State of Queensland v. Commonwealth of Australia.

Judges: Gibbs CJ

Mason J
Wilson J
Brennan J
Deane J
Dawson J

Court:
Full High Court

Judgment date: Judgment handed down 3 February 1987.

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Mason, Brennan and Deane JJ.

This special case raises for determination the question whether the prohibition of sec. 114 of the Constitution upon the imposition by the Commonwealth of "any tax on property of any kind belonging to a State" has the effect of precluding the Fringe Benefits Tax Act 1986 (Cth) (the "Tax Act") and the Fringe Benefits Tax Assessment Act 1986 (Cth) (the "Assessment Act") from imposing a tax on car and housing fringe benefits provided by a State as employer to its employees. Each Act binds the Crown in right of the States (Tax Act sec. 4; Assessment Act sec. 163(3)). However, sec. 7 of the Tax Act provides:

"It is the intention of the Parliament that if, but for this section, section 5 of this Act

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would impose a tax on property of any kind belonging to a State within the meaning of section 114 of the Constitution, section 5 of this Act shall have effect as if it did not impose that tax."

Section 5 of the Tax Act imposes tax, at a rate which currently corresponds with the company rate of income tax (sec. 6), in respect of the fringe benefits taxable amount of an employer during the tax year. The expression "fringe benefits taxable amount" in relation to an employer in relation to a year of tax is defined by sec. 136(1) of the Assessment Act as meaning, subject to any contrary intention, "the sum of the taxable values, in relation to the year of tax, of all the fringe benefits in relation to the employer in relation to the year of tax". The expression "fringe benefit" is also defined by sec. 136(1), in terms of a benefit provided, or deemed to be provided, to the employee or an associate of the employee in respect of the employment of the employee, whether the benefit be provided by the employer, an associate of the employer or another person under an arrangement with the employer or an associate of the employer. The definition of "fringe benefit" excludes a long list of benefits too numerous to mention. Wages, salary and superannuation benefits are among the benefits thereby excluded.

The two instances of fringe benefits with which we are presently concerned are car fringe benefits, dealt with in Pt III Div. 2 of the Assessment Act, and housing fringe benefits, dealt with in Pt III Div. 6 of that Act. Section 7, which appears in Pt III Div. 2, sets out the circumstances in which the private use of a car by an employee or his associate, or the availability of a car for the private use of an employee or his associate, shall be taken to constitute a car fringe benefit to the employee or his associate in respect of the employment of the employee. In the case of car fringe benefits, the designated or imputed value of the relevant vehicle provides the basic ingredient of the statutory formula by reference to which the taxable value of a fringe benefit will ordinarily be determined (Assessment Act sec. 9). The taxpayer has a right to elect to have the taxable value of a car fringe benefit calculated on a cost basis according to another statutory formula in which the basic ingredient is the operating cost of the car (Assessment Act sec. 10).

Section 25, which appears in Pt III Div. 6, provides that the subsistence during the whole or a part of a year of tax of a "housing right" granted by a person ("the provider") to another person ("the recipient") shall be taken to constitute a benefit provided by the provider to the recipient in respect of the year of tax. The expression "housing right" is defined by sec. 136(1) as meaning:

"... a lease or licence granted to the person to occupy or use a unit of accommodation, insofar as that lease or licence subsists at a time when the unit of accommodation is the person's usual place of residence."

The "market value" of the relevant "housing right", which is naturally influenced by the nature and value of the premises, ordinarily constitutes a basic component for determining the taxable value of the fringe benefit (Assessment Act sec. 26).

The plaintiff employs a large number of persons and owns motor vehicles and various types of accommodation which it makes available to its employees in connection with their employment. According to their terms, the Acts would, subject to sec. 7 of the Tax Act, impose liability on the plaintiff to pay fringe benefits tax in respect of the sum of the annual values of those car and housing fringe benefits.

The questions referred to a Full Court for determination by the special case are whether in the circumstances, apart from the provisions of sec. 7 of the Tax Act, tax is imposed by the Tax Act on the taxable value of property of any kind belonging to a State (within the meaning of sec. 114 of the Constitution):

• (a) with respect to a car fringe benefit within the meaning of Pt III Div. 2 of the Assessment Act; and
• (b) with respect to a housing fringe benefit within the meaning of Pt III Div. 6 of the Assessment Act?

