Federal fiscal relations after Vanderstock
Anthony Gray
Federal fiscal relations after Vanderstock (PDF 307KB)
This paper was presented as part of the Senate Lecture Series on 3 May 2024.
Introduction
In late 2023 the High Court rendered its first decision regarding excise in 25 years, and considered for only the third time in its history whether what I call a ‘true’ consumption tax is an excise within the terms of section 90 of the Australian Constitution. It found by a slim majority that such a tax was within the meaning of ‘excise’, and thus was invalid due to section 90, which prohibits states from levying customs and excise duties. This paper will explain the background to the decision, the decision itself and what it may suggest regarding the state of federal fiscal relations in Australia.1
One preliminary note by way of explanation is considered necessary. The relevant tax was a ‘true’ consumption tax. In other words, it was imposed on an act of consumption. Consumption has been defined in this context, in relation to items other than food, as meaning destruction by use.2 Such taxes are extremely rare in Australia, reflected in the fact that in its 120-year history the High Court has only considered this issue on 3 occasions. Much more common are sales taxes on goods, such as the Australian GST (though obviously, it is imposed on services as well as goods), taxes on production, taxes on manufacture, taxes on distribution and licence/registration fees in order to legally run a business involving the sale of goods. It is necessary to be precise here because GST-type taxes are often called ‘consumption taxes’. This is not the sense in which it is meant here. In this context, and in the context of the decision, a consumption tax is imposed upon an act of consumption.
Outline of Victorian legislation
The Victorian Parliament imposed a fee upon the use of zero and low emission vehicles (ZLEVs). The fee was payable by the registered owner of a vehicle, based on the extent to which that vehicle had been used on Victorian roads. The charge was either 2 or 2.5c per kilometre during a given financial year.3 It was argued that users of ZLEVs needed to pay a contribution to the upkeep of the roads they used.4 Those using petrol or diesel vehicles would pay a substantial ‘excise’ tax when they purchased fuel, given that this tax is a significant component of the bowser price. Users of ZLEVs were obviously not contributing to road maintenance through payment of such taxes; thus the Victorian Parliament developed this scheme so that such users would so contribute. The scheme was not expected to raise a significant amount of revenue for the Victorian Government, there being relatively few of such vehicles currently on the road, and given that the rate of the charge was relatively low. Two individual owners of ZLEVs commenced a constitutional challenge to the scheme, arguing that the fee they were being charged was an excise duty, and prohibited by section 90 of the Constitution.5 That section renders constitutionally invalid a state tax that is of the character of a customs or excise duty. The intention was that the Commonwealth would levy such taxes.
The law prior to Vanderstock
Many cases prior to this one had considered the meaning of section 90, though they typically raised different issues. The Constitution does not define the word ‘excise’. Some have resorted to the Convention Debates leading up to the development of the Constitution in order to try to determine its meaning. This also occurred in some of the judgments in Vanderstock itself, as I will show. While this is understandable, on one level, the High Court has increasingly turned against the use of these debates to determine the meaning of a constitutional provision. The orthodoxy is now reflected in a judgment of 5 members of the High Court in New South Wales v Commonwealth (‘WorkChoices Case’)6 where Gleeson CJ, Gummow, Hayne, Heydon and Crennan JJ noted:
To pursue the identification of what is said to be the framers’ intention, much more often than not, is to pursue a mirage. It is a mirage because the inquiry assumes that it is both possible and useful to attempt to work out a single collective view about what now is a disputed question of power, but then was not present to the minds of those who contributed to the debates. And even if a statement about the framers’ intention can find some roots in what was said in the course of the Convention Debates, care must be taken lest, like the reserved powers doctrine, the assertion proves the answer to the very question being investigated (the constitutionality of a measure) … the answer to that question is not to be found in attempting to attribute some collective subjective intention to all or any of those who participated in the Convention Debates.7
Even if it were accepted (though it is not) that the Convention Debates are potentially an important source in terms of constitutional interpretation more than 120 years after they occurred, in the specific context of section 90 it is very difficult to discern much from the Convention Debates regarding the intended meaning of the provision. This is noted by 5 justices in Vanderstock, including the joint reasons,8 and Gordon and Jagot JJ.9 This is similar to the comments of Mason CJ and Deane J in Philip Morris Ltd v Commissioner of Business Franchises (Vic) that:
We do not regard reference to the history of successive drafts of s 90 or to the Convention Debates as being at all helpful to the problem of eliciting what may be the constitutional purpose of the section. This view is due not to a refusal to acknowledge the relevance of the historical context in which the provision was drafted and enacted, but to the sheer lack of evidence of a convincing or consistent nature from the available materials.10
