Fairfax v Federal Commissioner of Taxation
(1965) 114 CLR 139 ALJR 308
(Judgment by: Kitto)
FAIRFAX
v FEDERAL COMMISSIONER OF TAXATION
Judges:
Barwick C.J.
KittoTaylor
Menzies
Windeyer JJ.
Judgment date: 2 December 1965
Judgment by:
Kitto
This is a case stated under s. 198 of the Income Tax and Social Services Contribution Assessment Act 1936-1962 (Cth) in an appeal to this Court by the trustees of a superannuation fund. The appeal is against an assessment by which the respondent Commissioner treated the trustees as liable to pay tax upon the "investment income" of the fund by virtue of the provisions of s. 121D, which is one of the sections in Div. 9B of Pt III of the Act. The trustees deny liability, contending that s. 11 of the amending Act No. 17 of 1961, by which, if it be valid, Div. 9B was inserted into the Act, is void and the provisions of Div. 9B are therefore not law. The question asked in the case stated is whether s. 11 is valid.
The first operative provisions in Div. 9B, those contained in sub-ss. (1), (2) and (3) of s. 121C, are directed to denying to the whole or part of the investment income of a superannuation fund in a year of income the general exemptions from income tax which pars. (j) and (ja) of s. 23 of the Principal Act confer upon the income of such a fund, unless the Commissioner is satisfied that at all times during the year (a) the assets of the fund included "public securities" the cost of which was not less than the lesser of two amounts, and (b) the assets of the fund consisting of "public securities" included "Commonwealth securities" the cost of which was not less than the lesser of two amounts. By definition, inserted into s. 6 of the Principal Act by the 1961 amendments "Commonwealth securities" is defined to mean (broadly) bonds, debentures, stock or other securities issued under an Act of the Commonwealth Parliament, and "public securities" is defined to mean (broadly) (a) Commonwealth securities, (b) bonds, debentures, stock or other securities issued by a State, a Territory or an authority constituted by or under an Act or law of a State or Territory, and (c) securities issued in respect of a loan to a water, gas or electricity company in Australia or a Territory.
The provisions thus made by sub-ss. (1), (2) and (3) are qualified by sub-ss. (4) and (5). The former provides that for the purposes of the section the Commissioner shall disregard any failure of the assets of a superannuation fund to include, at all times during a particular year of income, assets as provided by the section if he is satisfied either that the trustee made a genuine and bona fide attempt to ensure that the assets included at all such times assets as so provided, or that the failure was by reason of a temporary delay in investment, and that in all the circumstances it would be reasonable to disregard the failure. The provision of sub-s. (5) is that where the Commissioner is satisfied that the inclusion in the assets of the fund of assets as provided by the section would be likely to endanger the financial stability of the fund and would be unreasonable in all the circumstances the Commissioner may inform the trustee that the exemption (under s. 23 (j)) will continue in whole or in part, and in that case the exemption continues accordingly.
It is unnecessary to refer in greater detail to the provisions of s. 121C, and the only other provision of the new Div. 9B that need be mentioned at all is s. 121D. By sub-s. (1) of that section the trustee of a superannuation fund is made assessable and liable to pay tax upon the investment income of the fund, to the extent to which it is not exempt from income tax under the Act (i.e. to the extent to which s. 121C removes the exemption under s. 23) at the rates declared by the Parliament for the purposes of the section. Sub-section (2) provides that the investment income of a superannuation fund is not subject to income tax otherwise than as provided by sub-s. (1).
The contention of the appellant trustees is that no head of federal legislative power will support the enactment of s. 11. It is, they say, a law with respect to the investment of the moneys of superannuation funds, a subject which is not one upon which the Parliament has any power to make laws. The Commissioner's answer is that s. 11 is a law with respect to taxation, whatever else it is, and is therefore to be upheld as an exercise of the power conferred on the Parliament by s. 51 (ii.) of the Constitution.
The argument for invalidity not unnaturally began with the proposition that the question to be decided is a question of substance and not of mere form; but the danger quickly became evident that the proposition may be misunderstood as inviting a speculative inquiry as to which of the topics touched by the legislation seems most likely to have been the main preoccupation of those who enacted it. Such an inquiry has nothing to do with the question of constitutional validity under s. 51 of the Constitution. Under that section the question is always one of subject matter, to be determined by reference solely to the operation which the enactment has if it be valid, that is to say by reference to the nature of the rights, duties, powers and privileges which it changes, regulates or abolishes; it is a question as to the true nature and character of the legislation: is it in its real substance a law upon, "with respect to", one or more of the enumerated subjects, or is there no more in it in relation to any of those subjects than an interference so incidental as not in truth to affect its character ? See per Latham C.J. in Bank of New South Wales v. The Commonwealth (1948) 76 CLR 1 , at pp 185-187 , and per Higgins J. in Huddart Parker & Co. Pty. Ltd. v. Moorehead (1909) 8 CLR 330 , at pp 409-411 .