The answer to these questions depends on whether the liability which the Acts would impose, but for sec. 7 of the Tax Act, upon a State to pay tax in respect of car and housing fringe benefits, is for the purposes of sec. 114 of the Constitution a "tax on" the cars or accommodation units which are the "property" of the State.

The plaintiff's case is: (1) that a tax imposed on a State in respect of the provision for use by

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another of the State's property is a tax on that property; and (2) that the effect of the two Acts is to impose a tax on the State in respect of the provision for use by another of the State's property. On the other hand the Solicitor-General for the Commonwealth submits that sec. 114 prohibits the imposition of a tax on property of the State as such and that the legislation now in question does not tax the plaintiff's property as such.

The reciprocal immunity from taxation which sec. 114 gives to the property of the Commonwealth and the property of a State resembles the reciprocal immunity from taxation given by sec. 125 of the British North America Act 1867 (U.K.) (renamed the Constitution Act 1867 ) to the "lands" and "property" "belonging to Canada or any Province". The reference to "any tax on property of any kind" in the Australian provision serves to emphasise the width of the protection given by the section. The generality of the language indicates that the object of the section is to protect the financial integrity of the Commonwealth and the States by exempting each from taxation on its property by the other.

In its context in sec. 114 of the Constitution, a "tax on property" is neither a term of art nor a concept with a clearly settled legal meaning. Nor, in that context, do the words express a concept susceptible of elucidation by means of a formula reflecting precise criteria. Rather, the section refers to a "tax on property" as that expression is ordinarily understood. The question whether a particular tax is properly to be characterised, for the purpose of sec. 114, as a tax "on property of any kind belonging to a State" must be determined by reference to matters of substance rather than mere form. It is "the substance of the operation of the statute, rather than merely its form" which is "definitive of the relevant nature of the tax it imposes or exacts": see
Dickenson's Arcade Pty. Ltd. v. Tasmania (1973-1974) 130 C.L.R. 177 at p. 186 ;
Hematite Petroleum Pty. Ltd. v. Victoria (1983) 151 C.L.R. 599 at pp. 630-631, 633 and 662-663 ;
Gosford Meats Pty. Ltd. v. New South Wales (1985) 155 C.L.R. 368 at pp. 383-384 . It follows that if the impost which the relevant law seeks to impose is in substance a tax on property belonging to a State, it will be prohibited by the section.

As a matter of ordinary language, a prohibition against a tax on property might be understood in a very broad sense as prohibiting a tax on any transaction affecting property or in a somewhat narrower sense as prohibiting attacks on the ownership or holding of property. The Supreme Court of Canada has read sec. 125 of the British North America Act as conferring a broad immunity from taxation on transactions affecting property. In
Re Proposed Federal Tax on Exported Natural Gas (1982) 136 D.L.R. (3d) 385 that Court by majority held that sec. 125 of the British North America Act protected the proceeds of sale of a province's natural gas from taxation on disposition. The majority supported its conclusion by saying at p. 444:

"The purpose of this immunity... is to prevent one level of government from appropriating to its own use the property of the other, or the fruits of that property. This immunity would be illusory if it applied only to taxes `on property' but not to a tax on the Crown in respect of a transaction affecting its property or on the transaction itself.... The fundamental constitutional protection framed by s. 125 cannot depend on subtle nuances of form."

To the extent to which the second sentence in this passage suggests that a tax on the Crown in respect of a transaction affecting its property or a transaction tax is necessarily and relevantly a tax on property, it ascribes to sec. 125 a broader immunity than this Court has attributed to sec. 114. In
A.-G. of N.S.W. v. Collector of Customs for N.S.W. (1908) 5 C.L.R. 818 ("the Steel Rails case ") this Court held that sec. 114 did not confer an exemption from customs duties on steel rails imported by a State for the purposes of its railways. Two basic reasons were assigned for this conclusion. The first was that the language of the section, according to its primary or usual meaning, conferred an exemption from taxation on the ownership or holding of property, as distinct from taxation on transactions or on operations or movements of property ( Griffith C.J. at p. 829; Barton J. at p. 839; O'Connor J. at pp. 843-844). The same idea was expressed by Higgins J. (at p. 854) when he spoke of the section conferring an exemption from taxation on property "as such". The second reason was that the existence of the Commonwealth Parliament's exclusive control over customs duties was inconsistent with the existence of a constitutional immunity of State property from

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taxation on transactions generally, and taxation on importation in particular.