In its first section 90 decision in Peterswald v Bartley (‘Peterswald’)11, the High Court confined excise duties to taxes imposed on goods at the production or manufacture stage. This gave the section relatively little scope, leaving states free to impose taxes on goods at other stages of the movement of goods to consumers, including distribution, sales and consumption taxes. It must be noted that, for the first 20 years of Federation, the High Court applied the doctrine of reserved powers to constitutional interpretation. This meant that powers granted to the new Commonwealth Parliament would be read narrowly having regard to the position of the states. Logically, it would also suggest that limitations on state power, including section 90, would be read narrowly. This means any High Court decisions on constitutional law during this period must be treated with great care; they may not be as impactful as High Court decisions typically would be. This is because, in 1920, the High Court overturned the reserved powers doctrine, and this remains the law today.12
In Commonwealth and Another v State of South Australia; Commonwealth Oil Refineries Limited v State of South Australia (‘Commonwealth Oil Refineries’)13, the High Court extended the meaning of excise in section 90 to include taxes on distribution and sale14, a finding that was obviously inconsistent with the decision reached in Peterswald. Two members of the Court in this case suggested that a tax on consumption could be within the meaning of an excise duty, and prohibited to the states by section 90.15
In Matthews v Chicory Marketing Board (‘Matthews’)16, one of the most revered High Court justices, Sir Owen Dixon, stated that a tax on the consumption stage could be an excise for the purposes of section 90.17 He was influenced by the work of Sir William Blackstone who had noted that in English historical practice, the meaning of excise was broad and that it included consumption taxes.18 Latham CJ agreed.19 However, a few years later the Privy Council decided a case involving a section of the Canadian Constitution which related to the meaning of excise duties.20 It is very important to observe that there were and are material differences between the Canadian provision and the Australian. Specifically, the Canadian Constitution was written at a time when the distinction between direct and indirect taxation loomed large in the literature, and the Canadian Constitution expressly embraced the distinction. By the time the Australian Constitution was being drafted, that distinction had been discredited, and it was not utilised (expressly) here.21
However, comments by the Privy Council in the Canadian context were construed (misconstrued) as suggesting that a consumption tax could not be an excise. This led Dixon J to change his position in Parton v Milk Board (Vic) (‘Parton’)22 a decade after Matthews, now stating that a tax on consumption was not an excise. He clearly did this because of what he thought was required by the Privy Council decision. This is understandable at a time when the High Court considered itself legally bound to follow Privy Council decisions, a shackle that was later overthrown by the High Court itself.23 Thus, it can safely be said that Dixon J believed that a consumption tax could be an excise, as his judgment in Matthews reflects. However, a definition of excise was later adopted by the High Court that excluded consumption from it, given the response of the Court to the Privy Council decision.24 The other important development in Parton was the classic statement of the purpose of section 90 by Sir Owen Dixon, that the section was designed to give the Commonwealth ‘real control over the taxation of commodities’.25
The question whether a consumption tax was an excise was squarely addressed in Dickenson’s Arcade Pty Ltd v Tasmania (‘Dickenson’s Arcade’).26 On its face, the challenged tax was a ‘true’ consumption tax – apparently payable not when a person purchased some tobacco from a retail outlet, but once they had actually consumed it at a later date. This was clearly an attempt by the Tasmanian Parliament to take advantage of the loophole created when consumption taxes were excluded from the definition of excise. Knowing that a tax imposed at the retail level would be considered an excise and invalidated, the parliament cannily imposed the tax, at least on its face, on a later act of consumption. Of course, when loopholes in the law are created (by case law or statute), they will be exploited. Barwick CJ went on the record in the case expressing his incredulity that the legislation as drafted reflected how the legislation was intended to work in practice.27
Of the 6 justices who decided the case, 4 found that, as a consumption tax, it was not an excise. These justices followed the decisions in Parton and Bolton v Madsen to this effect. Two of these justices expressly doubt the correctness of the distinction between consumption taxes and other taxes on goods, but feel duty-bound to accept the (limited) precedents to this effect. Barwick CJ and McTiernan J dissented. Barwick CJ said there was no logic in excluding consumption taxes from other taxes on goods, and doubted that the interpretation of the Privy Council decision that led to this outcome was correct.28 He noted that the direct/indirect distinction that formed the basis of the Privy Council decision had no counterpart in Australia. McTiernan J adopted a similar view.29
I noted earlier that the decision in Peterswald must be read in its historical context – at a time when the High Court adopted reserved powers reasoning. That context helps to limit the precedential value of the decision. The same might be said about the Dickenson’s Arcade decision, for another reason. At this time, the High Court was applying a formalistic, criterion of liability approach to the interpretation of section 90. The focus was the literal provisions of the challenged legislation, as opposed to evidence of parliamentary intent or the substance of the provision.30 Again, this approach lent itself to relatively easy subterfuge by a clever parliamentary drafter. The High Court would later abandon this formalistic approach to section 90, in favour of an approach based on substance.31 This broader development in the interpretation of the section inevitably cast doubt on the correctness of decisions based on the opposite approach, favouring formality.
