BILLS DIGEST NO. 175, 2011–12, 26 June 2012

Financial Framework Legislation Amendment Bill (No. 3) 2012

Daniel Weight, Economics Section

Diane Spooner, Law and Bills Digest Section

Note: this Bill’s Digest has been prepared to inform debate on the Bill in the Senate.  It is not possible to comprehensively assess the potential implications of the Bill prior to its scheduled debate in the Senate on 27 June 2012.

Date introduced:  26 June 2012

House:  House of Representatives

Portfolio:  Finance and Deregulation

Commencement:  Royal Assent

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill's home page, or through http://www.aph.gov.au/Parliamentary_Business/Bills_Legislation. When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website at http://www.comlaw.gov.au/.

Purpose

The purpose of this Bill is to provide a robust legislative basis for Commonwealth programs that are impugned by the High Court’s decision in Williams v Commonwealth of Australia.[1] 

Background

The High Court’s decision in Williams v Commonwealth[2] is the latest in a series of cases that have examined the extent of the power of the Commonwealth to appropriate and spend monies from the Consolidated Revenue Fund (CRF) for certain purposes.  The immediate effect of the decision in Williams was to declare the funding agreement between the Commonwealth and the Queensland Scripture Union (QSU) for the provision of chaplaincy services in schools to be beyond the ‘executive power’ of the Commonwealth (at least in its current form); however, there is a risk that other Commonwealth funded programs are similarly invalid. 

Legislative power of the Commonwealth

Exclusive powers

Subject to anything else in the Constitution, the Commonwealth has certain ‘exclusive’ legislative powers in relation to matters such as the Commonwealth public service and Commonwealth places[3], and the imposition of uniform duties of customs and excise, and bounties on production.[4] 

Concurrent powers

In addition, under section 51 of the Constitution, the Commonwealth has certain enumerated legislative powers that are ‘concurrent’ with the legislative powers of the States.  However, where there is an inconsistency between a Commonwealth law and a state law, the Commonwealth law will prevail ‘to the extent of the inconsistency’.[5]  The enumerated powers of the Commonwealth under section 51 include:

•       trade and commerce with other countries, and among the States (s51(i));

•       taxation; but so as not to discriminate between States or parts of States (s51(ii));

•       invalid and old‑age pensions (s51(xxiii));

•       the provision of maternity allowances, widows' pensions, child endowment, unemployment, pharmaceutical, sickness and hospital benefits, medical and dental services (but not so as to authorize any form of civil conscription), benefits to students and family allowances (s51(xxiiiA);

•       matters incidental to the execution of any power vested by this Constitution in the Parliament or in either House thereof, or in the Government of the Commonwealth, or in the Federal Judicature, or in any department or officer of the Commonwealth (s51(xxxix)).

The executive power

Further, the High Court has further held that the reference to the ‘executive power of the Commonwealth’ in section 61 of the Constitution confers upon the Commonwealth legislative power for things that are ‘peculiarly adapted to the government of the country and which cannot otherwise be carried on for its benefit’.[6]  This is sometimes referred to as the ‘nationhood power.’  Things that have been considered to be within the scope of this power have included celebration of Australia’s Bicentenary,[7] and an emergency fiscal response during a global economic crisis.[8]

Discussion

Until the High Court’s decision in Pape the prevailing view was that the Commonwealth had the power to appropriate monies to a purpose irrespective of whether or not the Commonwealth had any legislative power in relation to that purpose or matter. This purported power was to be inferred from sections 81 and 83 of the Constitution, and, in particular the phrase ‘purposes of the Commonwealth’; the somewhat circular argument being that, once the Commonwealth Parliament appropriated monies towards a purpose, that purpose (at least in relation to expenditure) became a ‘purpose of the Commonwealth’ by virtue of the law appropriating the monies.  However, in Pape, the High Court held:

s81 (with s83) merely confirms parliamentary appropriation is a prerequisite for the lawful availability of money for expenditure.  Authority to spend such money must be found in the executive power [implied from section 61] or in legislation enacted under a head of power in ss51 [concurrent], 52 [exclusive], or 122 [which relates to territories].[9]

Against that backdrop, the High Court in Williams considered the scope of the executive power. 

