8,000 Years of Weird and Wonderful Taxes

By Darren Gleeson

'8,000 Years of Weird and Wonderful Taxes' takes a journey through history as we shed light on unusual and different taxes through the ages. We start with the beginning of taxation in 6,000 BC with the Bala tax and move through to the current day Social media taxes.

Governments levy taxes for two reasons: to raise revenue to fund their spending or to change citizens' behaviours (by either rewarding or punishing the behaviours they want to change). We look at the effect on society of the 420 BC - Sex tax, 870 - Breast tax, 1535 – Beard tax, and the 1807 – Killing of squirrels tax, to name a few. Some historical taxes will make us question the legislators' sanity (e.g. the 1800 – Tax on eye colour), while others were damaging to our health (such as the 2009 – Pro-cigarette smoking tax). Like them or loathe them, there is no doubt taxes have shaped history and the world we live in today.

• Language: English
• Publisher: BookBaby
• Release date: Sep 24, 2020
• ISBN: 9781922409539

Darren Gleeson

Darren Gleeson has been involved in the accounting public practice industry for over twenty-five years and is founder of the Success Tax Professionals franchise group of Registered Tax Agents and Public Accountants. Darren is a taxation and business development specialist who is an advocate for and active in the development, training and mentoring of accountants, so they achieve their full potential and provide more value added and proactive services to their clients. Darren’s blog on practice management, franchising and business development is available at www.stptax.com

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1.

Introduction

‘THE SECRET OF GETTING AHEAD IS GETTING STARTED’

– MARK TWAIN (AMERICAN AUTHOR, 1835 – 1910).

1. 8,000 years of taxes

Taxation has existed for over 8,000 years. Mesopotamia, a historical region covering the Tigris–Euphrates river system, introduced a Bala tax in 6,000 BC. The taxes included livestock, fish, grain, labour and craft products.

The idea of taxing income is a modern innovation and requires three things: a money economy, an accurate accounting system, and thirdly, an orderly society.

A money economy is a system of trade where money has replaced barter. The word ‘money’ originates from a temple of Juno, on Capitoline, one of Rome’s seven hills. In the ancient world, Juno was associated with money, and the temple of Juno Moneta in Rome was the location of the mint of Ancient Rome. Money is any item or verifiable record accepted as payment for goods and services and repayment of debts in a particular country. The main functions of money are distinguished as — a medium of exchange, a unit of account, a store of value, and sometimes a standard of deferred payment.

An accurate accounting system also requires a clear understanding of receipts, expenses, and profits. For this, we can thank Luca Pacioli (c.1447 – 1517) the ‘Father of Accounting’. Luca published works for the double-entry accounting system based on procedures in use by Venetian merchants during the Italian Renaissance. Most of the accounting principles and cycles described by Pacioli are still in use today, including double-entry accounting, journals, ledgers, trial balances, year-end closing dates, cost accounting, accounting ethics, and the Rule of 72.

An orderly society is a group of people involved in persistent social interaction, or a large social group sharing the same geographical or social territory—typically subject to the same political authority and dominant cultural expectations. They are bound together by their national or cultural identity, social solidarity, language, or hierarchical structure.

For most of the history of civilisation, these three preconditions required for taxing income did not exist. Consequently, wealth, social position, and ownership of the means of production (typically land and slaves) were taxed instead.

Governments levy taxes for two reasons, to raise revenue to fund their spending or change citizens behaviours. Carbon taxes, for example, have been introduced by Governments to reduce carbon dioxide emissions. In 1979, economist Milton Friedman said ‘the best way to deal with pollution is to impose a tax on the cost of the pollutants emitted by a car and make an incentive for car manufacturers and for consumers to keep down the amount of pollution’. In 2012 the Australian Federal government introduced a carbon price of AUD$23 per tonne of emitted CO2 on selected fossil fuels consumed by major industrial emitters and government bodies. This carbon tax cut Australia’s annual carbon emissions by 17 million tonnes and produced the most significant annual reduction in greenhouse gas emissions in 24 years.

2. What is tax planning?

Tax planning is not the same as tax compliance. With tax compliance, accountants try to maximise their clients’ refunds or savings by claiming valid deductions that they have evidence for while complying with compliance obligations. Compliance is a reactive service.

In contrast, tax planning is an advanced service that goes well beyond this and investigates what strategies can be implemented and used to make structured tax savings. Tax planning is a proactive service.

The Australian Taxation Office (ATO) defines tax planning or tax-effective investing as the arranging of financial affairs to keep tax to a minimum. Tax planning is legitimate when done within the letter and the spirit of the law.