A formalistic approach was also hard to square with the High Court’s acceptance, since the Parton decision in 1949, that the purpose of section 90 was to give the Commonwealth real control over the taxation of commodities. It is now obvious that, if a Court takes a narrow, formalistic approach to interpreting the section, it may affect the Commonwealth’s control over commodity taxation.32
The High Court considered the meaning of section 90 in 2 decisions in the 1990s.33 In both of them, an approach was taken favouring substance over formality. In both of them, that the purpose of section 90 was to give the Commonwealth real control over the taxation of commodities was confirmed by majority.34 The High Court rejected suggestions of a return to the Peterswald definition of excise, and rejected suggestions that section 90 was designed for a more limited purpose. These decisions did not need to consider whether consumption taxes could be excise duties, but the Court expressly left open the question whether a consumption tax could be an excise,35 and 3 members of the Court suggested that the distinction between consumption taxes and other taxes on goods in the excise context was illogical.36 A definitive decision in that regard would need to wait 26 years, until the 2023 decision in Vanderstock, to which my attention now turns.
Majority view – ZLEV levy is an excise and invalid
The majority reasons comprised joint reasons by Kiefel CJ, Gageler and Gleeson JJ (joint reasons), and a separate judgment of Jagot J. The majority re-confirmed that the section was designed to give the Commonwealth real control over the taxation of commodities. This justified the extension of the meaning of excise to include consumption taxes, as earlier decisions such as Commonwealth Oil Refineries and Matthews had suggested. This was because:
A tax on goods imposed on the consumption of those goods will increase the cost of those goods to consumers. Because consumers, acting rationally, will tend to factor the cost of consumption into the price they are prepared to pay for goods to be consumed, a tax on the consumption of goods can tend to depress demand for those goods, no less surely than can a tax on the production or distribution of those goods which increases the price of those goods to consumers. Not only are these tendencies intuitively obvious, they have been observed since the time of (Adam) Smith. They are well documented in economic literature and are referred to in economically literate legal texts. Through its tendency to depress demand, a State or Territory tax on goods imposed on the consumption of those goods … can impact on the flow of trade of goods into and out of that State or Territory. By reason of its cross-border effects as well as by reason of its effect on demand with the State or Territory, such a State or Territory tax can interfere with the outworking of such policy with respect to national or international trade in those or other goods as might from time to time be adopted by the Commonwealth Parliament and implemented by (means of national uniform taxation).37
The joint reasons stated that 2 questions were relevant when considering whether a fee was an excise duty. The first was whether the fee was a tax on goods – whether it bore a close relationship to production, manufacture, sale, distribution or consumption of goods. The fee would have to relate to an activity or relationship in respect of goods. This would exclude fees imposed for the right or privilege to do something, such as a licence fee to conduct a business. The second was whether the tax affected goods as articles of commerce – in other words, was it of a size that would likely reduce demand for the goods. The general tendency of a fee to enter into the cost of the goods was relevant, rather than a high level of specificity in detail about a particular market involving the goods. Applying these tests, the ZLEV levy was clearly a tax on goods, imposed on use of the vehicle. It had a tendency to reduce demand for ZLEVs. Those intending to purchase such a vehicle would rationally take such a fee into account in making their purchasing decision.38 Jagot J agreed, noting that if consumption taxes were excluded from the definition of excise, and/or a formalistic approach were taken to the section, the section would be liable to easy subterfuge by clever drafting.39
Minority view – ZLEV levy is not an excise and valid
The dissentients sought to distinguish consumption taxes from other taxes on goods. Gordon J confined excise taxes to those likely to enter into the cost of goods to the consumer at the point of sale, thus excluding consumption taxes. Her Honour argued the precise impact of a consumption tax on demand for goods was unknown; it should not be assumed that a tax on usage consumption would reduce demand for the goods.40 She concluded the majority’s position would ‘radically affect the scope of the states’ ability to raise taxation revenue’,41 in the context of the existing mis-match in the Australian federation between spending and expenditure. Gordon J accused the majority of ‘further entrenching the extraordinarily unbalanced fiscal relationship between the states and federal governments to exacerbate a bad system and make it worse’.42 She argued it was ‘about the Commonwealth polity having most of the power to tax and the power to decide how that money is spent, but the States knowing what spending is needed, when and how’.43
