South Australia and Ors v Commonwealth and Anor
(1942) 65 CLR 373[1942] HCA 14
(Judgment by: McTiernan J)
Between: State of South Australia and Anor - Plaintiffs
And: Commonwealth of Australia and Anor - Defendants
Between: State of Victoria and Anor - Plaintiffs
And: Commonwealth of Australia and Anor - Defendants
Between: State of Queensland and Anor - Plaintiffs
And: Commonwealth of Australia and Anor - Defendants
Between: State of Western Australia and Anor - Plaintiffs
And: Commonwealth of Australia and Anor - Defendants
Judges:
Latham CJ
Rich J
Starke J
McTiernan JWilliams J
Judgment date: 23 July 1942
Judgment by:
McTiernan J
The question to be decided is whether four Acts which have been passed by the Commonwealth Parliament are within the powers vested in the Parliament by the Commonwealth of Australia Constitution Act. The Acts are the Income Tax Act 1942 , the Income Tax Assessment Act 1942 , the States Grants (Income Tax Reimbursement) Act 1942 and the Income Tax (War-time Arrangements) Act 1942 .
In my opinion these Acts are justified by the following provisions of the Constitution: The Income Tax Act and the Income Tax Assessment Act by sec. 51 (ii.), (vi.) and (xxxix.), the States Grants Act by sec. 96, sec. 51 (vi.) and (xxxix.), and the War-time Arrangements Act by sec. 51 (vi.) and (xxxix.).
Sec. 51 of the Constitution provides that the Parliament shall, "subject to this Constitution," have power to make laws for the peace, order and good government of the Commonwealth of Australia with respect to, among other things, "(ii.) Taxation; but so as not to discriminate between States or parts of States:" "(vi.) The naval and military defence of the Commonwealth and of the several States ...:" and "(xxxix.) Matters incidental to the execution of any power vested by this Constitution in the Parliament ... or in the Government of the Commonwealth."
Sec. 96 vests in the Parliament power to grant financial assistance to any State on such terms and conditions as the Parliament thinks fit.
It is a settled principle of interpretation that the words "subject to this Constitution" mean subject to the provisions of the Constitution. They do not make any power vested in the Parliament by this section subject to any a-priori rules for reconciling State and national powers under a Federal system of government. It is also a settled principle that the powers vested in Parliament by the Constitution are, subject only to its provisions, plenary. Each is not less than a complete power to make laws with respect to the subject of the power.
The taxation power includes the power to impose income tax for the purposes of the Commonwealth. The Court assumes that an Act, which in substance imposes taxation, was passed by the Parliament for the purpose of raising revenue for the Commonwealth. There is no legal limitation to the amount of the rate of taxation which the Parliament may impose.
The nature and extent of the Commonwealth defence power is explained in Farey v. Burvett [F162] . In that case Griffith C.J. said it "includes all acts of such a kind as may be done in the United Kingdom, either under the authority of Parliament or under the Royal Prerogative, for the purpose of the defence of the realm, except so far as they are prohibited by other provisions of the Constitution. ... It includes preparation for war in time of peace, and any such action in time of war as may conduce to the successful prosecution of the war and defeat of the enemy. This is the constant and invariable meaning of the term. It is obvious, however, that the question whether a particular legislative act is within it may fall to be determined upon very different considerations in time of war and time of peace. ... I agree generally with Mr. Mann's argument that the power to legislate with respect to defence extends to any law which may tend to the conservation or development of the resources of the Commonwealth so far as they can be directed to success in war, or may tend to distress the enemy or diminish his resources, as, for instance, by the prohibition of trading with him or with persons associated with him. But this definition is not exhaustive. The control of finance or trade may be the most potent weapon of all. One test, however, must always be applied, namely: Can the measure in question conduce to the efficiency of the forces of the Empire, or is the connection of cause and effect between the measure and the desired efficiency so remote that one cannot reasonably be regarded as affecting the other?" (Farey v. Burvett [F163] , per Griffith C.J.).
The Chief Justice added: "The power to make laws with respect to defence is, of course, a paramount power, and if it comes into conflict with any reserved State rights the latter must give way" [F164] .
