Australian Parliamentary Library - Current Issues Brief 28 1996-97

Current Issues Brief 28 1996-97

Proposed Changes to Financing Aged Care - Some Tax and Constitutional Issues

Possible implications of the 10 February 1996 Exposure Draft of the Aged Care Bill 1997

Bernard Pulle
Economics, Commerce and Industrial Relations Group

Introduction

General Objects of the Scheme for Financing Aged Care

Outline of the Structure for Financing Residential Care Services

Constitutional Issues

Conclusion

Attachment A: Principles the Minister May Make under Division 96

Attachment B: The Unconscionable Conduct Provisions of the Trade Practices Act 1974 (Cth)

Attachment C: Public Authority and Public Purpose Tests for a Tax

Attachment D: Constitutional Prohibition against Discrimination and Preference

Introduction

In the 1996-97 Budget, the Government announced a major structural reform in residential aged care. This reform was to take effect from 1 July 1997 and will result in the alignment of nursing home and hostel systems, including:

a single resident classification scale which determines the level of subsidy of each person;
a relaxation of the previous detailed acquittal requirements for nursing homes;
income testing of residential care benefits;
adoption of refundable resident entry contributions across all residential care; and
creation of an Aged Care Standards Agency.(1)

The Aged Care Bill 1997 (Exposure Draft) (the ED) seeks to give effect to this major structural reform with income and asset tested contributions from residential care recipients as well as with Commonwealth grants and subsidies. The main features of the proposed changes are discussed in the companion Current Issues Brief No 27, Proposed Changes to Institutional Residential Aged Care in Australia by Greg Clarke. This paper examines the circumstances in which some of the contributions from care recipients may be taxes and the consequences under the Constitution of including taxation measures in this omnibus reform Bill. Further, this paper suggests measures to avoid these constitutional consequences.

General Objects of the Scheme for Financing Aged Care

Significant constitutional issues arise mainly from the attempt in the Exposure Draft to provide residential care services on an equitable basis to a range of potential care recipients with different income and assets. This objective is to be achieved by using the collective resources of care recipients and the limited resources of the Commonwealth. Under the Constitution, some of the payments to be made by care recipients may have the character of taxes, and not fees for services rendered by approved providers. Alternatively, these payments may amount to the acquisition of property of care recipients on unjust terms under the Constitution. The various Principles under 23 categories set out in Attachment A, which the Minister may make under clause 96-1 of the ED, will give details of the subsidies and grants to be paid by the Commonwealth. Additionally, these Principles will either give details of payments to be made by care recipients or specify how they should be worked out. These Principles are not available in draft form at this stage, and when made by the Minister will be disallowable instruments under section 46A of the Acts Interpretation Act 1901. The outcome of the constitutional issues considered in this paper may finally depend on the details in the Principles when they are made by the Minister.

Basically the ED contains measures for a range of subsidies, based on income and assets tests applied to care recipients, to be paid by the Commonwealth to approved providers of aged care services. Approved providers, which will be corporations within the meaning of that term in section 51(xx) of the Constitution, will also be provided with grants from the Commonwealth. These Commonwealth subsidies and grants will be supplemented by contributions to be made by care recipients towards their residential care under Accommodation Bond Agreements and or Residential Agreements with approved providers. Accommodation bonds are deposits paid by care recipients as a condition for admission to residential care services. The amount of the accommodation bond or deposit payable will be determined by an assets test and there is no monetary limit to the amount payable. The ED authorises approved providers to appropriate the income from these deposits and to make certain retentions from them based on the period during which residential care was provided to care recipients. Such appropriations and retentions will be referred to in this paper as charges on accommodation bonds.

In addition to these charges, fees will be payable by care recipients for residential care services, and the fees payable will be subject to an income and assets test. Care recipients with income and assets above specified thresholds must negotiate fees with approved providers to be included in Accommodation Bond Agreements. Although an Accommodation Bond Agreement can provide for the payment of a lower amount of deposit than that determined by the assets test, given the high demand for residential aged care, a potential aged care recipient desperate for care will undoubtedly be negotiating with an approved provider, on the amount of the deposit as well as fees, from a position of weakness. The unconscionable conduct provisions in Part IVA of the Trade Practices Act 1974 (Cth) will be a factor limiting the amount of the accommodation bond and fees which approved providers may extract from care recipients.

Under the proposals in the ED the Commonwealth will pay a viability supplement to the residential care subsidy. This key element of the subsidy is designed to ensure that the total of the contributions from care recipients and subsidies and grants that are paid to an approved provider will make the provider's residential care services viable and meet the needs of the aged care recipient community in that location. As the viability supplement will vary with the fees and charges on accommodation bonds paid by care recipients in a particular location, the Commonwealth stands to benefit if an approved provider negotiates with each care recipient for the payment of the maximum possible bond and fees within the constraints of Part IVA of the Trade Practices Act 1974 (Cth). The outcome of the financing scheme for residential care services is intended to be that the income and asset rich section of the aged care recipient community will, collectively and together with the Commonwealth, subsidise the care recipient community whose income and assets do not exceed or only marginally exceed the thresholds set in the ED and the Principles.

Subclause 2-1(2) of the ED states explicitly that in construing the objects of the Act (the Aged Care Bill 1997 when enacted) due regard must be had to the limited resources available to support services and programs under the Act and the need to consider equity and merit in accessing those resources.

Outline of the Structure for Financing Residential Care Services

The Exposure Draft of the Aged Care Bill 1997 (the ED) provides a scheme for the financing of aged care comprising residential care, community care and flexible care by a range of subsidies and grants to be provided by the Commonwealth. The scheme envisages that care recipients with income and assets above specified thresholds will make a contribution towards their care and the Principles will also give details of these contributions or how they must be worked out. This section sets out the significant features of the scheme which have a bearing on the constitutional questions considered in this Current Issues Brief. Attachment A sets out the 23 types of Principles that may be made by the Minister.

Allocation of Places and Subsidies to Approved Providers of Aged Care

There are three types of care for the aged provided for in the ED: residential care, community care and flexible care. There are various subsidies payable for the different types of care and there is a wide discretion vested in the Minister and the Secretary in the allocation of places and subsidies. Thus the Minister must, in respect of each type of subsidy, determine the number of places that are available for allocation in each State and Territory for each financial year. The determination must be published in the Gazette (clause 12-3).

The Secretary may, in respect of each type of subsidy, distribute the places available for allocation in a State or Territory among the regions within the State or Territory for each financial year. If such distribution is not made in respect of a type of subsidy, the whole of the State or Territory will comprise the region (clause 12-4). The Secretary may allocate places in respect of a particular type of subsidy to an approved provider to provide aged care services to a region (clause 14-1).

The Secretary may, in respect of each type of subsidy, determine for the places available for allocation and the proportion of care that must be given to certain groups of people including concessional residents and people of kinds specified in Allocation Principles (clause 12-5). The Secretary may determine that a person is to be treated as a concessional resident in accordance with Residential Care Subsidy Principles (RCSP) (subclause 44-8(1)).

Applications will be invited for the allocation of places and available places will be allocated to approved providers who must be corporations within the meaning of that term in section 51(xx) of the Constitution. Allocation of places will also be dealt with under Allocation Principles. Corporations proposing to provide some or all of these forms of aged care must make application to the Secretary together with the fee specified in (or worked out in accordance with) Approved Provider Principles.

The viability supplement to the residential care subsidy as envisaged in clause 44-25 is specific to a residential care service and will play a key role in the allocation of places to regions. The Secretary may, in accordance with the Residential Care Subsidy Principles (RCSP), make a determination having regard to the size of a residential care service, the population it serves, the degree of isolation of its location and any other matters specified in the RCSP. The viability supplement for a particular day is the amount specified or to be worked out in accordance with the RCSP and may include nil amounts or be based on any matters specified in the RCSP.

Classification of Care Recipients

Care recipients approved under Part 2.3 of the ED and the Classification Principles for residential care are classified according to the level of care they need. The Classification Principles may set out criteria for determining which level applies to a care recipient. The Secretary may, in respect of each type of subsidy, determine the places available for allocation and the proportion of care that must be provided to one or more of the following:

(a) particular groups with special needs;

(b) concessional residents;

(d) people needing a particular level of care; and

(e) people of kinds specified in the Allocation Principles.