Edelman J also framed a narrow definition of excise, stating it was a tax that would have a ‘real and substantial economic effect in a market for the sale of goods’, the effect being on the supply side, changing the sale price. The effect on the sale price would have to be a direct effect in the market of the good taxed, not an indirect effect in the market of another good.44 His Honour seemed to favour a narrower view of the purpose of section 90 than giving the Commonwealth real control over the taxation of commodities.45 He claimed that these constraints were part of the ’settlement’ in Capital Duplicators Pty Ltd v Australian Capital Territory (‘Capital Duplicators No 2’) and Ha v New South Wales (‘Ha’).46 Edelman J claimed that a result of the majority decision was that taxes that had not in the past been considered excises, such as payroll tax, industrial taxes or taxes on the sale of businesses might now be excises.47 He said the majority had abandoned the ‘directness’ requirement of an excise.48 He accused the majority decision of a ‘neglect of constitutional structure’,49 citing the so-called Melbourne Corporation decision that stated the Constitution contemplated the continued existence of the federal and state governments within the federation. He refers to the work of Hamill in stating that, if states are deprived of fiscal, administrative or legislative capability in areas of major public spending, the question arises as to whether Australia is a federation.50 Edelman J also accused the majority of neglect of history, citing the speech of one delegate at one of the Convention Debates, and a report of an Accounts Committee from Victoria which had claimed one of the conventions had intended to limit excises to taxes on production and manufacture.51
Steward J similarly saw Ha as the end of a ‘journey’ on section 90, which the majority decision here upended.52 His Honour argued that, at Federation, the meaning of excise was clear, and was reflected in the judgment in Peterswald.53 He found that this fee was not an excise, because it was an ongoing charge, because it was direct, and there was no evidence it impacted demand for ZLEV vehicles.54 Steward J also disagreed with the purpose of section 90 being to give the Commonwealth real control over the taxation of commodities,55 preferring a narrower view relating to tariff policy.56
Some reflections on the decision
1. Majority view removes an anomaly from the interpretation of the section and is consistent with the agreed purpose of the section
The High Court has accepted since 1949 that the purpose of the section was to give the Commonwealth control over the taxation of commodities. It was re-affirmed by High Court majorities in the 2 section 90 cases decided prior to Vanderstock, namely Capital Duplicators No 2 and Ha. The simple fact is that the exclusion from the definition of consumption taxes was illogical, once that purpose of the section was accepted. Clearly if states could impose taxes on consumption, the Commonwealth’s ability to maintain control over the taxation of commodities could be compromised. It is no answer to say that section 109 would be utilised to remove any state taxation inconsistent with federal taxation, because it remains unclear at this point how section 109 applies in the context of taxation. On this basis, the majority decision is supported because it better aligns the meaning of the section with its stated purpose.
In this light, it was (respectfully) disappointing that each of the dissenting justices in Vanderstock took issue with the agreed purpose of the section. Gordon, Edelman and Steward JJ favoured a narrower purpose of the section. With respect, these arguments were fully ventilated in Capital Duplicators No 2 and Ha, with a majority decision to re-affirm the position established in 1949 in the masterly judgment of Dixon J in Parton. There is surely a point at which justices need to accept the outcomes of previous decisions, particularly where a position has stood since 1949, and was re-affirmed by differently constituted majorities in the most recent High Court decisions on the matter.
2. Claims that Capital Duplicators No 2 and Ha reflected a ‘settlement’ or the end of a ‘journey’
Edelman spoke of the alleged ‘settlement’ involved in these decisions, and Steward J spoke of the supposed end of a journey in Ha. My interpretation of these statements is that these justices believe that Vanderstock was a significant departure from what had been determined in these cases. Respectfully, this would not be correct. The Court in Capital Duplicators No 2 specifically left open whether consumption taxes should be included within the definition of excise, and 3 justices in Ha called the exclusion illogical. Respectfully, it is hard to characterise this as some kind of settlement or end of journey on the matter of whether a consumption tax was an excise. Further, in both Capital Duplicators No 2 and Ha, a majority of the High Court re-affirmed the broad view of the purpose of section 90 as designed to give the Commonwealth real control over the taxation of commodities. Neither Edelman nor Steward JJ accepted this in Vanderstock. Thus, they cannot have regarded that part of the judgments in these cases as some kind of final decision or outcome, as the words ‘settlement’ or ‘journey’ might suggest.
Thirdly, if I may be permitted a personal observation, I have studied Australian constitutional law for 35 years. One thing I have learned is that very little can be regarded as permanently settled. To give a few instances in my time, it was not known until 2005 that the Commonwealth could utilise the corporations power to regulate in the industrial relations area.57 The implied freedom of political communication was first discerned in 1992.58 The High Court has adopted many different approaches to the interpretation of sections 90 and 92. Who could say that the current positions regarding these sections, exemplified in Vanderstock and Palmer respectively,59 represent the last word as to how these sections will be interpreted? Both of them changed what had previously been regarded as the law regarding these sections. This is the nature of constitutional law. Experience has taught me it would be a ‘brave’ person to indicate that anything in constitutional law was settled for eternity.
3. Claims that tax is too small to change behaviour mixed with fears for future of federalism
Again, a true tax on consumption of the kind discussed here is very rare. Vanderstock represents the third occasion in 120 years that the question whether a consumption tax is an excise has been directly raised for the High Court’s determination. This was noted in Dickenson’s Arcade.60 Further, the ZLEV levy was set at a low level, expected to cost the average ZLEV owner about $300 per year, and was not expected to raise much revenue. One of the reasons that Edelman J gave for validating the measure was that it was unlikely to have any effect on demand; Steward J reached a similar conclusion.
