group certificate. [Items 1 and 34]
6.18 The amendments repeal section 221Q that allowed the Commissioner, not having received a group certificate from an employee because their employer did not issue one, to allow credit for tax instalments deducted if he was satisfied that the deductions had been made. The provision is no longer necessary because of the new basis of allowing credit [items 33, 39 and 41]. Similarly, subsection 221F(8) permits the Commissioner, where he has released an employer from the obligation to issue a group certificate in certain circumstances, to apply the crediting provisions in respect of the relevant employee as if a group certificate had issued for the purposes of allowing credit. The provision is being amended to reflect the new basis for allowing credit [item 15].'
22 Clearly the effect of the above amendments was to make the entitlement to a credit to depend upon a question of fact of whether or not a deduction was made. Section 221A is the definition section of Div 2 relevantly defining 'deduction', 'employee', 'employer', 'group certificate' 'PAYE deduction obligation', 'PAYE obligation' and 'salary and wages'.
23 A deduction made for the purposes of the ITAA 36 must satisfy subs 221C(1A) of that Act, which is in the following terms:
'Where an employer pays to an employee salary or wages before I July 2000, the employer shall, at the time of paying the salary or wages, make a deduction from the salary or wages at such rate (if any) prescribed in accordance with subsection (1) as is applicable.'
24 Subsection 221C(1) provided that the rate of deductions for 'the purpose of enabling the collection by instalments of income tax' is prescribed by the regulations. In particular, Div 2 of the Income Tax Regulations 1936 (Cth) fulfilled this function. In addition, the Income Tax Rates Act 1986 (Cth) declared the rates of income tax and each year PAYE schedules with explanatory notes setting out the tax instalment deductions to be made by employers from salary or wages of employees were available from the Australian Taxation Office ('the ATO').
25 Whether a deduction had been made under subs 221C(1A) was a question of fact. In Federal Commissioner of Taxation v Barnes (1975) 133 CLR 483, Barwick CJ, Mason and Jacobs JJ, in considering the priority the Commissioner formerly enjoyed under s 221P (in respect of group tax), said, at 494, in relation to deductions under s 221C:
'The amount of the deductions may be identifiable or may be unidentifiable in his hands. It does not matter. In the first case, the identifiable deductions should have been handed over. In the second case, the deductions are represented by property which the employer would have had to realize in order to pay over the deductions to the Commissioner of Taxation or would not have been able to purchase if he had paid the deductions over.'
26 In Sargon, Ormiston J concluded at 358 that:
'"[D]eduction" within the meaning of the word used in the division involves the arithmetic subtraction of instalments of income tax at the prescribed rates from the gross income of employees and the payment to them of only the resulting remainder of their wages, that is their net pay. The division does not specifically require the retention of the amounts so deducted in any identifiable form.'
27 Subsection 221H(2) provided as follows:
'If:
(a) an employer has made any deductions in respect of an employee under this Division during a year of income; and
(b) an assessment has been made of the tax payable, or the Commissioner is satisfied that no tax is payable, by the employee in relation to the of income;
the employee is entitled to a credit equal to the sum of the deductions.'
28 At the end of the day, under the PAYE system which operated until 30 June 2000 it was a question of fact as to whether a deduction was in fact made. In terms of administering the ITAA 36, in the usual case the Commissioner would allow a credit for a tax instalment deduction on provision by the employee taxpayer or the employer, as the case may be, of:
(1) An employee's copy of a group certificate lodged with the relevant tax return; and/or
(2) on the basis of counterpart copies of the group certificates required to be lodged with the Commissioner pursuant to s 221F(5J)(a) by the employer; and/or
(3) on the basis of an annual reconciliation of the total deductions required to be lodged with the Commissioner pursuant to s 221F(5J)(b).
29 That approach was efficacious and sensible in terms of administration of the ITAA 36 having regard to the resources available to the Commissioner and was congruent with a self-assessment regime. However, it did not displace or supplant the requirement under subs 221H(2) that, in order to be entitled to a credit amount, it was necessary for an employee, if challenged by the Commissioner, to show as a matter of fact that the sum of deductions made on the employee's account was equal to the amount of the credit.