State Chamber of Commerce and Industry & Ors v. Commonwealth of Australia.

Judges: Mason CJ
Wilson J

Brennan J
Deane J
Dawson J
Toohey J
Gaudron J

Court:
Full High Court

Judgment date: Judgment handed down 2 September 1987.

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Brennan J.

I agree with the reasons for judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. except in one respect. I would hold that the Fringe Benefits Tax Act 1986 (Cth) ("the Tax Act") and the Fringe Benefits Tax Assessment Act 1986 (Cth) ("the Assessment Act") do not validly impose tax on a State in respect of so much of the fringe benefits taxable amount of a State as represents the value of fringe benefits provided in respect of the "employment" of members of the State

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Parliament, Ministers of the Crown and Judges of the State Supreme Court. It may be that on the true construction of the definition of "employee" in sec. 136 of the Assessment Act, the value of fringe benefits provided in respect of the "employment" of State Judges or any State Ministers of the Crown who are not members of the State Parliament is not included in the fringe benefits taxable amount of the State. The judgment of Deane J. states the difficulty in the way of including that value. However, I do not find it necessary to decide the point for I would rest my conclusion on a different principle. The relevant principle, implied in the Constitution, is that a law of the Commonwealth cannot unduly impair the capacity of a State to perform its constitutional functions. The implication of a prohibition of this kind in the Constitution has long been recognized, though its formulation has not been uniform and its scope uncertain: Melbourne Corporation v. The Commonwealth (1947) 74 C.L.R. 31 at pp. 66, 75, 80, 99;
Bank of N.S.W. v. The Commonwealth (1948) 76 C.L.R. 1 at pp. 242-243, 325-326, 338 ;
Victoria v. The Commonwealth ("the Pay-roll Tax case") (1970-1971) 122 C.L.R. 353 at pp. 392, 403, 411, 424 ;
Victoria v. Australian Building Construction Employees' and Builders Labourers' Federation (1981-1982) 152 C.L.R. 25 at p. 93 ;
Koowarta v. Bjelke-Petersen (1982) 153 C.L.R. 168 at pp. 191-192, 216, 225-226, 240 ;
The Commonwealth v. Tasmania ("the Tasmanian Dam case") (1983) 158 C.L.R. 1 at pp. 128, 212-214, 281 ;
Queensland Electricity Commission v. The Commonwealth (1985) 159 C.L.R. 192 at pp. 206, 217, 222, 231, 247, 260 . The principle, however it is stated, is to be distinguished from a complementary but different principle recently considered in Queensland Electricity Commission v. The Commonwealth, namely, that a law of the Commonwealth cannot discriminate against a State unless the power under which the law is made authorises the discrimination.

In this case, the Acts are general in their application. They do not discriminate against the States (except, perhaps, in reference to members of a State Parliament who are included in the definition of "current employee" though they might not otherwise fall within that category). But if the Acts sweep into the general net of taxation the value of the fringe benefits provided in respect of the "employment" of the State officers mentioned, a tax is imposed on the States in respect of the emoluments provided to their essential functionaries. As Dixon J. pointed out in Melbourne Corporation at p. 80, most of the legislative powers assigned to the Commonwealth would not support a law which offends the implied prohibition against unduly impairing the capacity of a State to perform its constitutional functions, but the tax power is an exception. His Honour noted:

"... to attempt to burden the exercise of State functions by means of the power to tax needs no ingenuity, and that, no doubt, is why that power occupies such a conspicuous place in the long history both in the United States and here of the question how far federal power may be used to interfere with the States in the exercise of their powers."

Attempts to answer the question how far federal taxing power may validly burden the exercise of State functions have not yielded in this country a general criterion which distinguishes between those taxes to which a State is subject and those from which it is immune. In America, the problem was considered in
New York v. United States (1946) 326 U.S. 572 , a case to which reference has been made in this Court. It was a case where a federal tax was imposed on a State in respect of activities in which the State had engaged in exercise of its powers. A suggested criterion for determining whether the State was immune from the tax was the governmental character of the power which the State was exercising, but that criterion proved too elusive. In the leading opinion, Frankfurter J. said at p. 581:

"Any implied limitation upon the supremacy of the federal power to levy a tax like that now before us, in the absence of discrimination against State activities, brings fiscal and political factors into play. The problem cannot escape issues that do not lend themselves to judgment by criteria and methods of reasoning that are within the professional training and special competence of judges."

The principle expressed by Stone C.J., with the concurrence of Reed, Murphy and Burton JJ., was that a tax, though non-discriminatory, should not "interfere unduly with the State's performance of its sovereign functions of

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government": see pp. 587-588. As Latham C.J. observed in Melbourne Corporation at p. 60, "this statement of principle renders it necessary to distinguish between the `sovereign functions of Government' performed by a State and other functions assumed and performed by it".