Concessional residents are persons in receipt of income support payment and satisfy certain asset tests in clause 44-7 and persons determined by the Secretary to be concessional residents under clause 44-8 in accordance with the Residential Care Subsidy Principles. Further aspects of concessional residents are considered under 'Subsidies for Providing Aged Care' below.

It will thus be seen that the approved provider must carry places for a range of recipients of care determined by the Secretary to qualify for approval as well as the subsidy. The amounts of residential care subsidy payable to an approved provider are worked out under Division 44 of the ED in respect of each residential care service. Division 44 includes a residential care subsidy calculator (RCSC) to work out the subsidy in respect of individual care recipients and the amounts so worked out are added to make the subsidy payable to the approved provider. The significant aspects of the RCSC are considered under 'Subsidies for Providing Aged Care' below.

There is provision in the ED for Extra Service Places in a Residential Care Service. Extra service places involve providing a higher standard of accommodation, food and services to care recipients. Extra service places can attract higher resident fees, but a lower amount of residential care subsidy is payable. Thus the fees that could be charged by an approved provider for residential care would depend on whether the recipient occupies an ordinary place or an extra service place.

The Secretary may approve the extra service fees which an approved provider proposes for one or more places set aside for extra service if they comply with the provisions in the ED as well as the Extra Service Principles.

Subsidies for Providing Aged Care

Under the measures in the ED an approved provider will receive a subsidy for providing aged care in respect of which a place has been allocated for the provision of residential care, community care or flexible care to an individual. The subsidies involved are the Residential Care Subsidy, the Community Care Subsidy and the Flexible Care Subsidy, which will be specified or worked out in accordance with Residential Care Subsidy Principles, Community Care Subsidy Principles and Flexible Care Subsidy Principles respectively. As the structure of Residential Care Subsidy affects the constitutional and taxation issues considered, a brief outline of its structure is set out below.

Residential Care Subsidy

A person must be approved by the Secretary under Part 2.3 and Approval of Care Recipients Principles to receive a residential care subsidy. The general structure of the Residential Care Subsidy payable in respect of a care recipient is set out in a Residential Care Subsidy Calculator (RCSC) in Subdivision 44-A and comprises the components set out below, the details of which must await the publication of the Residential Care Subsidy Principles (RCSP).

Basic Care Subsidy

Subdivision 44-B provides that different amounts, including nil amounts, may be specified by the RCSP as the basic subsidy amount. The factors to be taken into account would include the levels of care for which a care recipient is approved under Part 2.3 and any other matters that may be specified in the RCSP.

It is therefore likely that the RCSP could specify that no basic subsidy is payable where the income and assets of a care recipient exceed certain threshold amounts.

Primary Supplements

The primary supplements will include a concessional resident supplement, a respite supplement, an oxygen supplement, an enteral feeding supplement and any additional primary supplements set out in the RCSP. The RCSC provides for these supplements to be added to the basic care subsidy.

A concessional resident as defined in clause 44-7 includes a person who was receiving income support payment under the Social Security Act 1991 or other Acts listed therein and was a person who had not been an home-owner for 2 years or more. In addition, the value of assets of a concessional resident must be less than 4 times the annual maximum basic rate of pension payable to a person who is not a member of a couple under section 1064-B1 of the Social Security Act 1991 (i.e. less than $36,500 at the current rate) or such amount as specified in, or to be worked out in accordance with, the RCSP.

Further, under subclause 44-6(4), the RCSP may specify different amounts (including nil amounts) as the concessional resident supplement based on the amount of accommodation bond paid by a care recipient at the time of admission to a residential care service, the care recipient's assets and any other matters specified in the RCSP.

The conditions for payment of the concessional resident supplement are intended to apply an income and assets test, with a possibility that no concessional resident supplement will be payable in respect of care recipients whose accommodation bonds give the approved provider adequate compensation in lieu of the concessional resident supplement. Other matters to be specified in the RCSP in determining the concessional resident supplement could include taking account of the benefits derived by an approved provider from all accommodation bonds of care recipients in a particular residential care service. Thus there is scope, with the scheme of open ended accommodation bonds, for those with higher accommodation bonds to subsidise those with lower or no accommodation bonds.

Under clause 44-12 the RCSP may provide for additional primary supplements and specify the circumstances in which a supplement will apply to a care recipient and the amount or the way it is to be worked out.

Reductions in Subsidy

Under Subdivision 44-D reductions are made in the RCSC in respect of extra services, adjusted fees and compensation payments.

The extra service reduction for a particular day is an amount equal to 25% of the daily rate of extra service fee in force under Division 35 approved by the Secretary.

Under clause 44-15 the adjusted fee reduction for a particular day is the amount to be determined in accordance with the RCSP, which might specify different amounts based on specified matters. Here again, there is scope for adjusting the subsidy based on the fees received individually and collectively from all residents in a residential care service.

Where a care recipient is entitled to compensation under a judgment, settlement or reimbursement arrangement, and such compensation has taken into account the cost of providing residential care, a reduction in the subsidy is provided for under clause 44-16. This measure is intended to relieve the Commonwealth of the subsidy to the extent that the compensation entitlements of a care recipient make provision for residential care.

Income Test

Subdivision 44-E deals with the reduction of the subsidy based on the application of an income test. It provides an Income Tested Reduction Calculator which takes into account the ordinary income of a care recipient and an ordinary income free area. Clause 44-20 provides that the Secretary may determine that the ordinary income may be worked out under section 1064 of the Social Security Act 1991, where the care recipient is not entitled to a service pension or income support supplement under the Veterans' Entitlements Act 1986. Where the care recipient is in receipt of a service pension, the Secretary may determine that the ordinary income is as worked out under section 41 of the Veterans' Entitlements Act 1986.

It is relevant to note that under the Aged Care Income Testing Bill 1997 the income test to be applied by the Departments of Social Security and Veterans' Affairs is the existing test carried out in determining entitlements to pensions and benefits.

However, the determination of ordinary income is more flexible in the provisions of the ED, as subclause 44-20(4) significantly states that the RCSP may specify other amounts that are to be included in the ordinary incomes of specified kinds of care recipients. It could therefore result in the RCSP including terms that might override the provisions in the Aged Care Income Testing Bill 1997 for the determination of ordinary income for the purpose of the income test. There will therefore be considerable flexibility to make a reduction of the subsidy on the application of the income test and to confine the subsidy to those in greatest need.

Other Supplements

Subdivision 44F provides for three additional supplements to the subsidy in the RCSC: the pensioner supplement, the viability supplement and the hardship supplement.

The Pensioner Supplement

A care recipient who was in receipt of income support payment or had a dependent child or was included in a class of people specified in the RCSP is eligible for a pensioner supplement under clause 44-24. This brings in an income test.

On the other hand, a care recipient who has paid or agreed to pay an accommodation bond exceeding 10 times the annual maximum basic rate of pension payable under section 1064-B1 of the Social Security Act 1991 (i.e. greater than $90,500 at the current rate) is not eligible for the pensioner supplement under subclause 44-24(3). Thus the pensioner supplement is an income and asset tested payment.

Further, subclause 57-4(1)(h) requires that the accommodation bond agreement must provide for additional fees to be paid by a care recipient who is not eligible for a pensioner supplement because the accommodation bond exceeds 10 times the annual maximum basic rate of pension (i.e. $90,500 at the current rate). Thus a care recipient who is not entitled to a pensioner supplement will be liable to additional fees and such additional fees will result in a reduction in the viability supplement (discussed below) payable by the Commonwealth in respect of a care recipient to a residential care service.

The Viability Supplement

The viability supplement for a care recipient as envisaged in clause 44-25 is specific to a residential care service. The Secretary may in accordance with the RCSP make a determination having regard to the size of a residential care service, the population it serves, the degree of isolation of its location and any other matters specified in the RCSP (subclause 44-25(2)). The viability supplement for a particular day is the amount specified in or to be worked out in accordance with, the RCSP, and may include nil amounts or be based on any matters specified in the RCSP.

The provisions in clause 44-25 will enable the Minister to specify in the RCSP that the viability supplements to each residential care service should be such that it will be a viable proposition to an approved provider. The viability of each residential care service will be dependent on all fees and accommodation bonds paid by care recipients of that service, as well as the total subsidies and grants paid by the Commonwealth to that service. The amount of the viability supplement could be such that it will leave a reasonable profit to the approved provider after meeting commitments with contributions made by care recipients and Commonwealth contributions.