The decision in Williams

The central issue in Williams appears to be—not the legislative power of the Commonwealth—but rather the scope of the executive power of the Commonwealth in relation to the Executive government’s capacity to enter into agreements or contracts that provide funding without any legislative basis. 

The argument put by the Commonwealth was that, through the executive power, the Commonwealth could ‘contract’ to do anything that it could otherwise do through legislation.  The High Court in Williams, however, has held that executive power of the Commonwealth in relation to a particular subject matter does not exist merely because the Commonwealth could make a law about that same subject matter.  It appears that the executive power (at least in relation to these types of ‘contractual’ arrangements) is limited to things that are more appropriately done thorough contractual mechanisms than legislative mechanisms, such as the leasing of buildings for Government departments or the purchase of office equipment.

Gummow and Bell JJ described the central issue in dispute as follows:

The Commonwealth parties make the general submission that the executive power extends to entry into contracts and the spending of money without any legislative authority beyond an appropriation.  The determinative question on this Special Case thus becomes whether the executive power is of sufficient scope to support the entry into and making of payments by the Commonwealth to SUQ under the Funding Agreement. For the reasons which follow this question should be answered in the negative.[10]

The decisions in Pape and Williams significantly altered the understanding of the Commonwealth’s power to spend monies.

There are two ways in which grants and programs are now impugned by these decisions:

•       firstly: excluding programs that are incidental to the existence of the executive power, where a program involves the spending of monies without a legislative authorisation, they are not likely to be valid (Williams); and

•       secondly: should the Commonwealth wish to continue programs that are now impugned because of the decision in Williams, it must find within the Constitution a basis upon which to support the enactment of legislation to give effect to that program (Pape).

There are likely to be some areas of existing Commonwealth spending for programs that cannot be supported (at least in their current form) because the Commonwealth lacks an enumerated or implied legislative head of power in relation to the subject matter to which the program relates, or the enactment of legislation would be otherwise inconsistent with the Constitution—such as because it would discriminate between States or parts of States.[11] 

Grants to the States

Section 96 of the Constitution also provides that the Commonwealth may:

…grant financial assistance to any State on such terms and conditions as the Parliament thinks fit.

The High Court has construed this power broadly[12], and, subject to anything else in the Constitution, the Commonwealth may make grants to that are tied to specific purposes or programs; effectively making the states conduits for monies aimed at a particular program or purpose. 

Should the Commonwealth lack the power to implement the impugned programs directly, it would still have the power to make a ‘tied grant’ to the states that attached equivalent conditions and criteria as currently exist for those programs.

Basis of policy commitment

On 25 June 2012, the Commonwealth Attorney-General, Nicola Roxon, the Minister for Finance and Deregulation, Penny Wong, and the Minister for School Education, Peter Garrett, announced that:

The Government will introduce legislation to amend the Financial Management and Accountability Act 1997, and regulations under that act, to provide legislative authorisation for existing programs that have already been approved by the Parliament through the Appropriation Acts.[13]

The Financial Framework Amendment Bill (No. 3) 2012 is intended to provide this legislative authorisation.

Committee consideration

It is not known whether or not the Bill will be subject to consideration by a committee.

Policy position of non-government parties/independents

The Coalition has expressed reservations about the constitutionality of the proposed Bill.  They have proposed that a ‘sunsetting’ clause be introduced to cease the operation of the provisions on 31 December 2012.  Nonetheless, the Coalition has stated that it will support the Bill.

The Greens have welcomed the High Court’s decision in Williams because it will allow greater scrutiny of expenditure by Parliament.

Financial implications

The Bill includes in regulations 427 existing grants and programs.  The total amount of these grants and programs is not known.

Significant technical flaws

Constitutionality of the proposed approach

The scheme implied by Williams and Pape appears to be that, firstly, the Commonwealth must have a legislative basis for the spending money beyond an Appropriation Act, and secondly, the law authorising the expenditure must have a constitutional basis evident from the enumerated or implied heads of legislative power found within the Constitution.  The Bill, however, merely asserts that all the programs listed in the regulations are within power; there is no nexus to an enumerated or implied legislative head of power for any specific program.