The need to distinguish between form and substance appears from what has just been said. The possibility has to be recognized, as it was in the United States as long ago as McCulloch v. Maryland (1819) 4 Wheat 316 , at p 423 (4 Law Ed 579) , that under the guise of exercising one or more of the powers of the Parliament legislation may in truth endeavour only to accomplish objects beyond those powers: Bank of New South Wales v. The Commonwealth (1948) 76 CLR 1 , at p 187 ; see, for example, Waterhouse v. Deputy Federal Commissioner of Land Tax (S.A.) (1914) 17 CLR 665 . Accordingly the task of characterizing laws according to subject matter must be performed with care lest mere words mislead. The Court, as Higgins J. said in R. v. Barger (1908) 6 CLR 41 "is not to be bound by the name which Parliament has chosen to give the Act" - one may add, or has chosen to give anything else - "but is to consider what the Act is in substance - what it does, what it commands or prescribes" (1908) 6 CLR, at p 118 . The appellant's argument in its final form accepted this as its real starting point and proceeded to say that s. 11, though it is couched in terms of taxation and wears the badge of a tax law prominently upon it, really operates to expose trustees of superannuation funds to a liability which it miscalls a tax, a liability which in truth is a penalty or sanction for a failure to pursue a prescribed course of conduct by such trustees with respect to the investment of moneys. For this reason, it was said, s. 11 is in substance not a law upon taxation but only a law upon the subject of the investment of such moneys. Thus the argument endeavours to lift the section out of its formal surroundings in an Income Tax Assessment Act, to treat the use it makes of the terminology and machinery of taxation legislation as a veil to be removed, and to exhibit it as in truth but an attempt to regulate, with sanctions, the investment of superannuation fund moneys.
For this method of attack there is precedent, by no means inconsiderable, in the United States. The Child Labor Tax Case, Bailey v. Drexel Furniture Co. (1922) 259 US 20 (66 Law Ed 817) , is an example. The legislation there in question purported to impose a tax of ten per cent of the net profits received from the sale of the products of any mine or quarry in which, during any portion of the taxable year, children under sixteen should have been employed or permitted to work or any mill, cannery, workshop or factory in which children under fourteen should have been employed or permitted to work more than eight hours in any day, or more than six days in any week, or after 8 p.m. or before 6 a.m. The Supreme Court held that Congress, "in the name of a tax which on the face of the Act is a penalty" was seeking to regulate the hours of labour of children, a matter beyond its constitutional authority, and that the Act was void.
There is a degree of general resemblance between some of the matters which the Supreme Court in that case treated as decisive of the true character of the Act and certain features of the provisions enacted by s. 11. The Court expressly refrained from treating the heaviness of the burden as concluding the matter, but emphasized that the Act imposed its heavy exaction upon a departure from a detailed and specified course of conduct in business. The same may be said of s. 11. The Court proceeded: "If an employer departs from this prescribed course of business, he is to pay to the Government one-tenth of his entire net income in the business for a full year. The amount is not to be proportioned in any degree to the extent or frequency of the departures, but is to be paid by the employer in full measure whether he employs five hundred children for a year, or employs only one for a day. Moreover, if he does not know the child is within the named age limit, he is not to pay; that is to say, it is only where he knowingly departs from the prescribed course that payment is to be exacted. Scienter is associated with penalties not with taxes . . . In the light of these features of the act, a court must be blind not to see that the so-called tax is imposed to stop the employment of children within the age limits prescribed. Its prohibitory and regulatory effect and purpose are palpable. All others can see and understand this. How can we properly shut our minds to it?"
To read through s.11 is to see that the removal of the exemption under par. (j) or par. (ja) of s. 23 in cases where the Commissioner is not satisfied that the stated conditions have been fulfilled throughout the year of income is only preliminary to the substantial operation of the provisions inserted into the Principal Act. The kernel of the provisions is to be found in the new s. 121D. Sub-section (1) of that section, as I have said, makes the trustee of a superannuation fund assessable and liable to pay tax upon the investment income of the fund, to the extent to which it is not exempt, at the rates declared by the Parliament for the purposes of the section; and sub-s. (2) provides that the investment income is not subject to income tax otherwise than as provided by sub-s. (1). The result is that the provisions of Div. 6, which regulate income tax liability upon the income of trust funds generally, do not apply to the investment income of superannuation funds, and the new Div. 9B is a law by reference to which the Parliament may, by declaring rates specially for the purposes of s. 121D, impose a liability peculiar to superannuation funds, a liability depending upon opinions which the Commissioner forms of the conduct of the trustees in relation to the investment of the assets of the fund during the year. First, as has been mentioned, the exemption is lost unless the Commissioner is satisfied that the prescribed level of investment in public securities and in Commonwealth securities has been observed at all times during the year of income; so that the threat of liability is an ever-present deterrent to even momentary waywardness. The severity of the sanction is mitigated by sub-ss. (4) and (5), the provisions of which I have already stated; but these provisions may fairly be described as providing grounds upon which the Commissioner may extend leniency in certain cases where the failure of the trustees to invest in the manner which the section contemplates is excusable.