It is considered noteworthy that in the same judgments where these sentiments appear, dire predictions on the implications for federalism of the majority decision to invalidate the fee are also expressed. Steward J expressed concern with the ‘elimination of state legislative power in the pursuit of absolute federal control’. Gordon J said the decision would ‘radically affect the scope of the states’ ability to raise taxation revenue’. Edelman J warned that the decision might have implications for the ability of states to maintain their status as independent political entities, and linked this to a question when Australia might practically cease to be a federation. With very great respect, these heightened concerns are difficult to square with the fact that consumption taxes are extremely rare, and raise very little revenue. It is hard to argue the very future of federalism is in peril.
Gordon J also (on one view) betrays a preference for state over Commonwealth legislative control. She said the effect of the majority decision had implications for federal fiscal relations: ‘it is about the Commonwealth polity having most of the power to tax and the power to decide how that money is spent, but the States knowing what spending is needed, when and how’.61 It is arguably (with respect) not appropriate for a justice to make a judgment as to which level of government ‘knows’ what spending is needed, when and how. It is considered relatively obvious that both levels of government have made good decisions about spending, and bad decisions about spending. Neither has a monopoly. I cannot respectfully agree with any suggestion that states know best or better as to how to spend money efficiently. In Justice Gordon’s home state of Victoria, the money spent on the (since abandoned) Victoria Commonwealth Games 2026 project, and the abandoned East West Link Road project, are 2 recent examples. Of course, one could name Commonwealth projects that have also been wastes of money. But the point is that it is not correct to claim that either has a monopoly on good financial decision making. And further that it is questionable (at best) whether that type of sentiment should be the basis of a constitutional law decision in any event.
4. The red herring of ‘directness’ in Australian constitutional law
Both Edelman and Steward JJ used the concept of ‘directness’ in explaining why the ZLEV levy was not an excise.
As indicated, the use of the direct/indirect distinction has a lengthy, chequered history in constitutional law. J S Mill introduced this distinction in the mid-19th century.62 He argued that a direct tax was one levied on the one expected to pay it, whereas an indirect tax was levied on someone expected to pass it on to another. The Canadian Constitution, a product of 1867, embraced this distinction. By the end of the 19th century, the distinction was seen as unsatisfactory, and it was not incorporated into the Australian Constitution. It is conceded that Edelman and Steward JJ use the concept in a different way than this. However, it is still argued that the distinction is unhelpful in this context, and should not be the basis for attempted distinctions. These may lend themselves to circumvention.
From a broader constitutional law perspective too, the distinction has proved troubling. At one time, it was central to interpretation of section 92 – the test was whether a challenged measure directly or merely indirectly impacted interstate trade and commerce. Sections 90 and 92 are the key economic provisions of the Constitution.
In the Bank Nationalisation case involving section 92, the Privy Council stated the test was whether the impugned measure ‘not remotely, or incidentally … but directly, restrict(s) the interstate business of banking’.63 The question was whether the measure restricted interstate trade and commerce ‘directly and immediately as distinct from creating some indirect or consequential impediment which may fairly be regarded as remote’.64 A unanimous High Court in Cole v Whitfield made a new start regarding section 92.65 In doing so, it criticised the distinction between direct and indirect burdens as ‘unsatisfactory’.66 There is an obvious equivalence between use of direct and immediate or remote and incidental in the context of section 92, and use of direct and indirect in the context of section 90. The High Court rejected it in the context of section 92; it should not be tempted to re-introduce it into section 90.
The likelihood that such a distinction will facilitate circumvention of the constitutional prohibition has been known for a long time. As Isaacs J stated in Commonwealth Oil Refineries:
The prohibitions of sections 90 and 92 of the Constitution may be transgressed not merely by a direct and avowed contravention. They are transgressed also by a statute – whatever its ultimate purpose may be, and however its provisions are disguised by verbiage or characterisation, or by numerous and varied operations lengthening the collective chain, or by otherwise paying titular homage to the supreme law of the Constitution – if it operates in the end by its own force so as to do substantially the same thing as a direct contravention would do, either in attaining a forbidden result or in using forbidden means. The relevant constitutional prohibitions include both means and results. It is no justification for using forbidden means that permissible results are sought, nor for securing forbidden results that lawful means are employed.67
Problems with the existing federal system in Australia
Perhaps the most fundamental problem with the Australian Constitution is that it was written in the 1890s, yet it is expected to provide the framework for Australian governance more than 120 years later. There has been so much change in the world since that time. For example, in the late 19th century, the colonies that would unite to become Australia were isolated and largely separate from one another. Transport and communication among them was, understandably, very limited. Individuals would understandably understand governance primarily in ‘local’ colony terms. Business was overwhelmingly local in nature. Links with other nations were limited. Australia was very much part of the British empire.