In the Communist Party Case, the High Court discussed the capacity of the Commonwealth Parliament to purport that an enactment, or an administrative action, was within power.  It said:

The validity of a law or of an administrative act done under a law cannot be made to depend on the opinion of the law-maker, or the person who is to do the act, that the law or the consequence of the act is within the constitutional power upon which the law in question itself depends for its validity. A power to make laws with respect to lighthouses does not authorize the making of a law with respect to anything which is, in the opinion of the law-maker, a lighthouse. A power to make a proclamation carrying legal consequences with respect to a lighthouse is one thing: a power to make a similar proclamation with respect to anything which in the opinion of the Governor-General is a lighthouse is another thing.[14]

Moreover in Plaintiff S157, the High Court considered the extent to which the Parliament could confer upon the Executive—through legislation—the power to make delegated legislation.  In that case, the High Court held:

It is well settled that the structure of the Constitution does not preclude the Parliament from authorising in wide and general terms subordinate legislation under any of the heads of its legislative power. …. But what may be "delegated" is the power to make laws with respect to a particular head in s 51 of the Constitution.  The provisions canvassed by the Commonwealth would appear to lack that hallmark of the exercise of legislative power identified by Latham CJ in The Commonwealth v Grunseit, namely, the determination of "the content of a law as a rule of conduct or a declaration as to power, right or duty".[15] 

And:

Moreover, there would be delineated by the Parliament no factual requirements to connect any given state of affairs with the constitutional head of power.  Nor could it be for a court exercising the judicial power of the Commonwealth to supply this connection in deciding litigation said to arise under that law.  That would involve the court in the rewriting of the statute, the function of the Parliament, not a Ch III court.[16]

And:

In a federal nation, whose basic law is a Constitution that embodies a separation of legislative, executive, and judicial powers, there is a further issue that may be raised by a privative clause [which were in dispute in that case].  It is beyond the capacity of the Parliament to confer upon an administrative tribunal [or the Executive] the power to make an authoritative and conclusive decision as to the limits of its own jurisdiction, because that would involve an exercise of judicial power.[17]

The proposed approach adopted within the Bill would appear to be problematic for several reasons:

•       firstly: the Parliament may only delegate to the Executive the power to make delegated legislation with respect to a head of legislative power that the Commonwealth Parliament itself enjoys; such as under section 51, 52, 61, and 122.  Nothing in the Bill requires that the empowering regulations reference any “factual requirement to connect any given state of affairs with [a] constitutional head of power.” 

•       secondly: it is questionable whether or not the mere inclusion of multiple programs within a regulation and then—apparently—leaving it for the Executive or a court to determine—item by item—whether or not each program was within the power of the Commonwealth would be a valid exercise of legislative power by the Parliament; that is, it is questionable whether the Bill meets the constitutional conception of a ‘law’.

•       thirdly: to the extent that the Bill allows the Executive to determine those programs that are within power through the making of the empowering regulations, it would appear to purport to confer upon the Executive the power to conclusively determine “the limits of its own jurisdiction”, and thereby allow the Executive to impermissibly exercise judicial power within the meaning of Chapter III of the Constitution.[18]

While these are merely initial constitutional issues that appear from the Bill, there may be further issues with the approach proposed by the Commonwealth. 

The Commonwealth has not provided any legal advice that demonstrates the constitutional validity of its proposed approach.

Any consequences of failure to pass

The lawful continuation of the 427 grants and programs that are listed in the regulations would appear to be questionable.

Key provisions

The Bill primarily amends the Financial Management and Accountability Act 1997 to provide a legislative basis for the expenditure of monies otherwise appropriated from the Consolidated Revenue Fund for certain programs.  This is a response to the High Court’s decision in Williams v Commonwealth.

The Bill also amends the Administrative Decision (Judicial Review) Act 1977 to exclude review of decisions made under Division 3B and section 44 of the FMA Act.