It is significant that in the Exported Natural Gas case the minority ( Laskin C.J.C., McIntyre and Lamer JJ.) relied on the Steel Rails case to support the proposition that sec. 125 of the British North America Act does not apply to a transaction tax. Their Honours referred at p. 414 to the comments of Griffith C.J., O'Connor and Higgins JJ., quoting the statement of Higgins J. at p. 854 of the Steel Rails case:

"There is a fundamental difference between taxing men for having property, and taxing men for moving property - and, in particular, for moving property into the country from overseas."

This statement expresses what in our opinion is the essence of the immunity conferred by sec. 114 and what was one of the basic grounds of the decision in the Steel Rails case. The section protects the property of a State from a tax on the ownership or holding of property but it does not protect the State from a tax on transactions which affect its property, unless the tax can be truly characterised as a tax on the ownership or holding of property. This interpretation gives effect to the popular or common understanding of what is involved in the prohibition of a tax of any kind on property of a State, namely a tax on the ownership or holding of property. And it gives a powerful measure of protection to the financial integrity of a State without preventing the Commonwealth from taxing every form of transaction to which a State is a party. No compelling reason has been advanced for giving the constitutional immunity any wider operation.

It may be said that a tax on the exercise of any of the rights giving content to the concept of ownership is itself a tax on ownership. This notion is rather more extensive than the common understanding of what is involved in the prohibition of a tax on the property of a State, as we have explained it, though we would accept that some taxes on rights exercised by an owner with respect to his property would amount to a tax on property in the prohibited sense. Thus, in the context of an exemption from taxation on ownership of property, a tax on the possession or use of property would constitute a tax on the ownership of that property: see
A.-G. for Saskatchewan v. Canadian Pacific Ry. Co. (1953) A.C. 594 at p. 616 . This is because an exemption from taxation on ownership of property naturally extends to an exemption from taxation on the use of it. And a tax on the proceeds of sale of property is likewise a tax on the ownership of property or on property because it is an indirect means of taxing the ownership of property. Such a tax would necessarily fall within the constitutional immunity; if it did not, the constitutional immunity would amount to nothing but a formal prohibition.

Once this interpretation of sec. 114 is accepted, it is apparent that the car and housing fringe benefits tax stands outside the constitutional immunity. In the case of car fringe benefits the tax is imposed on the value of the private use of the car by the employee or his associate or on the value of the availability of the car. The tax is not imposed on the ownership or holding of the car by the State as employer or on its possession or use of the car. Nor is it imposed on the disposition by the State of any interest in its property. The tax is imposed because the employer provides the employee with a benefit in connection with his employment. Likewise with housing fringe benefits, though in this case the tax is imposed on the value of a benefit, a housing right, which may be an interest in property in the form of a lease. The tax is not imposed on or in respect of the disposition as such. Nor is it imposed on the proceeds of sale. It is imposed on the benefit which the employer provides to the employee in connection with his employment and it is imposed because the benefit is provided on that account.

The tax imposed by the two Acts is not an income tax. It is levied on employers in respect of the fringe benefits which they provide to employees, not on employees in respect of the fringe benefits which they receive in connection with their employment. Granted that it is a tax on employers in respect of employees' fringe benefits, it is natural that the legislative focus is on what the employer provides, rather than on what the employee receives. Indeed, the character of the tax accounts for other features of the tax on which the plaintiff relied in support of its submission that the Acts impose a tax on its property, namely that:

• (a) the tax is imposed on the employer's fringe benefits taxable amount;

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• (b) the amount is ascertained by reference to the value of the benefit provided by the employer, the value of the benefit provided to the employee being disregarded; and
• (c) the calculation of the fringe benefits taxable amount is made, in the case of car and housing fringe benefits, by reference to the value of the employer's property.

All these features are matters of machinery and valuation associated with the imposition of a tax on employers. But they do not establish that the tax is imposed on property of the employers. They do not detract from the conclusion that the tax is not in substance a tax on the property of the State.

In the result we would answer the questions asked in the special case as follows:

• (a) No.
• (b) No.