A distinction between essential and inessential functions of government for the purpose of determining the tax immunity of a State has not been recognized as valid in this Court in modern times (see per Gibbs J. in the Pay-roll Tax case at p. 424) and, in the United States, a similar distinction - between "governmental" and "proprietary" functions - was abandoned as untenable and unworkable: see the discussion in
Garcia v. San Antonio Metro (1985) 469 U.S. 528 at pp. 542-543 . The criterion of "undue" interference has also proved to be insufficiently precise for application under our Constitution, for we have not adopted the doctrine which Stone C.J. espoused in New York v. United States (at p. 589) that the tax immunity "be so construed as to allow to each government reasonable scope for its taxing power". In the Pay-roll Tax case, Walsh J., while acknowledging that there was some implied limitation on the power of the Commonwealth Parliament to affect the States by a law imposing taxation, said (at pp. 410-411):

"I have said above that the limitations have been described in various ways. Some of these descriptions have been in terms which, in my opinion, do not provide satisfactory tests for determining whether or not a law is valid. For example, a statement that a law is invalid if it subjects the governmental functions of a State to `undue interference' provides no satisfactory means for determining what is `undue'. Again there are difficulties in a test which makes the decision of a legal question depend upon a distinction made by the Court between functions of governments which are `normal' or are `essential' and those which are not."

Barwick C.J. rejected the approach of implied limitations on the federal taxing power. Noting that "States and their functions are not matters committed to the Parliament", his Honour's approach was to determine the validity of an impugned law by ascertaining its true character and subject matter. The supposed implied limitation was, in his Honour's view, too imprecise:

"... the concept of an `undue' interference with State functions attracting invalidity provides but a question begging formula. And to attempt to use a distinction between governmental and other functions of a State in the modern world as a legal criterion of validity is, in my opinion, without promise. New York v. United States, to my mind, illustrates the difficulties without affording any sure guide to their resolution."

(At pp. 382-383.)

Owen J. agreed with the Chief Justice and McTiernan J. adopted a somewhat similar approach.

It is not surprising that the Pay-roll Tax case was decided without the enunciation of a general criterion by reference to which the immunity of a State from a general federal tax might be determined. Menzies J. (at p. 392) declined to offer "an exhaustive formulation". Windeyer J. (at p. 403), accepting that implied limitations might restrict the Parliament's exercise of its powers, upheld the tax because it was not "directed to the States to prevent their carrying out their functions as parts of the Commonwealth". Walsh J. (at p. 413) accepted that a non-discriminatory taxing law affecting the States might be beyond power but did not regard the laws there under challenge as impermissibly affecting the capacity of the States to carry out their functions. Gibbs J. (at p. 424) said that a "general law of the Commonwealth which would prevent a State from continuing to exist and function as such would in my opinion be invalid". His Honour did not regard the laws there under challenge as infringing any implied prohibition, how ever the prohibition might be framed. I shall presently return to his Honour's reasons for holding the payroll tax to have been validly imposed.

When the Parliament imposes a tax on any person who engages in a particular activity and a State in exercise of its powers is among those who engage in that activity, the State is not exempt from the tax merely because the exercise of its powers is burdened by the tax. No satisfactory criterion has been found and, in my opinion, none can be found to isolate the exercise of State powers from the burden of a federal non-discriminatory tax. The

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Constitution confers on the Parliament power to select whatever subject of taxation it chooses and a State procures no immunity by exercising its powers to engage in an activity on which a general federal tax is imposed. The exercise by a State of its powers is not protected if the tax does not single out the State and impose a discriminatory burden upon it. But there is a distinction, material in the present case, between the exercise by a State of its powers and the steps which a State takes to ensure or facilitate the performance by the essential organs of government of their respective functions in exercising or directing the exercise of the powers of the State. The distinction was pointed to by Dixon J. in Melbourne Corporation at p. 82:

"The foundation of the Constitution is the conception of a central government and a number of State governments separately organized. The Constitution predicates their continued existence as independent entities. Among them it distributes powers of governing the country. The framers of the Constitution do not appear to have considered that power itself forms part of the conception of a government. They appear rather to have conceived the States as bodies politic whose existence and nature are independent of the powers allocated to them."

Accordingly, his Honour held that the foundation of State immunity is not the preservation of the powers of the States but the preservation of their governments (at p. 83):

"Accordingly the considerations upon which the States' title to protection from Commonwealth control depends arise not from the character of the powers retained by the States but from their position as separate governments in the system exercising independent functions."

The essential organs of government - the Governor, the Parliament, the Ministry and the Supreme Court - are the organs on which the "existence and nature" of the body politic depends. (I mention only the Supreme Court, for that is the Court of general jurisdiction in which, subject to the jurisdiction of this Court, the laws of the State are finally interpreted and the constitutional and administrative law of the State is applied.) The existence and nature of the body politic depends on the attendance to their duties of the officers of the essential organs of government and their capacity to exercise their functions. The emoluments which a State provides to the officers of the essential organs of government ensure or facilitate the performance by those organs of their respective functions, and a tax on a State in respect of the value of those emoluments is not merely a tax on an activity in which the State engages in exercise of its powers; it is a tax on what is done to secure the continued existence and functioning of the government of the State.