Clauses 1, 2 and 3 incorporate the amendments outlined in the schedules into the respective Acts and Regulations.

Schedule 1 amends two Acts.

Clause 1 amends the Administrative Decision (Judicial Review) Act 1977 to exclude review of decisions made under the Division 3B and section 44 of the FMA Act.  Nothing in the Act, however, would purport to reduce the ability to issue Constitutional writs under Section 75 of the Constitution, or under Section 39B of the Judiciary Act, which, relevantly, confers upon the Federal Court the same jurisdiction as the High Court with respect to judicial review.

Clause 2 inserts into the FMA Act a Division 3B.

Proposed section 32B of the FMA Act provides a mechanism to make regulations to empower the Commonwealth with respect to certain expenditure: the ‘empowering regulations’.  Subsection 32B(1) provides for the making of regulations to declare—absent any other legislative basis—that “the Commonwealth has power to make, vary or administer” any program listed by regulation.  Subsection 32B(2) allows the power conferred in subsection (1) to be exercised by a Minister or a Chief Executive.

The proposed section 32C allows the Commonwealth to impose conditions on any grant made under the proposed section 32B.  The proposed subsection 32C provides definitions. 

The proposed section 32D allows the powers of the Minister to be delegated to any official in any agency, subject to whatever conditions the Minister may impose.

The proposed section 32E states that Division 3B does not abrogate anything that the Executive might otherwise do under the executive power within the Constitution. 

The proposed subsection 44(1A) expands the responsibilities of the Chief Executives to include the responsibility to make, vary and administer the arrangements on behalf of the Commonwealth but, the proposed subsection 44(1B) makes it clear that the expansion of the powers of Chief Executives does not allow Chief Executives to exercise the powers conferred on the Commonwealth by section 32B.

The remaining provisions are technical and transitional in nature.

Schedule 2 lists the by programs that are within the empowering regulation.

Concluding comments

It is unclear whether or not the Bill is within the power of the Commonwealth or that it will achieve the certainty around programs and funding that the Commonwealth desires. 

Members, Senators and Parliamentary staff can obtain further information from the Parliamentary Library on (02) 6277 2462 & 6277 2526.

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ISSN 1328-8091

[1].               Williams v Commonwealth of Australia [2012] HCA 23, http://www.austlii.edu.au/au/cases/cth/HCA/2012/23.html

[2].              [2012] HCA 23.

[3].              Constitution, section 52.

[4].              Constitution, section 90.

[5].              Constitution, section 109.

[6].              Pape v Commissioner of Taxation (2009) CLR 1.

[7].               Davis v Commonwealth (1988) 166 CLR 79.  In this decision, although broad views were expressed about the nationhood power, the whole Court ultimately held the relevant provisions of the Australian Authority Act were invalid. See T Blackshield and G Williams, Australian Constitution Law and Theory, The Federation Press, Fourth Edition, p. 541.

[8].              Pape v Commissioner of Taxation (2009) CLR 1.

[9].              (2009) CLR 1 at 55, emphasis added.

[10].              Williams v Commonwealth [2012] HCA 23, per Gummow and Bell, [139].

[11].              Constitution section 99.

[12].              Uniform Tax Cases. South Australia v Commonwealth (First Uniform Tax Case) (1942) 65 CLR 373, and Victoria v Commonwealth (Second Tax Case) (1957) 99 CLR 575.

[13].              N Roxon (Attorney-General) et. al., Legislation to be introduced following Williams High Court decision, media release, 25 June 2012, viewed 25 June 2012, http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22media%2Fpressrel%2F1738523%22

[14].              Australian Communist Party v Commonwealth (Communist Party case) (1951) 83 CLR 1, 259.

[15].              Plaintiff S157/2002 v Commonwealth [2003] HCA 2, [102], citations omitted.

[16].              Ibid, citations omitted.

[17].              Ibid, [9], citations omitted.

[18].              R v Kirby; Ex parte Boilermakers' Society of Australia (Boilermakers' case) (1956) 94 CLR 254, Plaintiff S157/2002 v Commonwealth [2003] HCA 2 [102].