The Hardship Supplement

This provision enables the Commonwealth to provide an additional subsidy to a care recipient on grounds of hardship. The hardship supplement for a particular day in respect of a care recipient is an amount equal to the reduction of resident fees made under clause 58-6 on grounds of hardship in respect of that care recipient.

Grants

The Commonwealth may make grants to contribute to costs associated with the establishment or enhancement of aged care services, with assessments or approvals related to aged care or with support services related to the provision of aged care. The ED provides for the following types of grants in Chapter 5: residential care grants, community care grants, assessment grants, accreditation grants, advocacy grants, community visitors grants and other grants. Grants are in most cases payable under agreements with the recipients of the grants and may be subject to conditions. Grants are also dealt with in the corresponding Grant Principles to be made by the Minister.

Determination of fees

Division 58 of the ED and the User Rights Principles will determine the maximum daily amount of resident fees payable by a care recipient. The resident fee calculator in Division 58 provides for a standard resident contribution, with adjustments for the daily income tested reduction, the hardship supplement, the extra service amount and other amounts agreed between the care recipient and approved provider under the User Rights Principles. The standard resident contribution is subject to an income test and assets test. Clause 58-6 provides for a reduction of fees on grounds of hardship and this is complemented by a supplement to the subsidy provided by the Commonwealth.

Charging of Accommodation Bonds

In addition to fees that may be charged for residential care, whether ordinary fees or extra service fees, an approved provider can charge Accommodation Bonds if the service has been certified in accordance with the provisions of Part 2.6 of the ED as well as the Certification Principles. As will be discussed below, accommodation bonds have the characteristics of deposits to be paid by care recipients to approved providers as a condition for admission to residential care services. The ED authorises approved providers to appropriate the income from these bonds and to retain certain amounts therefrom whilst care recipients remain in that residential care service. In this paragraph these amounts to be appropriated and retained from accommodation bonds will be referred to as charges on accommodation bonds.

Nature of Accommodation Bonds

The Accommodation Bond arrangement in the ED has some of the hallmarks of a statutory trust arrangement over a deposit paid by the care recipient as a condition for admission to a residential care service of an approved provider, the trustee being the approved provider with whom the care recipient enters into an Accommodation Bond Agreement. This is so for the following reasons (among others):

An accommodation bond must not exceed the maximum amount specified in Subdivision 57-C. This is the lesser of the amount of the accommodation bond specified in the Accommodation Bond Agreement and an amount which, when deducted from the value of a care recipient's assets at the time of admission into a resident care service, leaves an amount equal to the minimum permissible asset value (section 57-7 (1)).
The minimum permissible asset value is an amount equal to 2.5 times the annual maximum basic pension payable to a person who is not a member of a couple under section 1064-B1 of the Social Security Act 1991 at the time of the care recipient's admission to the residential care service, or such higher amount to be specified in or worked out in accordance with the User Rights Principles (clause 57-7(2)). At the current rates of annual basic pension, the minimum permissible asset value rounded up, as provided in the ED, works out to $22,500 unless a higher amount is specified in the User Rights Principles. The value of assets of a care recipient is determined by reference to 50% of the sum of the assets of a care recipient and of the partner, if any, at the time of admission of a care recipient to the residential care service (subclause 57-7(1) and (5)). If the care recipient is a home-owner, the value of the home owned by the care recipient is not taken into account in valuing the care recipient's assets if the home was occupied by the partner or a dependent child, or if a close relative had occupied the home continuously for the past 5 years and was eligible to receive income support payments (subclause 57-7(4)).

The impact of subclauses 57-7(1) and (2) is that an amount equal to the value by which a care recipient's assets exceed $22,500, or such higher amount specified in the User Rights Principles, could be the amount of the accommodation bond. There is thus no limit to the amount that could be charged as accommodation bonds to a care recipient. The higher the value of a care recipient's assets, the higher could be the accommodation bond charged.

Where the care recipient has not paid the accommodation bond at the time of admission to the residential care service, the care recipient may be required to pay to the approved provider an amount representing the income that would have been derived from investing the accommodation bond from the date of admission to the date of payment of the accommodation bond to the approved provider. The User Rights Principles may specify a method for working out these amounts (subclause 57-13(2) and (4)).
The User Rights Principles may provide that in certain circumstances an approved provider must not retain income derived from the investment of an accommodation bond balance (subclause 57-13(5)).
The accommodation bond balance must be refunded by the approved provider, if the care recipient dies, to a person specified in the Accommodation Bond Agreement (subclause 57-16(1) and (2)(b)); or, if the care recipient ceases to be provided with residential care or the resident care service ceases to be accredited or certified, the accommodation bond must be refunded to the care recipient (subclause 57-16(1) and (2)(a)).
The approved provider must comply with the accountability provisions of Part 4.3, including the responsibilities specified in Accountability Principles made by the Minister under clause 96-1. The User Rights Principles may specify prudential arrangements to safeguard the accommodation bond balance and would probably deal with the indemnities to care recipients for losses on investments made by approved providers.
Sanctions may be imposed on an approved provider who has not complied with the responsibilities under the Aged Care Act 1997. The sanctions that may be imposed by the Secretary are specified in Division 66, including those that may be specified in the Sanctions Principles. There is also provision for the Secretary to revoke any sanctions if the approved provider agrees to appoint an administrator approved by the Commonwealth to administer an aged care service which has been defined to include residential care, community care and flexible care.
Amounts owed to the approved provider by the care recipient may be retained from accommodation bonds (subclause 57-14(1)(b)).

The exceptions to the trustee arrangement concept are the following provisions in the ED which appear to give the accommodation bonds the character of a tax or an appropriation of property of care recipients.

The authorisation of payment of accommodation bonds as a condition for admission to the resident care service of the approved provider is an imposition unrelated to the cost of the service to a particular care recipient particularly, as it is an open ended payment related to the value of the assets of a care recipient.
The approved provider may retain income derived from the investment of an accommodation bond balance during the period of residence of the care recipient (subclause 57-13(1)). As the appropriation of income is additional to the fees charged it would appear that the income appropriated and fees charged are not related to the degree of care required of a particular care recipient.
The approved provider may in addition retain amounts each year from the balance of the accommodation bonds as provided in the ED. The period of residence for which such deductions could be made is limited to 5 years in the ED but it may be extended by the User Rights Principles to a longer period.

This paper takes the view that, overall, accommodation bonds have the characteristics of deposits to be paid to approved providers as a condition for admission to residential care services and that the payment authorised by the proposed legislation is not a tax. In arriving at this conclusion, due consideration has been given to the fact that it is a voluntary payment made by a prospective care recipient to an approved provider under an Accommodation Bond Agreement and may lack the degree of compulsion required to make the payment a tax, notwithstanding that there is no statutory limit to the amount that could be charged as an accommodation bond based on the value of the assets of the care recipient and of the partner. Thus paragraph 57-7(1)(a) has provided for the possibility that a care recipient could enter into an Accommodation Bond Agreement with an approved provider which is lower than the amount worked out by reference to a care recipient's assets under paragraph 57-7(1)(b). This is an attempt to avoid the conclusion that a care recipient is under compulsion to enter into an accommodation bond agreement on the basis of the higher figure of accommodation bond by reference to his or her assets.

Whilst this provision gives scope for bargaining between the approved provider and the care recipient on the amount of the accommodation bond, whether or not there was compulsion in entering into a particular Accommodation Bond Agreement would depend on the circumstances of a care recipient, and in particular the urgency for residential care which the care recipient faced before admission. In such situations the weaker party to the bargain will doubtless be the care recipient, who in most circumstances will have no option but to agree to the terms required of the approved provider. It is difficult to imagine situations where approved providers, armed with legislative backing for an accommodation bond based on a care recipient's assets, would voluntarily agree to a lesser amount than that permitted by the legislation. This advantageous position, in which the approved provider has been placed by legislation, is in fact a compulsive force to enable the exaction of more than a commercially acceptable accommodation bond dictated purely by market forces.

Although the proposed legislation for the payment of accommodation bonds may therefore not have the compulsion required to make this payment a tax, the payment of a deposit without limit for admission to a residential care service and bearing no relation to what is reasonable in commercial terms may be an acquisition of property on unjust terms. The unconstitutionality of charging accommodation bonds beyond what is commercially reasonable should be a restraint on approved providers and could be covered by the User Rights Principles. However, the Unconscionable Conduct Provisions in Part IVA of the Trade Practices Act 1974 (Cth) will be a factor limiting the extraction of an accommodation bond totally unrelated to the service to be provided. This is discussed in Attachment B. The consequence of limiting the amounts to be paid as accommodation bonds is that there would be a reduction in the income to be appropriated by approved providers and a corresponding increase in the viability supplement to subsidies payable by the Commonwealth. Thus the Commonwealth, too, has an interest in enabling approved providers to charge the maximum by way of accommodation bonds from care recipients.