The nature and extent of the Commonwealth defence power were also explained by Isaacs J., as he then was, in Farey v. Burvett [F165] . His Honour said that when war imperilling our existence had begun the limits of the defence power "then are bounded only by the requirements of self-preservation. It is complete in itself, and there can be no implied reservation of any State power to abridge the express grant of a power to the Commonwealth" [F166] . His Honour added:-
"As I read the Constitution, the Commonwealth, when charged with the duty of defending Commonwealth and States, is armed as a self-governing portion of the British Dominion with a legislative power to do in relation to national defence all that Parliament, as the legislative organ of the nation, may deem advisable to enact, in relation to the defence of Australia as a component part of the Empire, a power which is commensurate with the peril it is designed to encounter, or as that peril may appear to the Parliament itself; and, if need be, it is a power to command, control, organize and regulate, for the purpose of guarding against that peril, the whole resources of the continent, living and inert, and the activities of every inhabitant of the territory. The problem of national defence is not confined to operations on the battlefield or the deck of a man-of-war; its factors enter into every phase of life, and embrace the co-operation of every individual with all that he possesses-his property, his energy, his life itself; and, in this supreme crisis, we can no more sever the requirements and efforts of the civil population, whose liberties and possessions are at stake, from the movements of our soldiers and sailors, who are defending them, than we can cut away the roots of a living tree and bid it still live and bear fruit, deprived of the sustenance it needs" [F167] .
Higgins J. said in the same case: "What is the ambit of the power, not merely to make laws for the control of the forces, but to make laws (not for, but), with respect to naval and military defence, and to matters incidental to that power and the powers of the Government? All the subjects for legislation in sec. 51 are on the same logical level: there is no hierarchy in the powers, with the power as to defence on the top. But, from the nature of defence, the necessity for supreme national effort to preserve national existence, the power to legislate as to defence, although it shows itself on the same level as the other powers, has a deeper tap-root, far greater height of growth, wider branches, and overshadows all the other powers. Defence-naval and military defence-is primarily a matter of force, actual or potential; the whole force of the nation may be required; and for the purpose of bringing the whole force of the nation to bear, the policy of the States may have to be temporarily superseded, the law made under the Federal Constitution prevailing (sec. 109). The temporary suspension of the policy of a State may possibly help to prevent the total and permanent paralysis of the State's policy and functions, and of the State itself, under foreign invasion and domination. In Great Britain there is no limit to the legislative powers, and therefore there is no line of demarcation between Acts for defence and Acts for other purposes" [F168] .
This doctrine as to the nature and extent of the defence power was accepted and applied recently in the case of Andrews v. Howell [F169] .
Sec. 96 does not bind the Parliament to give equal grants to the States. A law granting financial assistance is not a law or a regulation of revenue under sec. 99. Sec. 96 leaves to the judgment of Parliament the question of deciding to what State or States it will grant financial assistance, the amount of the grant, and the terms and conditions of the grant.
The Income Tax Act 1942 imposes income tax and declares the rates of taxation: See Constitution, secs. 53 and 55. The Income Tax Assessment Act 1942 provides for the assessment and levy of income tax. It is incorporated with the Income Tax Act 1942 by sec. 3 of this Act. Each of these Acts is (apart from sec. 31 of the Assessment Act as to which a special question is raised) in real substance and effect a law with respect to Commonwealth income taxation. Neither law contains any provision which infringes any restriction imposed by the Constitution. The Acts do not, in the imposition of the tax or in the declaration of the rates of taxation or in any other way, discriminate between the States or parts of States.
The power of taxation (customs and excise excepted) is not by the Constitution exclusively invested in the Commonwealth Parliament nor withdrawn from any State. This power continues in the States. But any State law is subject to sec. 109 of the Constitution, which provides that when a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail and the former shall, to the extent of the inconsistency, be invalid. There is no legal limitation on the amount of the rate of taxation which a State Parliament may impose. These Commonwealth and State powers of taxation have been described as concurrent powers. They are, more strictly, separate powers. A State Act and a Commonwealth Act have not been regarded as inconsistent, merely because each imposes tax on a taxpayer in respect of the same income. But a question of inconsistency which is resolved by sec. 109 in favour of the Commonwealth arises when the Commonwealth Parliament, by a valid law, commands the taxpayer to pay the Commonwealth tax before he pays the State tax. Sec. 31 of the Income Tax Assessment Act prohibits a taxpayer from paying State tax before he pays Commonwealth tax.
A question was raised whether, having regard to sec. 7 (2) of the Income Tax Act 1942 , the effect of sec. 31 is to introduce a prohibition against the payment of State income tax. The question turns on the meaning of the words "that last-mentioned tax" in sec. 31. These words, in my opinion, refer to Commonwealth tax for a year of income in contradistinction to the State tax imposed in respect of that year. The meaning of the section is that the taxpayer is forbidden under the penalty of £100 or imprisonment for six months from paying State tax imposed for any year until he has paid the Commonwealth tax due by him for that year.