The difference between tax planning and tax avoidance primarily comes down to intent. Tax planning is organising your tax affairs in the most tax-effective way within the intention of the law. In contrast, tax avoidance is the legal usage of the tax regime to reduce the amount of tax that is payable by means that are within the law (but outside the intent of the law). Community attitudes to tax avoidance vary from approval through to neutrality and outright hostility. Reactions may vary depending on the steps taken in the avoidance scheme, or the perceived unfairness of the tax avoided.

Although tax planning software is a relatively recent phenomenon, tax planning itself has occurred for over 8,000 years (since the Bala Tax 6,000 BC). Irrespective of the type of tax imposed, history shows us that taxpayers (and their advisors), inevitably come up with ingenious (and mostly legal) strategies to reduce the burden imposed.

2.

Taxation in Australia

‘THE ART OF TAXATION CONSISTS IN SO PLUCKING THE GOOSE AS TO OBTAIN THE LARGEST AMOUNT OF FEATHERS WITH THE LEAST AMOUNT OF HISSING’

– JEAN BAPTISTE COLBERT, 1619 – 1683.

1. 1813 – Australia’s exercise and customs duties

The English navigator James Cook became the first European to map the east coast of Australia in 1770, and the First Fleet of British convicts followed to establish a penal colony at Sydney in 1788. When the first Governor, Governor Phillip, arrived with the First Fleet, he had a Royal Instruction that gave him the power to impose taxation if the colony needed it. In the earliest days of the New South Wales colony, there were no taxes as the convicts had no income of course, and the free settlers were not generating enough wealth to enable any tax to be levied.

In 1813 Australia’s colonies introduced their first taxes, customs and exercise duties which they levied on wharfage fees, wine, beer, tobacco and spirits. Also, customs duties were charged on significant export products such as timber, wool, seal, seal skins and whale oil. These taxes were attractive to the Government as they were levied on necessities (so providing a secure source of revenue) and easy to administer (readily collected at the limited number of piers where goods entered or left the colonies).

Although the exercise and customs duties raised over 90% of the colonies revenue, they had the advantage that they were less likely to attract negative attention than direct forms of taxation. Besides, revenues were generally hypothecated (pledged by law to a specific purpose) in an attempt to draw support from the public. For example, a particular tax may fund an orphanage, another a goal, and another building works.

The one difficulty with relying on customs and exercise duties to raise the majority of the colonies tax was the problem of accurately and honestly assessing the value of imports. Those doing the importing, left to their own devices, invariably under-assessed, thereby avoiding tax.

Apart from raising revenue, the early customs and exercise duties on tobacco and alcohol were ‘sin taxes’. The primary purpose of a sin tax is to discourage people from buying specific goods, and this is accomplished by levying an exercise tax on products deemed harmful to individuals and society. The sin taxes were in response to concern over the level of alcohol consumption in the colonies (over 13.6 litres of pure alcohol per head). In contrast, today, Australian’s alcohol consumption has fallen to 9.4 litres per head and is trending lower.

As the taxes on alcohol were excessive, and alcohol was one of the few pleasures available in the colonies at the time, this naturally led to smuggling to avoid the taxes. Smugglers often buried their contraband in barrels in dunes to prevent detection from Customs Officers.

2. 1851 – Death duties

Australia’s first direct taxes took the form of taxing the estates of deceased persons which at the outset applied only to private estates and not real estate. NSW applied the first death duty in 1851, Tasmania in 1865, and all the other states by 1901.

The rates were progressive and based on the value of the estate, with reasonably high exemption thresholds, thus limiting the impact on small estates. In general, estate duties were relatively low cost to administer and, when introduced, were more readily accepted than a wealth tax, levied throughout a taxpayer’s life. In 1914, the Federal Government also introduced a progressive system of estate taxes to help fund wartime expenses.

Proponents of death duties argue that they assist with redistributing inherited wealth and making society fairer and equitable. Besides, you would think to raise taxes from the dead would receive fewer complaints and be more popular than raising taxes from the living.

Nevertheless, over time death duties became hugely unpopular and were phased out by the Bjelke-Peterson Coalition Queensland government in 1977. Malcolm Frasers Liberal federal government followed suit in 1979, and all the other states by 1984. Although Australia was the first wealthy country in the world to phase out death duties, other countries soon followed suit. Israel in 1981, New Zealand in 1982, Sweden in 2005, Hong Kong, Russia and India in 2006, and Austria and Singapore in 2008, and Norway in 2014.

Despite Australia abolishing death duties over 30 years ago, there are still several taxes that apply when you receive an inheritance from a deceased estate. Inherited shares or real estate, for example, may be subject to capital gains tax (CGT). If the deceased purchased the assets after September 20 1985, then CGT will be payable on the sale of the inherited assets. Also, beneficiaries of the deceased’s superannuation fund who are not financially dependent on the deceased (i.e. adult children), will generally have to pay a 17% tax on their inheritance.