The accommodation bond arrangement has been so designed to enable the residential care service of an approved provider to be financially viable, with the Commonwealth subsidy and grant contributions as well as the fees, and income and retentions from accommodation bonds of asset rich care recipients. The clear object of the measures in the ED is to provide an aged care service, partly financed by Commonwealth funds in the form of subsidies and grants appropriated from the Consolidated Revenue and partly from the funds of care recipients whose open ended payments imposed by law will subsidise the less fortunate care recipients. However, the constitutional requirement in section 51(xxxi) that acquisition of property authorised by Commonwealth legislation should be on just terms may limit the contributions which is anticipated from the asset rich care recipients. In the final analysis the crucial test would be whether the amounts paid by a care recipient by way of fees, charges on accommodation bonds and the subsidies and grants attributable to him or her amount to a reasonable payment for the services rendered by an approved provider to that care recipient. If the net payments made are excessive it would not be a fee for services rendered but would either be a tax or an acquisition of property on unjust terms.

Taxation of Income and Capital Gains from Accommodation Bonds

It was mentioned earlier that an approved provider could appropriate the income from accommodation bonds so long as a care recipient is resident in the residential care service under subclause 57-13(1) except in the circumstances specified in the User Rights Principles as provided in subclause 57-13(5). The ED is silent on the question as to whether the care recipient or the approved provided is liable to income tax arising on accommodation bonds during the period that it is appropriated by the approved provider. In the circumstances this question must be decided on an application of the provisions of the Income Tax Assessment Act 1936 and of section 19 thereof dealing with the derivation of income in particular, as there is no indication in the ED that the measures in the ED will override these specific provisions. Further light on the true nature of accommodation bonds and the use of the income appropriated therefrom will be shed by the Principles to be made by the Minister.

However, as can be gathered from the ED, it would appear that accommodation bonds paid are held as deposits in trust for care recipients, and on that basis the income therefrom is derived by the trustee for care recipients. The approved provider must therefore retain the tax to be paid by a care recipient on income from accommodation bonds before appropriating the balance, as provided in clause 57-13. Further, if the approved provider is not a tax exempt organisation, the net income received from accommodation bonds will be liable to tax as income of the approved provider being fees for services rendered.

On the same analysis, any capital gains made by the approved provider, on the disposal of investments made with accommodation bonds, will be to the account of the care recipient and liable to tax as capital gains of the care recipient. The ED does not provide a definition of 'income' for the purposes of subdivision 57-E. The word 'income' must therefore be given its ordinary meaning and capital gains would not come to be included in the ordinary meaning of that term. It is therefore doubtful whether the net capital gains on the disposal of investments could be appropriated by the approved provider unless the User Rights Principles makes provision for such retention.

Constitutional Issues

Possibility of Payments Being Considered Taxes

If the Bill is enacted in its present form, the Act and the Principles made thereunder will contain measures for the payment of various application fees to the Secretary of the Department of Health and Family Services (the Secretary), the payment of accommodation bonds to approved providers as deposits for admission to residential care services, the retention by approved providers of income from accommodation bonds, and the retention of amounts from accommodation bonds by approved providers. These measures might have the character of taxes for the purposes of section 55 of the Constitution.

Section 55 of the Constitution provides that:

Laws imposing taxation … shall deal with one subject of taxation only…

If some of these measures are held to be taxes then the other measures in the Act and Principles will be of no effect. Further, it may make no sense to retain the taxing provisions in isolation from other provisions for the care of the aged with the consequence that the whole Act may be of no effect.(2) The circumstances in which these amounts may be taxes are considered below.

Will the application fees payable to the Secretary be taxes under section 55 of the Constitution?

In providing for the payment of various application fees to the Secretary, the ED clearly anticipates the possibility that they might be deemed to be taxes and in consequence render ineffective the other provisions for aged care services under section 55 of the Constitution. It therefore requires that the amount of the relevant application fees determined under the ED or the corresponding Principles must not be such as to amount to taxation.(3)

The distinction between a tax and fee for services is difficult to draw. In Matthews v Chicory Marketing Board (Victoria)(4) (Chicory Marketing Board), Latham CJ gave the attributes of an exaction of money by a public authority which gives it the character of a tax for the purpose of the Constitution. The character of a tax is:

A compulsory exaction of money by a public authority for public purposes, enforceable by law, and ... not a payment for services rendered.

A fee for services must be related to and be commensurate with work involved with the rendering of those services. Thus in The General Practitioners Society in Australia and Others v The Commonwealth of Australia(5) (General Practitioners), the High Court held that the fee provided by section 16C(2) of the Health Insurance Act 1973 (Cth) was not a tax but a fee for services rendered, being the price which a medical practitioner seeking to become an 'approved' pathology practitioner must pay for having the application processed by the Minister.

In Air Caledonie International v The Commonwealth(6) (Air Caledonie), the High Court held that the fee which section 34A of the Migration Act 1958(Cth) purported to be exacted for immigration clearance of passengers was a tax, at least in so far as it related to passengers who were Australian citizens. The fee was to be collected by the international air operator who was made liable to pay it to the Commonwealth regardless of whether the fee had been or could be actually collected from the passenger. The fee had no relationship to the actual cost of processing.

On the criteria in these cases, if the fees for processing applications under the ED and the corresponding Principles are excessive in relation to the cost of processing them, the fees would be exactions in the nature of a tax. However, the fee structure could be so designed as to avoid this constitutional pitfall.

Will the charges on accommodation bonds appropriated by approved providers be taxes on care recipients under section 55 of the Constitution?

Accommodation bonds appear to have the characteristics of a deposit to be paid by care recipients prior to admission to a residential care service. As indicated in the section on the nature of accommodation bonds, the accommodation bond payment itself may not be a tax. The compulsion required to give it the character of a tax may not be present in the scheme for residential care, as under the proposed legislation there is provision for the prospective care recipient to negotiate with the approved provider for the payment of an accommodation bond which is lower than that permitted by the application of the assets test. Although there are no measures in the ED to limit the amount of an accommodation bond, the equitable doctrine of unconscionable conduct and the provisions of Part IVA of the Trade Practices Act 1974 (Cth) should inhibit an approved provider from extracting the maximum permissible amount allowed for in the ED. This issue is briefly considered in Attachment B.

However, the question arises whether the appropriation of income and retentions from accommodation bonds made by approved providers are taxes on care recipients. These are compulsory exactions from care recipients who have been admitted to residential care services and would satisfy the compulsion test laid down by Latham CJ in Chicory Marketing Board. The ED does not permit the approved provider to bargain on these charges. There are, however, two elements of the positive attributes in Latham CJ's test of a tax which must be met before the charges on accommodation bonds could be said to be taxes. These refer to the requirements that the exaction of money must be by a public authority and that it must be for a public purpose. Whilst Latham CJ's statement in Chicory Marketing Board is recognised as stating the positive and negative attributes of a tax, the High Court has since held that it is not an exhaustive definition and has attached important qualifications. The qualifications that are relevant to the issue of whether the charges on accommodation bonds are taxes are dealt with in Attachment C.

Under the proposals in the ED it is the approved providers who are to collect the charges on accommodation bonds, and a public purpose for the collection of these charges needs to be established. The qualifications to Latham CJ's test, in so far as it relates to these two elements in the definition of a tax, were considered by the High Court in Australian Tape Manufacturers Association Ltd and Others v The Commonwealth of Australia(7) (Australian Tape Manufacturers). In Australian Tape Manufacturers the 'royalty' on the sales of blank tapes which was held to be a tax was collected by a society and the amounts so collected were distributed to copyright owners to compensate them for infringement of their rights. The High Court held that the public purpose was to find a solution to the problem of copyright infringement and the loss sustained by copyright owners. Under the proposals in the ED the public purpose as stated in subclause 2-1(2) is to provide access to aged care services on the basis of equity and merit. In Australian Tape Manufacturers the High Court also decided that an imposition on one section of a community to assist another would yet be a tax although it was not collected by a public authority and not paid into the Consolidated Revenue Fund. Thus the collection of charges on accommodation bonds by approved providers would not deny to the charges the character of a tax.