The words of the Supreme Court of the Un ited States may be adapted, not unfairly, to the case: in the light of these features of the enactment, a court must be blind not to see that the "tax" is imposed to stop trustees of superannuation funds from failing to invest sufficiently in Commonwealth and other public securities.
But is this enough to justify the conclusion that what purports to be a set of provisions for imposing a tax upon the investment income of superannuation funds is in reality not a law with respect to taxation at all, but only a law with respect to the investment of such funds? If the criterion is to be found in Bailey v. Drexel Furniture Co. (1922) 259 US 20 (66 Law Ed 817) and other cases in the same line, such as Hill v. Wallace (1922) 259 US 44 (66 Law Ed 822) ; United States v. Constantine (1935) 296 US 287 (80 Law Ed 233) ; and Carter v. Carter Coal Co. (1936) 298 US 238 (80 Law Ed 1160) , the Supreme Court of the United States would be likely to say, Yes. Corwin's edition of the Constitution of the United States of America with annotations to June 30, 1952, at p. 111 makes the broad statement, by reference to these decisions, that where a tax is conditional, and may be avoided by compliance with regulations set out in the statute, the validity of the measure is determined by the power of Congress to regulate that subject matter: if the regulations are within the competence of Congress, apart from its power to tax, the exaction is sustained as an appropriate sanction for making them effective; otherwise it is invalid. It is not for us to say whether the statement is too general. Possibly the Court has not gone further than to hold that a law purporting to impose a tax upon failure to pursue a defined course of conduct is not a law upon taxation if the inference arises on the face of the law itself that the purpose is to enforce the course of conduct and not to raise revenue.
But even this proposition represents a departure from principles formerly adhered to in a line of cases from the Head Money Cases (1884) 112 US 580 (28 Law Ed 798) ; Ex parte Kollock (1897) 165 US 526 (41 Law Ed 813) and McCray v. United States (1904) 195 US 27 (49 Law Ed 78) to United States v. Doremus (1919) 249 US 86 (63 Law Ed 493) , and there seems to have been a reaction against it: see Sonzinsky v. United States (1937) 300 US 506 (81 Law Ed 772) ; United States v. Kahriger (1953) 345 US 22 (97 Law Ed 754) . See generally, Willoughby on The Constitution of the United States, 2nd ed. (1929) pp. 669-681, pars. 379-388.
The dissenting judgment of Frankfurter J. in the case last-mentioned makes it clear that the distribution of power as between the Congress and the State legislatures in relation to the regulation of conduct has been a potent underlying factor in the decision of all these cases. In Australia, too, the distribution of powers has greatly influenced decision, particularly in the majority judgment in R. v. Barger (1908) 6 CLR 41 , upon which the appellants' argument in the present case is largely founded. While affirming that in deciding whether a law is supported by the taxation power it is irrelevant to inquire into the ultimate indirect consequences of the operation of the law - for no conclusion can be built upon them save as to the motives of the legislators - the majority of the Court accepted the view that it is legitimate to draw an inference from what appears on the face of the law as to whether the substantial purpose is, on the one hand, to raise revenue or, on the other hand, to regulate the conduct of persons by providing for a sanction in the form of a pecuniary impost to be incurred by departure from a specified course. Griffith C.J. and Barton and O'Connor JJ. treated the task of choosing the correct inference as one to be performed against a background provided by the doctrine, to which they were adherents, that the Constitution was to be interpreted as intending to reserve to the States all such powers as were not expressly conferred upon the Commonwealth. From this doctrine they took as the background of their thinking in Barger's Case (1908) 6 CLR 41 the proposition that "taxation" in s. 51 (ii.) of the Constitution has a special meaning, that it refers only to taxation not imposed as a means of regulating the domestic affairs of the States.
Confronted by an Act which purported to provide for a duty of excise to be paid upon manufactured goods if certain conditions of employment in the course of manufacture were not observed, their Honours saw on the face of it an intention to use the taxation power as a mere means of regulating conditions of employment, a matter "reserved", as they considered, to the States; and they concluded that the end aimed at was the substance, the taxing means employed was mere form, and that the law was therefore outside the true limits of the power.