It may be objected that, if a State must have the services of the officers of the essential organs of government, equally it must have a public service and yet, in the Pay-roll Tax case, a tax on the salary or wages paid to the public service was upheld. In that case, an argument founded on the necessity for employing servants of the Crown was rejected. Menzies J. said at p. 392:

"It was argued that, because the State needs Crown servants to carry out its functions of government, the payment of tax upon wages paid to such servants interfered with the performance of those functions. This I do not accept. At this point, I think, the argument for the State moved from the operation of the laws to their economic consequence, an entirely different matter. The most that can be said is that, because the State pays the tax to the Commonwealth, it has so much less money with which to carry out the functions of government. Such a consequence does not spell invalidity."

And Gibbs J. said at p. 425:

"Although in some cases it may be possible to show that the nature of a tax on a particular activity, such as the employment of servants, renders the continuance of that activity practically impossible, it has not been shown that the tax in the present case prevents the States from employing civil servants or operates as a substantial impediment to their employment. The tax has now been imposed upon and paid by the States for nearly thirty years, and it has not been shown to have prevented the States from discharging their functions or to have impeded them in so doing. They may have less money available for public purposes

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because they have to pay the tax, but that could be said in every case in which a tax is imposed on the States, and in itself it cannot amount to an impediment against State activity sufficient to invalidate the tax."

I would respectfully agree that a diminution in the States' resources by paying a non-discriminatory federal tax is insufficient in itself to establish the invalidity of the impost upon them.

However, the employment of a public service does not have the same significance for the existence and functioning of the government of a State as the securing of attendance to their duties by the officers of the essential organs of that government. When a tax falls on the employment of a public service, a test of practical impossibility of continuing the employment may be the appropriate criterion of invalidity. But a test of practical impossibility is far too onerous to be applied to determine the validity of a tax which falls on the emoluments provided in respect of the "employment" of the officers of the essential organs of the government of a State. A tax of that kind is in substance a tax on a State's essential organs of government and is, in my opinion, an undue impairment of the State's capacity to perform its functions. If one were to adopt the approach favoured by Barwick C.J., it can be said that the essential organs of government are not a subject of taxation within the taxing power. Though State immunity from a non-discriminatory federal tax cannot be invoked in protection merely of the freedom of the State to exercise a particular power, in my opinion it can be invoked in protection of the State's freedom to benefit the officers of the essential organs of government and thereby to ensure or facilitate the performance by those organs of their respective functions. I would therefore hold that the Tax Act and the Assessment Act cannot validly impose a tax in respect of "employment" of those officers.

The Tax Act (sec. 4 and 5) imposes tax on the fringe benefits taxable amount of the respective States which includes the value of all fringe benefits provided "in respect of the employment of the employee" (the Assessment Act, sec. 136(1)). It seems that the value of fringe benefits provided to a State Governor is not included in the amount. It is by no means clear that the definitions of "employee", "current employee", "fringe benefit" and "fringe benefits taxable amount" in sec. 136(1) of the Assessment Act, coupled with the definition of "employee" in Div. 2 of Pt VI of the Income Tax Assessment Act 1936 (Cth) (to which the definition of "current employee" refers) result in the value of fringe benefits provided to State Ministers of the Crown and Judges of the Supreme Courts of the States being taken into account in determining the tax liability of a State under the Tax Act. That question is not resolved by pointing to the phrase "the holding of any office" in the definition of "employment" in sec. 136(1) of the Assessment Act, for the critical part of the definition of "fringe benefit" requires that the benefit be provided in respect of the "employment" not of a "person" but of "the employee", and the term "employee", which has its own exhaustive catena of definitions, is not expanded by the definition of "employment". However, the term "current employee" is defined to include a member of a State Parliament and that results in the imposition of a tax on the State which is to be assessed by taking into account at least the value of fringe benefits provided to members of State Parliaments. To that extent at least and, if the Acts would bring to tax the value of fringe benefits provided in respect of the "employment" of State Ministers and Judges of the State Supreme Courts, to that extent also, I would hold the Acts to be invalid.

This conclusion does not spell the invalidity of the Tax Act and the Assessment Act. Their general operation is saved by sec. 15A of the Acts Interpretation Act 1901 (Cth) for reasons explained in
The King v. Poole ; Ex parte Henry (No. 2) (1939) 61 C.L.R. 634 at pp. 652-653 ;
Pidoto v. Victoria (1943) 68 C.L.R. 87 at pp. 109-110 and
Strickland v. Rocla Concrete Pipes Ltd. (1971) 124 C.L.R. 468 at pp. 492-494, 516-520 . The tax is imposed in respect of the "fringe benefits taxable amount" of an employer and that term is defined to mean the sum of the taxable values of all the relevant fringe benefits. The Acts have a clear distributive operation upon the value of each fringe benefit, and there is no difficulty in giving the Acts an operation which leaves out of account the value of some fringe benefits in ascertaining the fringe benefits taxable amount of a State.

I would answer the questions in the special case other than question (f) as Mason C.J.,

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Wilson, Dawson, Toohey and Gaudron JJ. propose. I would answer question (f) as follows:

• The Tax Act is valid except in so far as it imposes tax in respect of the taxable value of fringe benefits provided in respect of the "employment" of Ministers of the Crown in right of a State, Judges of the Supreme Court of the States and members of State Parliaments.