Under the proposals in the ED, the income and asset rich section of the aged care community will make a contribution to subsidising the less advantaged section in the provision of residential care services. As the case that the charges on accommodation bonds have all the characteristics of a tax rests heavily on the decision in Australian Tape Manufacturers, the treatment of the relevant issues in the High Court decision are considered in Attachment C.

Finally it must be also determined whether the income appropriated and the amounts retained from accommodation bonds, based on the period of residence of a care recipient, are fees for services rendered. The crucial test is whether these amounts, together with the fees paid by a care recipient and the subsidies and grants paid by the Commonwealth to the approved provider in respect of that care recipient, constitute a reasonable fee for services provided by the approved provider to that particular care recipient. If they are not excessive and meet the test in General Practitioners, the amounts paid would probably not be taxes. If they are excessive in relation to the cost of the services rendered to a care recipient on an actual care basis and include a subsidy towards the care of the income and asset poor section of the care recipient community, they would be deemed to be taxes by the test laid down in Air Caledonie and Australian Tape Manufacturers.

The question whether the total charges and fees of particular care recipients will be excessive can only be decided by the details in the relevant Principles when they are made by the Minister. However, the structure of the scheme for residential care of the aged with its open ended accommodation bonds and appropriations of income would suggest that a subsidy element to support the less advantaged will be built into the charges on asset rich care recipients. This is supported by the object of the scheme for aged care, which is to consider equity and merit in accessing the limited resources available to the Commonwealth for this purpose as stated in subclause 2-1(2).

If the details in the relevant Principles stamp these amounts with the character of taxes and the financing scheme as envisaged in the ED must be retained in view of the policy objective of the Commonwealth for financing aged care, the contravention of section 55 of the Constitution could be avoided by enacting the provisions relating to the charging of accommodation bonds in a separate Act. Such exactions would be within the taxation power of the Commonwealth in section 51(ii) of the Constitution.

Possible Acquisition of Property on Unjust Terms

Will the charges on accommodation bonds appropriated by approved providers amount to an acquisition of property from care recipients otherwise than on just terms and contravene section 51(xxxi) of the Constitution?

If the test discussed in the previous section is not met, and the payments made to approved providers by and on behalf of care recipients are not characterised as fees for services rendered but are excessive, such payments can only be characterised as taxes or acquisition of property on terms that are not just.

It is settled law that if an imposition is held to be a tax it cannot at the same time be an acquisition of property.(8) The discussion in this section as to whether the charges on accommodation bonds amount to an acquisition of property from care recipients on terms that are not just, in contravention of section 51(xxxi) of the Constitution, is therefore based on the assumption that they are not taxes.

Section 51(xxxi) provides:

The acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws.

It is also now settled that section 51(xxxi) extends to laws for the acquisition of property by persons other than the Commonwealth or an agency of the Commonwealth: Dawson J in Australian Capital Television Pty Ltd v The Commonwealth of Australia.(9) Thus the appropriation of the charges on accommodation bonds by approved providers under the legislation proposed in the ED would meet this requirement in section 51(xxxi).

The acquisition must be for a purpose in respect of which Parliament has power to make laws. Approved providers will be corporations within the meaning of that term in section 51(xx) of the Constitution and the Commonwealth will therefore have power to regulate how they provide aged care services. In addition the Commonwealth has power under section 51(xxiiiA) to make laws relating to aged care. The appropriation of charges on accommodation bonds of care recipients by approved providers is a therefore a measure in the proposed legislation to provide equitable access to aged care with limited Commonwealth resources supplemented by the resources of care recipients. Thus the acquisition is authorised for a Commonwealth purpose and meets this requirement in section 51(xxxi). The property being acquired by approved providers is the income from accommodation bonds and annual retentions from the accommodation bond balance of each care recipient.

However, there will be a contravention of section 51(xxxi) only if the appropriation of charges on accommodation bonds is not on just terms. A number of principles have emerged on the interpretation of this section, following the decisions in five cases handed down by the High Court in 1994: Mutual Pools,(10) Peverill,(11) Georgiadis,(12) Lawler(13) and Nintendo.(14)

The Attorney-General's Legal Practice Briefing No. 13 of 28 July 1994 examined the developments in the interpretation of section 51(xxxi) in those cases against the pronouncements of the High Court in the earlier cases. The comments from the Legal Practice Briefing on the meaning of 'just terms' would support the view that to avoid a contravention of section 51(xxxi) a care recipient should not be charged more than the commercial cost of services provided to him or her by an approved provider:

The cases produced little discussion on 'just terms'. The Commonwealth had argued that 'just terms' did not necessarily involve full monetary compensation but involved general notions of fairness, and that a range of factors could be considered. Only Brennan J considered these arguments. He rejected them: in his view section 51(xxxi) is a guarantee that, when property is acquired in the circumstances to which the provision applies, the burden will be borne by the taxpayers (or, possibly, the person acquiring the property) and not by the individual whose property is confiscated. This appears to be a more restrictive view than had been put in statements in some earlier cases, which suggested that there might be circumstances in which compensation at less than full value of the property could be 'just'(15).

Thus if charges on accommodation bonds of care recipients are to be characterised as an acquisition of property on just terms, they must be part of a reasonable cost-related fee structure for services rendered by approved providers to each individual care recipient. Here again, the crucial test is whether these amounts, together with the fees paid by a care recipient and the subsidies and grants paid by the Commonwealth to the approved provider in respect of that care recipient, constitute a reasonable fee for services provided by the approved provider to that particular care recipient. Basically, if the charges on accommodation bonds are not to be an acquisition on unjust terms, the total payments made by or on behalf of a care recipient must meet the fees for services test.

In Australian Tape Manufacturers, as the High Court held that the 'royalty' payment was an imposition of tax, it was not necessary to make a pronouncement on whether in the event that it was held not to be a tax it would have been an acquisition of property on other than just terms. However, the majority of the High Court indicated their view that if the 'royalty' was not a tax then its imposition would be invalid as an unconstitutional 'acquisition of property'. Thus a tax can be imposed on one section of a community to support another, as was held in Australian Tape Manufacturers. However, an acquisition of property from one section of the community to meet the needs of another section for the provision of aged care services, for which the Commonwealth has legislative power under sections 51(xx) and 51(xxiiiA) of the Constitution, must comply with the provisions of section 51(xxxi) and be on just terms.

The restrictive view of 'just terms' in the 1994 High Court decisions may be difficult to achieve with the proposed charges on accommodation bonds. There may be no alternative to imposing the exactions from accommodation bonds as a tax in a separate Act, to avoid a contravention of section 51(xxxi) of the Constitution.

Possible Discrimination between States or Parts of States

Will the provisions for financing aged care services based on regional and locational criteria contravene the provisions against discrimination in sections 51(ii) and 99 of the Constitution?

The ED has a number of measures designed to bring about equity in access to aged care services in different regions and locations of Australia. Some of the more significant measures with potential for discrimination are the allocation of places and subsidies between States and between regions within States. Details of the discretion vested in the Minister and the Secretary on the allocation of places and subsidies are provided in the paragraph headed 'Allocation of Places and Subsidies to Approved Providers of Aged Care'.

Under the scheme for financing aged care services in the ED, as indicated in the structural outline above, the viability supplement of each residential care service could be dependent on all fees and accommodation bonds paid by care recipients of that service, as well as the total subsidies and grants paid by the Commonwealth. The amount of the viability supplement could in certain circumstances be such that it will leave a reasonable profit to the approved provider after meeting commitments with contributions made by care recipients and Commonwealth contributions.

There could be wide disparity in the viability supplement paid to approved providers based on regional considerations. This could apply equally to the other subsidies and grants paid by the Commonwealth for aged care services as well as the fee structure for residential care services. Thus if the fees, interest from accommodation bonds and retentions therefrom are either taxes or revenue measures for the provision of aged care services, it is necessary to avoid contravening the provisions of section 51(ii) and section 99 of the Constitution by ensuring that they are not discriminatory.

Section 51(ii) provides:

Taxation; but so as not to discriminate between States or parts of States:

Section 99 provides:

The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.