Sec. 31 is preceded by the recital showing that in enacting the section Parliament intended to exert the Commonwealth defence power. The recital is: "For the better securing ... of the revenue required for the efficient prosecution of the present war." The operation of the section is expressly limited to a period ending twelve months after the cessation of the war. Sec. 32 of the same Act provides that all the other amendments made by the Act shall continue in force in all subsequent years.
The Income Tax (War-time Arrangements) Act is also prefaced by a recital showing that Parliament regarded this Act as a defence measure. The recital is: "Whereas with a view to the public safety and defence of the Commonwealth and of the several States and for the more effectual prosecution of the war in which His Majesty is engaged, it is necessary or convenient to provide for the matters hereinafter set out."
The Court is not bound to declare a law, containing a recital such as either of those which have been quoted, a good law with respect to defence or matters incidental to the execution of the defence power. The position is examinable, but in a limited way. In Farey v. Burvett [F170] , Griffith C.J. said:-
"So far as the attack is made upon the Act as distinct from the Regulation the Court is invited to assume the function of determining whether the facts were at the time when the Act was passed such as to warrant the Parliament in exercising the defence power by passing it. Whether it was or was not authorized to do so must, so far as the authority depends upon facts, depend upon the facts as they appeared to it, of which we have not, and cannot have, any knowledge. In my opinion there is no principle, and there is certainly no precedent, which would justify a Court in entering upon such an inquiry, if upon any state of facts the exercise of the legislative power in the particular way adopted could be warranted. If it appeared on the face of the Act that it could not be substantially an exercise of the defence power different questions would arise. I am not prepared to say that it may not have some, and some important, influence upon the successful conduct of the war." And in the same case Isaacs J. said: "If the measure questioned may conceivably in such circumstances" (now the circumstances are a war of aggression against the Commonwealth, invasion of parts of its territories, and threatened invasion of the Commonwealth) "even incidentally aid the effectuation of the power of defence, the Court must hold its hand and leave the rest to the judgment and wisdom and discretion of the Parliament and the Executive it controls-for they alone have the information, the knowledge and the experience and also, by the Constitution, the authority to judge of the situation and lead the nation to the desired end" [F171] .
Reverting to sec. 31 of the Income Tax Assessment Act. This section gives the Commonwealth the prior right to a large part of the financial resources of the whole country. It is clearly a law which is incidental to defence, having regard to the present emergency. Parliament has rested the section on the defence power, and it is justified by that power. It is unnecessary then to decide whether the section is within the powers vested in the Parliament by sec. 51 (ii.) and (xxxix.).
The Income Tax Assessment Act denies to the taxpayer substantial deductions allowed by previous Commonwealth Acts, and the Income Tax Act increases the rates of taxation far above the previous rates. The consequence which will be likely to flow from these Acts is that a taxpayer will hardly be able to pay State income tax out of the residue of his income left after he has obeyed the command of sec. 31 to pay Commonwealth tax computed under the Commonwealth Acts. If the States are unable to administer their State taxation Acts, or to freely exercise their powers of taxation, this disability arises from the economic consequences of the Commonwealth Acts. But these economic consequences and the resulting practical disability of the States are irrelevant in deciding the question whether the Commonwealth legislation is within the legislative powers of the Commonwealth. These Acts are in substance and effect laws with respect to Commonwealth taxation and defence and matters incidental to the execution of these powers.