Obviously, 120 years later the world is a very different place. Australia is now a closely integrated nation. We have realised that most of the problems we face, and solutions we seek, are national and international in nature. Parts of the nation have common problems – at present, housing and the cost of living are prime examples. Business is typically structured on national (and international) lines. We recognise the concept of Australian citizenship. We are in fact an independent nation, even if our head of state is still the British monarch.
The federal government has become significantly involved in policy areas that were not anticipated at Federation. This includes health, school education, higher education, disability, aged care, criminal law, and the environment. This has been in response to calls for a national approach, or a recognition that the problem is more ‘national’ in nature, requiring a coordinated, consistent approach across the federation. As one example, it is hard to justify why a child should learn different things in mathematics in year 5 in one state, but in year 7 in another. Regarding aged care, it is hard to justify why the ratio of staff to residents, or the minimum time spent with each patient, should differ across the country.
Of course, others have noted this evolution in Australian governance. In Victoria v Commonwealth and Hayden,68 Jacobs J noted:
The growth of national identity results in a corresponding growth in the area of activities which have an Australian rather than a local flavour. Thus, the complexity and values of a modern national society result in a need for co‑ordination and integration of ways and means of planning for that complexity and reflecting those values. Inquiries on a national scale are necessary and likewise planning on a national scale must be carried out … the complexity of society … requires co-ordination of services designed to meet those needs.69
Our difficulty is that, although the nation has changed so much, and the world of which we are a part, our written Constitution has not changed very much. It is notoriously difficult to do, as the recent referendum demonstrates. It requires a majority of people, in a majority of states, and an overall majority, to vote in favour of the change, in order that it occur. There is a high degree of ignorance about the Constitution. When voters are not aware of the details of a particular issue, they often respond negatively towards suggestions to change something, particularly something as important as the Constitution. Of the 45 referenda held in Australia since Federation, only 8 have succeeded. Most of these have been relatively minor changes, the exception being the proposal regarding Indigenous Australians in 1967.
This is highly relevant in the current context because the Constitution specifies a list of topics over which the federal government is to have legislative power. The idea was that the states would have legislative responsibility for other areas not listed. The Constitution sets out important matters over which the federal government is to have control, including defence, interstate and overseas trade and commerce, corporations and external affairs.70 However, there are important policy areas, such as health, education, aged care and the environment, over which the federal government has no direct legislative power.
This raises the question of constitutional interpretation. As indicated above, the orthodox view of the High Court now is that the intention of the founding fathers does not control (or perhaps even influence) interpretation of the Constitution today.71 Individuals should not think that the state of federalism as it existed at the time of Federation was somehow set in stone. Sir Anthony Mason makes this point:
The Constitution contemplates a flexible balance of powers and … it does not expressly preserve the position and powers of the states free from federal interference … the Constitution (does not) preserve … the actual balance of powers or the actual federal-state relationship as it existed at some undefined time shortly after the Constitution came into operation.72
It is noteworthy that one of the founding fathers themselves, in introducing the bill to create the High Court of Australia, made similar remarks:
Our written Constitution, large and elastic as it is, is necessarily limited by the ideas and circumstances which obtained in the year 1900 … (formal amendment) is a comparatively costly and difficult task and one which will be attempted only in grave emergencies. In the meantime, the statute stands and will stand on the statute book just as in the hour in which it was assented to. But the nation lives, grows and expands. Its circumstances change, its needs alter, and its problems present themselves with new facts. The organ of the national life which (while) preserving the union is yet able from time to time to transfuse into it the fresh blood of the living present is the Judiciary, the High Court of Australia … it is one of the organs of government which enables the Constitution to grow and be adapted to the changeful necessities and circumstances of generation after generation that the Constitution operates.73
In other words, the founding fathers did not intend to ‘lock in’ a particular version of federalism that might have existed at the start of the 20th century. They intended that our constitutional arrangements would evolve, and that the High Court would play an important role in that respect. The genius of the founding fathers was to design a document that would, at the same time, endure as a foundational legal document, but also have the necessary ‘fluidity’. It had to ‘breathe’, in order for the nation to progress.
How has the Constitution ‘worked’, given that there is much increased demand for federal regulation and responsibility for particular policy areas, but little formal change to the Constitution to facilitate this change? It is suggested that the necessary ‘fluidity’ has been provided by the Commonwealth’s relative financial dominance over the states. The federal government raises the 3 largest taxes in Australia, namely income tax, corporate tax, and the goods and services tax. This provides the federal government with very significant revenue. Through this means the federal government can indirectly have significant control over policy areas which the Constitution does not provide it with directly.74 The federal government is responsible for significant policy in health, education, aged care, and disability support, though it lacks direct constitutional power over these matters. It can, for example, make financial appropriations to others to effect these policy changes, or make financial grants to states to do so. The Constitution provides power for the Commonwealth to both make financial appropriations to anyone pursuant to section 81,75 and to make grants to states under section 96.76 Interpretation of the section 96 grants power has generally been broad, permitting the Commonwealth to impose virtually any (lawful) conditions on the allocation of the money.77 The High Court’s view has been that if the state finds any conditions the Commonwealth seeks to impose to be objectionable, it can decline the grant. This is considered to be a logical interpretation of the section.