The reach of the prohibition against discrimination and preference in these sections of the Constitution is not clear from decided cases. The narrow and wide meaning of these prohibitions are discussed in Attachment D. Given that the measures in the ED may discriminate between regions within a state and also possibly between a region of one State and a region of another State, there may be contraventions of the prohibition in sections 51(ii) and 99, in its wide and or narrow interpretations, if the measures have the characteristics of taxation or revenue respectively. As for the types of discrimination or preference that may offend the provisions of sections 51(ii) and 99, Attachment D includes a summary of some High Court decisions which may be relevant to the issues that may arise in respect of the scheme for the financing of aged care on a regional basis.

It would appear that as a precaution against the financing measures in the ED contravening the anti-discriminatory provisions of sections 51(ii) and 99 of the Constitution as well as the provisions of section 55, the ED has included measures in Division 4 to pursue an alternative financing arrangement of aged care services based on the grants power in section 96 of the Constitution. Clause 4-2 provides for the Minister to enter into an agreement with a State or Territory under which the Aged Care Act 1997 or specific provisions of it will cease to apply in the State or Territory. Clause 4-3 provides that the Minister may, on behalf of the Commonwealth, make grants to assist a State or Territory to carry out its obligations under such an agreement and on such conditions as the Minister determines in writing. Subclause 4-3(3) provides that payments under clause 4-3 are to be paid out of money appropriated by the Parliament for the purpose.

The grants power in section 96 is wide enough for the Commonwealth to make grants to the States and Territories by appropriating funds for the purpose for aged care without specific Commonwealth legislation. If the Aged Care Act 1997 is held to contravene section 55 of the Constitution on the grounds that the fees and charges imposed on care recipients are taxes, the other measures in this Act, including Division 4, will be of no effect. In that event, the Commonwealth can yet proceed with the implementation of the scheme for financing aged care as proposed in the ED by agreement with the States and Territories using the grants power.

On the other hand, if the Aged Care Act 1997 is held to acquire property on unjust terms and therefore be in contravention of section 51(xxxi), the Minister could by agreement with the States and Territories under Division 4 provide for aged care on the principles outlined in the Act to be undertaken by the States with the grants provided by the Commonwealth. However, the provisions of Division 4 must be invoked before Principles are made under the Act which might offend the provisions of section 55 or section 51(xxxi) of the Constitution.

In Pye v Renshaw(16) it was held that although the Commonwealth can under section 51(xxxi) acquire property on just terms only, by providing grants under section 96 it could have property acquired by the States on unjust terms provided their Constitutions permitted it.

Conclusion

The Exposure Draft of the Aged Care Bill 1997, if enacted in its present form (referred to in this paragraph as 'the Act') will be an omnibus Act for aged care. It is likely that some measures for financing aged care in the Act, and the Principles to be made by the Minister thereunder, may be held to be taxes or the acquisition of property on terms that are not just. Specifically, this may apply to the measures in the Act to authorise approved providers to appropriate income and other amounts (referred to in this paragraph as 'charges') from accommodation bonds or deposits, which care recipients must pay as a condition for admission to residential care services. If these impositions on care recipients are taxes, the other provisions in the Act and the Principles will be invalid under section 55 of the Constitution and consequently the entire Act may be of no effect. If they are not taxes but amount to the acquisition of property on terms that are not just, there will be a contravention of section 51(xxxi) of the Constitution and it will not be possible to achieve the objects of the reform proposals.

These possible constitutional contraventions would be avoided if the payments made by or on behalf of care recipients to approved providers are so structured that they meet the test of being fees for services rendered. This test requires that the charges and fees paid by a care recipient, and the subsidies paid by the Commonwealth in respect of that individual to an approved provider, must have a commercial relationship to the cost of services rendered to that individual by the approved provider. If such payments are not excessive they will not be taxes. If such payments are excessive and bear no relationship to the commercial cost of services rendered they will be taxes or the acquisition of property on unjust terms. However, a fee structure related to the cost of services rendered to each care recipient will result in the Commonwealth paying higher subsidies to approved providers to cover care recipients who cannot afford such fees. This will again defeat the object of the proposals to get the income and asset rich section of the care recipient community to partly subsidise those who cannot afford payment of fees charged on the basis of services provided by approved providers.

Whether the charges on some care recipients will be excessive and in consequence whether there will be a contravention of sections 51(ii) or 51(xxxi) of the Constitution will only be known when the Minister makes the Principles under the Act setting out the fees and charges or how they are to be worked out. If they result in the asset rich section of the care recipient community partly subsidising the less fortunate section of care recipients, then as held in Australian Tape Manufacturers, these fees and charges payable by care recipients will be taxes or an acquisition of property on unjust terms.

The measures in the Act which provide for payment of unlimited accommodation bonds on the basis of an assets test, and the appropriation of income and other amounts therefrom, are pointers that the financing arrangement for aged care involves the asset and income rich section of the aged care community subsidising, together with the Commonwealth, those less advantaged in the aged care community in a particular location. Further, subclause 2-1(2) of the Exposure Draft makes it clear that the object of the Act will be to consider equity and merit in accessing the limited resources available for aged care. This being the stated object of the financing scheme for aged care, it will be inevitable that the charges on the asset and income rich section of the aged care community will in part subsidise those less advantaged in that community. Thus the test of fees for services rendered may not be met to avoid the contraventions of sections 55 or section 51(xxxi) of the Constitution. In the circumstances if the Commonwealth must achieve its stated policy objective for aged care, without contravening these constitutional provisions, the measures relating to charges on accommodation bonds should be included in a separate Act and imposed as a tax. This will also avoid some accommodation bond agreements being struck down by the unconscionable conduct provisions in Part IVA of the Trade Practices Act 1974 (Cth).

In addition, the structure for financing aged care also includes measures for the payment by the Commonwealth of subsidies and grants in respect of care recipients on a regional basis. This might result in a contravention of the prohibition against discrimination and preference between States or any parts thereof in sections 51(ii) and 99 of the Constitution respectively. These constitutional prohibitions may be avoided if the Minister does not make the Principles but acts under Division 4 of the Act. Under Division 4 the Minister may enter into agreements with the States for the implementation of the scheme for the provision of aged care by the States with grants provided by the Commonwealth under section 96 of the Constitution. This option will make it unnecessary to impose charges on accommodation bonds as a tax in a separate Act to avoid a contravention of section 55 or section 51(xxxi).

Endnotes

Budget Statements 1996-97; Budget Paper No.1, p. 3-102
R v Barger (1908) 6 CLR at p. 78; Australian Tape Manufacturers and Others v The Commonwealth of Australia (1991-93) 176 CLR 480 at p. 508
Application fees for approval as a provider of aged care (subclause 8-2(3)); application fees for the grant of extra service status (subclause 32-6(2)); application fees for the renewal of extra service status (subclause 34-4(2)) and application fees for certification of residential care services (clause 38-7).
(1938) 60 CLR 263 at p. 276
(1979-80) 145 CLR 532
(1988) 165 CLR 462
(1992-1993) 176 CLR 480
Federal Commissioner of Taxation v Barnes (1975) 133 CLR 483 at pp. 494-495
(1992) 177 CLR 106 at p. 197
Mutual Pools and Staff Pty Ltd v Commonwealth (1994) 119 ALR 577
Health Insurance Commission v Peverill (1994) 119 ALR 675
Georgiadis v Australian and Overseas Telecommunications Corporation (1994) 119 ALR 629
Re DPP; Ex parte Lawler (1994) 119 ALR 655
Nintendo Co Ltd v Centronics Systems Pty Ltd (1994) 121 ALR 577
Legal Practice Briefing No. 13 of 28 July 1994, p. 4
(1950-51) 84 CLR 58

Attachment A: Principles the Minister May Make under Division 96


Item   Principles                                               Part or provision 
  
1      Accountability Principles                                Part 4.3            
2      Accreditation Grant Principles                           Part 5.4            
3      Advocacy Grant Principles                                Part 5.5            
4      Allocation Principles                                    Part 2.2            
5      Approval of Care Recipient Principles                    Part 2.3            
6      Approved Provider Principles                             Part 2.1            
7      Assessment Grant Principles                              Part 5.3            
8      Certification Principles                                 Part 2.6            
9      Classification Principles                                Part 2.4            
10     Committee Principles                                     section 96-3        
11     Community Care Grant Principles                          Part 5.2            
12     Community Care Subsidy Principles                        Part 3.2            
13     Community Visitors Grant Principles                      Part 5.6            
14     Extra Service Principles                                 Part 2.5            
15     Flexible Care Subsidy Principles                         Part 3.3            
16     Information Principles                                   Part 6.2            
17     Other Grants Principles                                  Part 5.7            
18     Quality of Care Principles                               Part 4.1            
19     Records Principles                                       Part 6.3            
20     Residential Care Grant Principles                        Part 5.1            
21     Residential Care Subsidy Principles                      Part 3.1            
22     Sanctions Principles                                     Part 4.4            
23     User Rights Principles                                   Part 4.2

Attachment B: The Unconscionable Conduct Provisions of the Trade Practices Act 1974 (Cth)

As discussed in the structural outline, the provision in the ED for an approved provider to require a care recipient to pay an accommodation bond on the basis of an assets test, without a monetary limit, may not amount to a tax under the Constitution. This conclusion was reached on the basis that the ED provides for a lower amount of accommodation bond than that indicated by the assets test to be agreed between the potential care recipient and the approved provider. Nevertheless, a limit on the amount of the accommodation bonds chargeable by an approved provider may become necessary, in practice, to avoid the consequences of the equitable doctrine of unconscionability on the contract between the approved provider and the care recipient. A view of the application of this doctrine was presented by the High Court in Blomley v Ryan.(1) Kitto J stated:

This is a well-known head of equity. It applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands.