The States Grants (Income Tax Reimbursement) Act 1942
This Act and the Income Tax Act were assented to on the same day. It is expressed to begin on 1st July 1942 , and to continue until the last day of the first financial year beginning after the end of the war. This Act and the Income Tax Acts will operate simultaneously. The Act describes itself as: "An Act to make provision for the grant of financial assistance to States, and for other purposes." It is contended that this Act, which purports to be an execution by the Parliament of the power vested in it by sec. 96, and the Income Tax Acts, are only a colourable exercise by the Parliament of its powers because, as it is alleged, they are interdependent parts of a scheme or total law the substance and effect of which is to collect both Commonwealth and State taxation, to transfer a quota of the revenue collected to the States, and thereby prevent the States from exercising their powers of taxation. In my opinion it is impossible to draw these conclusions from the provisions of these Acts. Sec. 4 of the States Grants (Income Tax Reimbursement) Act provides that in every financial year during which this Act is in operation in respect of which the Commonwealth Treasurer is satisfied that a State has not imposed a tax upon incomes, there shall be payable by way of financial assistance to that State the amount set forth in the schedule against the name of that State. The amount is the average amount raised by that State by means of income tax in the financial years ended 30th June 1940 and 1941, and the amount of tax which the Income Tax Act 1942 is estimated to raise is approximately equal to the total amounts which would have been raised by the Commonwealth and the States from income tax payable under the existing State Acts and the previous Commonwealth Acts. Sec. 6 provides for the payment of additional financial assistance to any State if the Treasurer of the State is of the opinion that the payments under sec. 4 are insufficient to meet the revenue requirements of the State. Sec. 7 provides that payments in accordance with the Act shall be made out of the Consolidated Revenue Fund of the Commonwealth, which is appropriated accordingly by the Act.
It is clear from sec. 4 that the Commonwealth Parliament recognizes that the concurrent or separate State powers of taxation will continue. The Act is indeed based on that assumption. The assumption is a correct one. It is to be presumed that the Parliament fully appreciated that it might be inexpedient or impracticable for the States or any one or more of them to collect income tax for their own or its purposes after the increased Commonwealth demands were satisfied. If a State does not impose income tax, that would be only because the taxable capacity of its citizens would be practically exhausted by the payment of the Commonwealth taxation, which, by force of sec. 31 of the Income Tax Assessment Act 1942 , takes priority on account of the supremacy accorded by the Constitution to Commonwealth law. In these circumstances the amount set against the name of the State and possibly a further amount is payable to the State out of the Commonwealth Consolidated Revenue Fund. The Act leaves to the Commonwealth Treasurer to ascertain whether the State has imposed income tax or not. It is a misunderstanding of the provisions of the Act to say that it requires the States to cease imposing income tax under penalty of forfeiting the amounts set against their names respectively: it is also a misunderstanding of the Act to say that the grant is offered upon condition that the States agree not to impose income tax. The Commonwealth Parliament is neither using a stick to beat the States nor offering a bunch of carrots. The Commonwealth Parliament has, in the exercise of its clear constitutional rights, tremendously increased the burden of Commonwealth taxation, and given priority to that burden. It has left the States free to decide whether they should impose an additional burden of taxation in any financial year. The Act provides that, if "the Treasurer is satisfied that a State has not imposed a tax upon incomes," the amount specified in the schedule is payable to that State. The payment is in truth and in fact made to relieve a disability arising from the incorporation of the State in the Commonwealth. The money is paid to reimburse the State for the loss of revenue which it has not been expedient to collect because of the circumstances flowing from the operation of valid Commonwealth law. The money is paid out of Commonwealth revenue. The Act is therefore in substance a law granting financial assistance to any State to which it becomes payable. It is a mistake to say that the Income Tax Acts and the States Grants Act are interdependent parts of a law for the collection and disbursement of taxation. The relation between the Acts is that the States Grants Act is consequential upon the Income Tax Acts. This is a legitimate relationship, and, indeed, entirely harmonious with the spirit of federalism.
It was said by the Judicial Committee in Moran's Case [F172] that although a Commonwealth Act imposing taxation should contain no discriminatory provisions violating sec. 51 (ii.), yet, if it were followed by a Commonwealth appropriation Act "authorizing exemptions, abatements or refunds to taxpayers in a particular State" it would be impossible to separate the Acts in considering the effect of sec. 51 (ii.), "or to turn a blind eye to the real substance and effect of Acts passed by the Federal Parliament at or about the same time, if it appears clear from a consideration of all the Commonwealth Acts that the essence of the taxation is discriminatory" [F173] . The conditions contemplated do not exist here. The States Grants Act is an appropriation Act, but it does not authorize exemptions, abatements, or refunds of tax to taxpayers in any States. The real substance and effect of this Act is to grant financial assistance to the States. The real substance and effect of the Income Tax Act is to impose taxation.
Sec. 51 (ii.) empowers the Commonwealth Parliament to make laws with respect to taxation, "but so as not to discriminate between the States or parts of States." The argument that the Parliament has infringed this restriction is answered by the following statement from the judgment of the Judicial Committee in Colonial Sugar Refining Company Limited v. Irving [F174] : "The rule laid down by the Act is a general one, applicable to all the States alike, and the fact that it operates unequally in the several States arises not from anything done by the Parliament, but from the inequality of the duties imposed by the States themselves."