In so far as the judgment insisted upon testing the validity of the law by reference to its substantial operation, it has been approved by the Privy Council in W. R. Moran Pty. Ltd. v. Deputy Commissioner of Taxation [1940] AC 838 , at p 849; (1940) 63 CLR 338 , at p 341 and neither the dissenting members of the Court in Barger's Case (1908) 6 CLR 41 nor any Judge since has wished to disagree. But it is by no means a settled doctrine that a law which purports to provide for a tax upon behaviour is in substance not a law with respect to taxation if it exhibits on its face a purpose of suppressing or discouraging the behaviour and is to be explained more convincingly as a means to that end than as a means to provide the Government with revenue. Indeed, to espouse such a doctrine would be to fall into the error already mentioned, of confusing the distinction between form and substance with the distinction between the major and the minor importance which a reading of the Act suggests that those who passed it may have attributed to the various aspects of its operation. In my opinion the judgment of the majority in Barger's Case (1908) 6 CLR 41 provides no satisfactory guide in the case before us, partly because the doctrine of the reserved powers of the States, in the wide form in which it was held by their Honours, has long since been exploded (see Amalgamated Society of Engineers v. Adelaide Steamship Co. (1920) 28 CLR 129 , at p 154 ), but, more fundamentally, because we ought to maintain the principle which may be stated in words taken from the judgment of Clark J. in United States v. Sanchez (1950) 340 US 42 (95 Law Ed 47) : "It is beyond serious question that a tax does not cease to be valid merely because it regulates, discourages, or even definitely deters the activities taxed. Sonzinsky v. United States (1937) 300 US 506 , at pp 513, 514 (81 Law Ed 772, at pp 775, 776).
The principle applies even though the revenue obtained is obviously negligible, Sonzinsky v. United States (1937) 300 US 506 , at pp 513, 514 (81 Law Ed 772, at pp 775, 776) or the revenue purpose of the tax may be secondary, J. W. Hampton & Co. v. United States (1928) 276 US 394 (72 Law Ed 624) . Nor does a tax statute necessarily fall because it touches on activities which Congress might not otherwise regulate" (1950) 340 US, at p 44 (95 Law Ed, at p 50) .
The dissenting judges in Barger's Case (1908) 6 CLR 41 , Isaacs and Higgins JJ., rejected the doctrine of the reserved powers of the States, and thus they did not have to face the same somewhat loaded question as the majority, namely whether the Act was a law with respect to taxation other than taxation imposed to regulate matters reserved for regulation by the States. The question for them was less complicated: was the liability for which the Act provided, in its real nature, a tax or a penalty; and with emphasis and great elaboration they answered that it was what it purported to be, a tax. Nothwithstanding features of the Act which, like features of s. 11 to which I have drawn attention, might have induced a court like-minded with the Court that decided Bailey v. Drexel Furniture Co. (1922) 259 US 20 (66 Law Ed 817) to deny the quality of a tax to the exaction imposed, their Honours found themselves unable to take that course consistently with the acknowledgement, which they considered ought to be made, that subject only to the limitations expressed in the Constitution the power with respect to taxation was "plenary and absolute; unlimited as to amount, as to subjects, as to objects, as to conditions, as to machinery" (1908) 6 CLR, at p 114 , so that "the Parliament has, prima facie, power to tax whom it chooses, power to exempt whom it chooses, power to impose such conditions as to liability or as to exemption as it chooses": per Higgins J. (1908) 6 CLR, at p 114 . It may be that the power is subject to some implied as well as express limitations; but with that reservation the soundness of the propositions thus stated is not now, I think, open to doubt.
In the result I think that this case should be decided against the appellants upon the broad principle which Sir Owen Dixon stated in Melbourne Corporation v. The Commonwealth (1947) 74 CLR 31 : "Speaking generally, once it appears that a federal law has an actual and immediate operation within a field assigned to the Commonwealth as a subject of legislative power, that is enough. It will be held to fall within the power unless some further reason appears for excluding it. That it discloses another purpose and that the purpose lies outside the area of federal power are considerations which will not in such a case suffice to invalidate the law" (1947) 74 CLR, at p 79 . The operation of s. 11 is to replace a total exemption from all income tax with a conditional special liability to income tax on "investment income". The legislative policy is obvious and may be freely acknowledged: it is to provide trustees of superannuation funds with strong inducement to invest sufficiently in Commonwealth and other public securities. The raising of revenue may be of secondary concern. But the enactment does not prescribe or forbid conduct. Its character is neither fully nor fairly described by saying that it makes trustees of superannuation funds liable to pay for failing to do what the legislature wishes. To adapt the language of Higgins J. in R. v. Barger (1908) 6 CLR 41 , at p 119 , the substance of the enactment is the obligation which it imposes, and the only obligation imposed is to pay income tax. In substance as in form, therefore, the section is a law with respect to taxation.
I would answer the question in the case stated: Yes.