The principles relating to the continued operation of the doctrine of equitable unconscionability were stated by the High Court in Commercial Bank of Australia v Amadio.(2) Care recipients seeking residential care will generally fall into the class under special disadvantage arising from illness or impaired faculties, or in the special circumstance where they have nowhere to turn to for residential care. Thus, approved providers will be on notice that the legislative sanction to agree on the amount of accommodation bond chargeable will be subject to the limitation imposed by the operation of the equitable doctrine of unconscionability.

Additionally, Part IVA of the Trade Practices Act 1974 (Cth) dealing with unconscionable conduct may inhibit the approved provider from charging an accommodation bond that is unconscionable, as there are no provisions in the ED to override the application of Part IVA to residential aged care services. Section 51AA was enacted to give effect to the principles in Amadio's case. It states:

Section 51AA did not create any new rights but brought within the ambit of the Trade Practices Act 1974 (Cth) situations which would normally attract equitable relief. Section 51AA is not confined to situations involving consumer-type transactions for the supply or possible supply of goods or services to a person as is section 51AB discussed below. Thus section 51AA will apply to unconscionable conduct on the part of an approved provider in respect of services to a residential care recipient where the care recipient, the weaker party to the bargain, had no real opportunity or scope for negotiation on the amount of the accommodation bond or fees for services on a 'take it or leave it' type contract.

Section 51AB (formerly 52A) is directed to conduct which is clearly unfair or unreasonable. Subsection 51AB(1) provides that:

A corporation shall not, in trade or commerce, in connection with the supply or possible supply of goods or services to a person, engage in conduct that is, in all the circumstances, unconscionable.

It attempts to incorporate the equitable doctrines of undue influence and duress but the adoption of the word 'unconscionable' as opposed to the word 'unfair' is thought to restrict its application. Subsection 51AB(2) lists the matters the court may have regard to in determining whether there has been a contravention of subsection 51AB(1).

(b) whether, as a result of conduct engaged in by the corporation, the consumer was required to comply with conditions that were not reasonably necessary for the protection of the legitimate interests of the corporation;

(c) whether the consumer was able to understand any documents relating to the supply or possible supply of the goods or services;

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the consumer or a person acting on behalf of the consumer by the corporation or a person acting on behalf of the corporation in relation to the supply or possible supply of the goods or services; and

(e) the amount for which, and the circumstances under which, the consumer could have acquired identical or equivalent goods or services from a person other than the corporation.

However, section 51AB is limited to consumer-type transactions as subsection 51AB(5) provides:

A reference in this section to goods and services is a reference to goods and services of a kind ordinarily acquired for personal, domestic or household use or consumption.

It would appear that personal services of the type provided in residential care services would come within the provisions of subsection 51AB(5).

Commentators have taken the view that for section 51AB to apply there must be a knowing taking advantage of the inequality of bargaining power by the stronger party to the agreement. A potential care recipient desperately in need of care would be the weaker party in the negotiations with an approved provider. Whether the amount of an accommodation bond extracted under an Accommodation Bond Agreement was excessive in a particular case will always be open to examination subsequently under the equitable doctrine of unconscionability. In addition, an aggrieved care recipient or his or her beneficiary will be entitled to the redress offered to consumers of services against unconscionable conduct of corporations in Part IVA of the Trade Practices Act 1974 (Cth).

Attachment C: Public Authority and Public Purpose Tests for a Tax

In Australian Tape Manufacturers Association Limited v The Commonwealth Of Australia(3) (Australian Tape Manufacturers), the High Court had to deal with the argument that a levy under a Commonwealth law would not be a tax if it was imposed by a non-public authority. Additionally, the High Court had to deal with the argument that such a levy would not be a tax if the Commonwealth law did not provide for the levy to be paid into the Consolidated Revenue Fund. These arguments relied on the Latham CJ's statement in the Chicory Marketing Board case that a tax must be an exaction by a public authority for a public purpose.

The Australian Tape Manufacturers case concerned a scheme under Part Vc of the Copyright Act 1968 (Cth) to levy a royalty on all blank tapes sold. The royalty had to be paid over to a collecting society, a company limited by guarantee approved by the Attorney-General. The members of the company were copyright owners to whom the net proceeds were distributed irrespective of whether the recipient's work was copied. The High Court decided that it was a tax notwithstanding that the royalties were collected by a non-public authority and that it was not paid into the Consolidated Revenue Fund. The public purpose was the public interest served by finding a solution to the complex problem of copyright infringement.

Can a levy imposed by a non-public authority be a tax?

The High Court in Australian Tape Manufacturers noted that Latham CJ's statement of what constitutes a tax was not an exhaustive definition and that in subsequent decisions the High Court had attached important qualifications to that statement. The majority in Australian Tape Manufacturers cited the decision of the High Court in Air Caledonie International v The Commonwealth (Air Caledonie) which questioned the contention that a levy must be collected by a public authority for a public purpose to be a tax.

[T]here is no reason in principle ... why the compulsory exaction of money under statutory powers could not be properly seen as taxation notwithstanding that it was by a non-public authority or for purposes which could not properly be described as public.(4)

The majority in Australian Tape Manufacturers concluded at p. 501 that it is not essential to the concept of a tax that it should be exacted by a public authority unless the character of the authority is relevant in deciding whether the moneys raised are to be expended on public purposes.

It would seem to be a remarkable consequence if a pecuniary levy imposed for public purposes by a non-public authority acting pursuant to a statutory authority falls outside the concept of a tax simply because the authority that imposes the levy is not a public authority, when the amount of the levy is to be expended on public purposes, more particularly, if the purposes are Commonwealth purposes. It is scarcely to be contemplated that the character of the impost as a tax depends upon whether the authority is a public authority, unless it be a case in which the character of the authority will be relevant and influential in deciding whether the purposes on which the moneys raised are to be expended are themselves public. Of course, it is a misnomer to describe an authority as non-public when one of its key functions is to levy, demand or receive exactions to be expended for public purposes. To that extent, at least, the authority should be regarded as a public authority. But the better view is that it is not essential to a concept of tax that the exaction should be by a public authority.(5)

The test of a public authority is an agency, however constituted, which has as one of its functions to levy, demand or receive exactions to be expended for public purposes. Approved providers who are authorised to demand or receive charges on accommodation bonds under the measures proposed in the ED will be to that extent public authorities as the moneys so collected are together with the Commonwealth grants and subsidies to be expended on providing equitable access to residential care services for the aged.

Will the exaction of charges on accommodation bonds satisfy the public purpose test to be characterised as a tax?

In Australian Tape Manufacturers the High Court rejected the argument that only moneys appropriated from the Consolidated Revenue Fund could be said to be expended for public purposes. The essence of this argument is that the expression 'public purposes' is to be equated to 'governmental purposes' and that such purposes can only be served by funds from the Consolidated Revenue Fund.

If that proposition be correct, then an exaction not raised or received by the Executive Government, for example, an exaction raised and received by an independent statutory authority pursuant to a power conferred by a statute, could not constitute a tax. As Parliament has power to authorise a statutory to levy and receive tax, that general proposition must be rejected.(6)

The High Court in Australian Tape Manufacturers also considered whether an expropriation from one group for the benefit of another group in the community was an exaction for public purposes, when it was made in order to regulate the interests on a matter where the Commonwealth had legislative power and with a view to bring about an equitable outcome.