3. 1880 – Australia’ first colony income tax

The first reported sighting of Tasmania by a European was on November 24, 1642, by the Dutch explorer Abel Tasman. The explorer named the island Anthoonij van Diemenslandt (called after Anthony van Diemen, governor-general of the Dutch East Indies). Subsequently the British shortened the name to Van Diemen’s Land, and in 1803 established the first settlement at Risdon Cove (on the eastern bank of the Derwent estuary).

An alternative settlement was established at Sullivans Cove in 1804 on the western side of the Derwent (where freshwater was more plentiful). This settlement became known as Hobart Town and later shortened to Hobart (after the British Colonial Secretary of the time, Lord Hobart). The early settlers were mostly convicts and their military guards, who had the task of developing agriculture and other industries.

Tasmania was the first Australasian colony to introduce an income tax in 1880 to raise revenue due to a fiscal crisis. The Real and Personal Estates Duties Act 1880 (Tas), imposed a withholding tax on the distributed income of public companies. With over ninety-five per cent of businesses operating as sole traders or partnerships, this tax raised very little revenue for the Government. To rectify this deficiency, in 1894 Tasmania passed a bill that imposed a tax on all income ‘arising, accruing, received in or derived from Tasmania’ (the Income Tax Act 1894 (Tas)).

In 1884 South Australia introduced the first broad-based income tax of the Australasian colonies (the Taxation Act 1884 (SA)). Income tax applied to all income except the income of companies, public bodies and societies that did not carry on any business for the benefit of shareholders or members and the income of all friendly societies.

In 1895 income tax was introduced in New South Wales at the rate of 2.5%. By 1907 all colonies had established income taxation. Western Australia was the last of the colonies to do this. It enacted the Land and Income Tax Assessment Act 1907 (WA) which imposed income tax on all income of persons and companies but exempted, among other things, the revenue of all ecclesiastical, charitable, and educational institutions of a public character.

4. 1884 – Land tax

In 1884 South Australia introduced a land tax based on the unimproved value of the land. New South Wales followed suit in 1895, and today all states and territories except the Northern Territory impose a land tax. A land tax, unlike property taxes, disregards the value of buildings, personal property and other improvements to real estate.

In 1910 the Commonwealth enacted its land tax. The tax was not a huge revenue raiser for the Government, and the combined revenue raised from Federal and state land taxes represented only 1% of total tax revenue. As the Commonwealth land tax was expensive to collect with collection costs of 3.92%, they phased it out in 1952.

Although you don’t usually pay land tax on your primary residence, it still contributes over $10 billion per year to the states budgets. The rate of land tax payable on the property varies between the different states and territories. Also, exemptions from land tax vary between the states as well.

5. 1901 – Australian taxation and federalism

The Federation of Australia was the process by which the six separate British self-governing colonies (Queensland, New South Wales, Victoria, Tasmania, South Australia, and Western Australia) agreed to unite and form the Commonwealth of Australia. When the Constitution of Australia came into force, on January 1 1901, the Federal Government was responsible for matters concerning the whole nation while the six colonies (now states) kept the systems of government that they had developed as separate colonies.

The new constitution established a bicameral Parliament, containing a Senate and a House of Representatives. The Constitution also established a High Court, the office of Governor-General (as the Queen’s representative representing the British Government), and divided the powers of government between the states and the new Commonwealth government.

At Federation, the states gave up customs and excise duties to secure interstate free trade and ensuring adequate protection for Australian industry. Uniform federal tariff and excise duties were introduced in 1901 and applied to the goods that had been taxed by the former colonies — tobacco products, beer and spirits and some basic food and clothing. As the Federal Government’s revenue needs were limited, they believed that revenue from customs and excise duty would be more than sufficient and that only in an emergency would the federal Government use its direct taxation powers.

By Federation, many of the colonies had introduced income taxes, each with their definition of assessable income and different rates applying to different categories of income. Income taxation was made more complicated by some jurisdictions taxing according to where the income was earned and others the taxpayer’s residency.

6. 1915 – Australia’s federal income tax

When Britain declared war against Germany in August 1914, Australia, as a dominion of the British Empire, was automatically also at war. While thousands rushed to volunteer, most of the men accepted into the Australian Imperial Force in August 1914 were sent first to Egypt, not Europe.

On April 25, 1915, members of the Australian Imperial Force (AIF) landed on Gallipoli in Turkey with troops from New Zealand, Britain, and France. This military campaign was a disaster, and in December 1915 the allied troops were evacuated. The next year Australian forces