Interpretation of section 81 has been more problematic. The section provides that the parliament has power to make appropriations ‘for the purposes of the Commonwealth’. Interpretation has oscillated between occasions where a narrow view has been taken, confining the Commonwealth’s ability to spend money to areas in which it has specific legislative power,78 and a broader view, that the ‘purposes of the Commonwealth’ are for whatever purposes the Commonwealth Parliament deems fit.79 It has been found that the validity of a parliamentary appropriation ‘is not ordinarily susceptible to legal challenge’, for practical reasons.80
However, in the most recent decision, the High Court preferred a narrow view. In Pape v Commissioner of Taxation (‘Pape’),81 the Court considered the validity of the Commonwealth’s response to the global financial crisis, specifically the payment of money directly to households. It was argued that the federal government lacked constitutional power to do so. Though a majority of the Court validated the measure, it took a narrow view of section 81. It would be necessary, according to the Court, for the Commonwealth to point to a head of power to support the spending. In other words, in contrast to what had previously been decided, section 81 itself was not a head of power. The Court validated the measure on the basis of the inherent nationhood power – this was a spending measure that, for practical reasons, could only be implemented by the Commonwealth. In other words, the Commonwealth both ‘won’ and ‘lost’ in this case. It won because the challenge to the specific measure was dismissed. But it lost because the High Court took a much narrower view of the scope of section 81.
With respect, this decision was regrettable, potentially removing the ‘fluidity’ in Australian constitutional arrangements, whereby the Commonwealth could indirectly implement its policy objectives through the spending of money, even in areas over which it lacked direct legislative power. However, with the benefit of time, it can now be seen that this concern was misplaced. Frankly, the decision has had little practical effect. The Commonwealth continues to spend money in areas over which it has little or no direct legislative power. Sometimes this money is channelled through the states pursuant to section 96, sometimes not. The reality is that it is unlikely that a recipient of a government appropriation (or a person or organisation that might hope to be a recipient in future) will challenge the constitutional validity of a spending measure. Nor would others typically have a sufficient concern with such spending as to mount a challenge.82
Costs of federalism
An Access Economics report prepared for the Business Council of Australia considered the costs of federalism.83 It estimated that it was $9 billion per year, or more than $1,000 per household. This estimate is considered conservative, focussing on the costs to the individual, rather than business costs.84 This regulation severely impacted business. The report highlighted the 8 different systems of occupational health and safety systems, different payroll tax systems, and different environmental laws. Business licensing varies across states, creating barriers to free movement of families and individuals, and inefficiency.85 The report quoted a CEO of a large corporation who highlighted the significant cost of complying with multiple regulatory regimes. The CEO claimed that the company was growing by 15% per year, but this would double if the regulatory burden were eased. They estimated the company would have paid between $8 million and $10 million more in tax, and earned between $24 million and $30 million more for investment. If the regulatory burden were streamlined, this would save them about 0.75% of their revenue each year. Another study estimated the costs of Australian federalism at $20 billion per year.86
Benefits of federalism
Adherents of federalism point to the possibility of it acting as a check on power – it disperses government power, rather than concentrating it in one body. This provides checks and balances on the exercise of government power, in a way that is potentially liberty enhancing. It might provide greater choice and diversity. Families and individuals might move to a jurisdiction that has the balance between services and tax that suits them best, and a federation of clearly differentiated states in that regard might present a range of options. It is suggested that state governments might be ‘closer to the ground’, and more in touch with the wishes and will of the people, permitting them to target service delivery more effectively. It is said that federalism encourages competition among states, hopefully providing incentive for state governments to perform at a high level.87
Reform of Australian federalism
There have been calls for greater transparency in the Australian federation, so that individuals are aware of which level of government is responsible for what. At present, the lines are blurred, making it difficult to hold government accountable for particular policies. In an ideal world, Australia would have a mature debate regarding which level of government should be responsible for particular areas of policy, and areas where there is expected to be co-operation between the federal and state governments. Given that the nation has changed significantly since the 1890s, in the direction of economic and social integration, it is expected that the federal government might be given more areas of responsibility than were allocated to them when the Constitution was first drafted. For example, the federal government might have regulatory power over commerce generally (at present, it is limited to corporations, and to interstate and overseas trade and commerce). This would reduce the scope for multiple sets of regulation impacting on business, potentially harmonising areas such as occupational health and safety, business licensing, payroll tax, and discrimination law, in a way that would reduce the regulatory burden on business. This harmonisation has already occurred to the extent of creating a national corporate law and national industrial relations system, but more work is required. The Constitution’s apparently strict distinction between, on the one hand, interstate and overseas trade and commerce and, on the other intrastate trade and commerce has become particularly difficult to continue to draw, given the realities of how business is structured, when such a strict distinction is typically not made.