The only possible reason, apart from those already rejected, for holding that the provisions in question in this case is not a law imposing taxation is that an expropriation from one group for the benefit of another as an incident of legislative regulation of interests on a subject matter within power, with a view to bringing about what is conceived to be an equitable outcome, is not an exaction for public purposes and is therefore not a tax. In one sense it may be said that the purpose is private in that it concerns the interests of two groups only. But, in truth, the legislative solution to the problem proceeds on the footing that it is imposed in the public interest. Indeed, the purpose of directing the payment of the levy to the collecting society for ultimate distribution of the net proceeds to the relevant copyright owners as a solution to a complex problem of public importance is of necessity a public purpose.(7)

The outcome of the financing scheme for residential care services is that the income and asset advantaged section of the care recipient community will collectively, and together with the Commonwealth, subsidise the care recipient community whose income and assets do not exceed or only marginally exceed the thresholds set in the ED and the Principles. Access and equity to the limited resources available for aged care, as stated in subclause 2-1(2) of the ED, will be the public purpose served by the proposed legislation This will be significant in concluding that the appropriations of income and retentions from accommodation bonds are exactions in the nature of taxes.

Attachment D: Constitutional Prohibition against Discrimination and Preference

Section 51(ii) of the Constitution provides:

Section 99 provides:

The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.

On the face of it, section 51(ii) requires that Commonwealth legislation should not discriminate between States or between a part of one State and a part of another State. Given the federal nature of the Constitution, the interpretation of the taxation power should be consistent with the recognition that States should not be discriminated against taken as a whole, and likewise part of one State should not be discriminated against vis-a-vis part of another State. This may be said to be the narrow meaning of the prohibition against discrimination in section 51(ii) which would be consistent with maintaining one of the significant underpinnings for federation and hence the Constitution.

The question arises whether Commonwealth legislation can divide the Commonwealth into regions within State boundaries and introduce taxation measures which discriminate between regions without contravening the prohibition in section 51(ii). The answer to this question partly rests on whether the prohibition against discrimination in section 51(ii) will also cover discrimination between a part of one State and another part of the same State. If such an interpretation was possible, it might be said to be the wide meaning of the prohibition against discrimination in section 51(ii). If there was no such prohibition, the Commonwealth could effectively ignore the existence of the States and introduce taxation legislation on a regional basis. Again, given the federal nature of the Constitution, with States too having taxation powers, an interpretation of the prohibition in section 51(ii) should be consistent with reserving to the States taxation legislation which discriminates between areas within States, if that was permissible under their respective Constitutions.

It is possible to make a similar analysis of the interpretation of the reach of the prohibition against preference between States and parts thereof in section 99 of the Constitution. It will be noted that while section 51(ii) concerns 'taxation', section 99 has the wider term 'revenue' and extends to 'trade, commerce or revenue'. The term 'revenue' can include taxes as well as charges and fees. The application fees, residential care service fees, interest on accommodation bonds and retentions therefrom provided for in the ED for the provision of aged care services will probably come within the term 'revenue' in section 99, even if they are not taxes under section 51(ii) of the Constitution.

This Attachment sets out a summary of some High Court decisions to illustrate the types of discrimination or preference that may offend the provisions of sections 51(ii) and 99 of the Constitution and may be relevant to the issues that may arise in respect of the scheme for the financing of aged care on a regional basis.

In R v Barger(8) the High Court found a tax based on compliance with certain labour conditions which could differ from State to State, was a discrimination within the meaning of section 51(ii) and a preference within the meaning of section 99.
In Cameron v DFC(9) the High Court found a discrimination in the Income Tax Regulations which provided a method of calculating the value of livestock, State by State in consequence of which the fair average values of sheep, horses and pigs varied as much as 50% between some States.
In Commissioner of Taxation v Clyne(10) the provisions of the zonal rebate scheme in section 79A of the Income Tax Assessment Act 1936 were challenged as being outside the constitutional powers under section 51(ii) of the Constitution. In the event, the High Court did not find it necessary to decide in that case whether or not section 79A was constitutional. However certain observations of Dixon CJ, which had the support of the majority of the High Court, may be regarded as expressing the view that the zone allowance provisions do conflict with the Constitution.
In Conroy v Carter(11) the High Court found a discrimination in section 6(1)(b) of the Poultry Industry Levy Collection Act 1965 on a procedural matter relating to the collection of the levy. The effect of this section was to disadvantage a person liable to pay the levy if the Commonwealth had an arrangement with a State Egg Board which enabled the Board to retain funds equivalent to the levy from funds payable to that person. This disadvantage would not arise if the Commonwealth had no such arrangement in a State or where the State was not prepared to make such deductions.

There have been conflicting judicial dicta on what discrimination or preference directed by section 51(ii) and section 99 respectively may mean in relation to localities considered as States or parts of States. Lane's analysis of the cases shows a wide meaning and narrow meaning of discrimination emerging from them.

The narrow meaning: there must be discrimination "between ... parts of States, because they[are] ... parts of States ... [between] localities considered as parts of States, and not as mere Australian localities, or parts of the Commonwealth considered as a single country.

Whichever view prevails, the test is one of geography...(12)

Thus any variance in fees or charges on accommodation bonds as well as the subsidies within different regions may run the risk of contravening the anti-discriminatory provisions in section 51(ii) and 99 of the Constitution.

The certain exception to the rule against discrimination is when the Commonwealth acts under the grants power in section 96 of the Constitution. Thus the Commonwealth can tax all states equally and under section 96 reimburse the States in a discriminatory manner without offending section 51(ii). This was the view of the High Court and was confirmed by the Privy Council in W. R. Moran Pty Ltd v DFCT(NSW) (Moran):(13)

There is nothing in sec.51 to prevent the Commonwealth Parliament from passing measures in concert with any State or States with a view to a fair distribution of the burden of the tax proposed, provided always that the Act imposing taxes does not itself discriminate in any way between States or parts of States, and that the Act granting pecuniary assistance to a particular State is in its purpose and substance unobjectionable.

In Moran, five Commonwealth Acts imposed certain taxes on wheat and flour and a sixth Commonwealth Act provided for the appropriation of the proceeds of the taxes in payments to the States, including an additional payment to Tasmania. An Act of the State of Tasmania provided for the distribution of such additional payment amongst payers of tax on flour consumed in that State. The object of the scheme was to ensure that wheat growers in all the States were paid an affordable average price for wheat and to raise the necessary sum by imposing a tax on flour sold in Australia for home consumption.

Again, by using section 96 the Commonwealth can prefer one State or part of a State and not offend section 99. Thus in Grasstree Poultry Enterprises P/L v Bycroft,(14) a federal poultry levy was imposed on all States, the States were reimbursed under section 96 discriminately and the Commonwealth agreed with Queensland's plan to allocate 97 percent to North Queensland. This scheme received the approval of the High Court.

Endnotes

(1956) 99 CLR 362 at p. 414.
(1983) 46 ALR 402.
(1991-93) 176 CLR at p. 501.
(1988) 165 CLR 462 at p. 467.
op cit., p. 501.
ibid., p.504.
ibid., pp. 504-505.
(1908) 6 CLR 41
(1923) 32 CLR 68
(1958-59) 100 CLR 246
(1968) 118 CLR 90
Lane's Commentary on the Australian Constitution incorporating the Seventh Cumulative Supplement (1995): 114 -115
(1940) 63 CLR 338 at p. 349
(1969) 119 CLR 390

Proposed Changes to Financing Aged Care - Some Tax and Constitutional Issues

Possible implications of the 10 February 1996 Exposure Draft of the Aged Care Bill 1997

Bernard Pulle Economics, Commerce and Industrial Relations Group

Allocation of Places and Subsidies to Approved Providers of Aged Care

Classification of Care Recipients

Subsidies for Providing Aged Care

Residential Care Subsidy

Reductions in Subsidy

Income Test

Other Supplements

Grants

Determination of fees

Charging of Accommodation Bonds

Nature of Accommodation Bonds

Taxation of Income and Capital Gains from Accommodation Bonds

Possibility of Payments Being Considered Taxes

Possible Acquisition of Property on Unjust Terms

Possible Discrimination between States or Parts of States

Endnotes

Endnotes

Bernard Pulle
Economics, Commerce and Industrial Relations Group