Standard treatises on fiscal federalism suggest that federal governments must be responsible for (at least) distribution and stabilisation functions.88 The former involves spending on the so‑called safety net of health, education, social services, housing, and distribution of wealth. The latter involves economic management, including price stabilisation (low inflation), economic growth and employment. The Constitution should reflect the federal government’s control over these areas.
Similarly, there would be a strong argument for giving the Commonwealth more direct power over health and education. This would reflect what is already occurring indirectly through funding agreements with the states. The Commonwealth would have direct power over aged care and disability support services. It would also be given direct power over the environment, making it easier to develop and enforce national climate change policy, rather than relying indirectly on powers such as the external affairs power.
The Commonwealth presently has control over income tax, corporate tax and goods and services taxation in Australia. This should continue. It has been noted there are strong administrative efficiencies in having the federal government collect taxation.89 Australia is relatively highly reliant on income tax to raise revenue, and relatively less reliant on goods and services taxation. The nation might consider reducing reliance on income tax, and increasing taxes on goods and services. A detailed examination of this suggestion is beyond the scope of this paper. However, others have documented the positive economic effects of reducing income tax, including increasing the supply of labour, and bolstering investment. A shift to goods and services taxation could also reduce consumption and increase the incentive for saving and investment, in a way that is economically beneficial.90 These taxes are generally efficient, compared with stamp duty, income tax and corporate tax, being less distortionary of economic activity.91 There is a debate about the extent to which goods and services taxation is regressive.92 If it is accepted that it is, there are obviously means available to compensate those disproportionately impacted. We might also consider (federally‑administered) death duties and/or super profits tax.93
The states currently levy highly inefficient taxes, such as stamp duty.94 States must review their existing taxes, with a view to reducing their inefficiency. They might consider, for example, a shift from stamp duty to land tax, which previous New South Wales Governments have flagged. Land tax is typically regarded as more efficient than stamp duty, which acts as a disincentive for the movement of goods to more efficient uses. Further, payroll tax may act as a disincentive to employ individuals.
Conclusion
The majority decision in Vanderstock should be commended for removing a longstanding anomaly in our constitutional jurisprudence. Prior to the decision, there was a fundamental disjunct between the purpose of the section accepted by the High Court since 1949 and the exclusion of consumption taxes from the definition of excise. The High Court’s exclusion of consumption taxes from the definition worked to undermine the purpose of the section as identified and accepted by the Court. This anomaly is finally gone. Apart from that, the majority did not make substantive changes to the law as it was understood to be prior to Vanderstock. In this light, expressed fears by some that the decision will radically re-shape the federation, or that the future of federation itself is in peril, should be treated with great caution. The most recent previous decisions on section 90 had expressly left open the question whether consumption taxes were excises or not. The matter can hardly have been considered settled. Thus, it is incorrect (respectfully) to represent these cases as having represented a ‘settlement’ or ‘end of journey’ which Vanderstock somehow upended. These previous decisions had, though, settled upon a purpose of section 90, a purpose basically accepted since 1949. Members of the dissent in Vanderstock refuse to accept this purpose. To that extent, at least, they cannot have regarded these previous decisions as reflecting a settlement. And respectively, we have seen the use in the past of distinctions between direct and indirect in Australian constitutional law. It was abandoned in the context of section 92 interpretation. It should not find a new place in section 90 jurisprudence. We forget the lessons of history at our peril. And resort to scant evidence of what the founding fathers might have meant, but did not actually express in the Constitution, regarding section 90 are not convincing. The orthodoxy since the WorkChoices decision is that, at the very least, such evidence is not controlling in terms of constitutional interpretation. And there is evidence that the founding fathers themselves did not think it would be.
At a broader level, Australia does need a deep conversation about federal fiscal reform. It is suggested that this involves a move from less efficient to more efficient taxes. There should be less reliance on corporate tax and income tax, and more on goods and services type tax. Inefficient state taxes, particularly stamp duty and also payroll tax, should be the subject of serious reconsideration. It would be much better to replace these with more efficient taxes. Super-profits taxes and death duties might also be considered. It would be necessary to consider compensation (which the federal government would be suitable to provide) to protect the vulnerable from any changes to our tax system. But for too long Australia has had ‘make-do’ constitutional arrangements, which most would not consider to be desirable, regardless of the criteria used for assessment. In an ideal world, there would be a constitutional reset, with a modern view of the allocation of responsibilities between the federal government and sub-national governments given the world we live in today, not that which existed in the 1890s, and then provision of appropriate taxation levers to carry out those responsibilities, with a hope that national and sub-national governments could work together for the benefit of the nation.