According to the doctrine of Farey v. Burvett [F175] the States Grants Act may possibly be justified as an exercise of the defence power, because it secures to the States for the period of the war a flow of financial assistance which aids the maintenance of services which are capable of aiding the successful prosecution of the war.
The Income Tax (War-time Arrangements) Act 1942
This Act describes itself as: "An Act to make provision relating to the collection of taxes during the present war, and for other purposes." This Act was assented to on the same day as the other Acts. It is expressed to come into operation from then, 7th June 1942 , and to continue in operation until the last day of the first financial year to commence after the end of the present war. The provisions of this Act have already been set out, and I shall not repeat them except to refer briefly to the provisions which are in sec. 4 with respect to the temporary transfer of officers.
If these provisions are valid, those relating to the transfer of office accommodation, furniture and records can be supported by the same reasoning. There may be separate but less general questions arising under other sections upon which it is unnecessary now to pass an opinion. In brief, this Act transfers temporarily to the Public Service of the Commonwealth from employment under the Crown in right of a State, officers who are engaged on duties which, in the opinion of the Commonwealth Treasurer, are connected with the assessment or collection of taxes upon incomes. The Act is not self-executing. In order to effect the transfer, it is necessary for the Treasurer to give a notice to the State Treasurer. The transfer is effected by the notice. It notifies this Minister that as from the date specified it is, in the opinion of the Commonwealth Treasurer, "necessary for the efficient collection of revenue required for the prosecution of the war, for the effective use of manpower or otherwise for the defence of the Commonwealth," that the officers specified in the notice should be temporarily transferred to the Public Service of the Commonwealth. The officers are transferred by force of the notice as from the date specified, and are retransferred by the Act to the State Service immediately after the Act ceases to operate, unless sooner transferred. The Act contains detailed provisions protecting the rights of transferred officers.
In Farey v. Burvett [F176] the War Precautions Act, No. 10 of 1914, as amended by the Act No. 3 of 1916, was impeached. The attack went to so much of the Act as purported to authorize the Governor-General to make Regulations and Orders. The Act No. 3 of 1916 purported to authorize the Governor-General to make such Regulations as he thought desirable for the more effectual prosecution of the war, or the more effectual defence of the Commonwealth, "prescribing and regulating" a number of matters. The attack on the Act failed. Griffith C.J. said: "If the attack is transferred, as it must be, to the Regulation, that is, if it is treated as a denial of the desirability of making it at the time when it was made, the question, though not formally the same, is the same in substance. The Act expressly designates the Governor-General as the person to determine that question of fact. How can this Court say that it will assume the function of revising his opinion? In this aspect of the case Lloyd v. Wallach1(1915) 20 C.L.R. 299 ., decided by the Court last year, is exactly in point, and is conclusive" [F178] . The question arising under the present Act is whether the legislative powers of the Commonwealth extend to the enactment of the provisions in sec. 4. The preamble has already been quoted. Parliament has declared on the face of the Act that its provisions are "necessary and convenient" for the more effectual prosecution of the war. Referring to such a declaration on the face of the Act challenged in Farey v. Burvett [F179] , Higgins J. said:-
"It is not for this Court to decide that the Act does aid defence or how it aids defence; it is enough that it is capable of being an Act to aid defence, enough that the statement of Parliament is not necessarily untrue. Appellants' counsel urge that it is for this Court to decide whether the military necessities now existing are sufficient to justify the Act-or, as finally stated, whether this Act is capable of being a defensive Act in the circumstances of the country. In my opinion, this is not our function" [F180] .
I agree with these views. The transfer of these officers to the Commonwealth Public Service which has the duty of collecting the revenue of the Commonwealth is capable of conducing to defence. The dependence of defence on revenue is an obvious truth. The transfer of these officers will provide the Commonwealth with a skilled staff, and enable it to collect its revenue promptly and efficiently: it will place the collection of the revenue in the hands of officers who will be temporarily under its own control. At present in five States Commonwealth income tax is being collected by State officers. This Act will enable the Commonwealth to dispose the officers collecting its revenue at whatever places in the Commonwealth it thinks fit. It could not do this if the officers were not transferred to the Commonwealth Service. These are some of the considerations which point to the possibility at least of a relation between the provisions of sec. 4 and defence. In my opinion these provisions are within the powers vested in the Parliament to make laws with respect to defence and matters incidental to the execution of this power. It follows that sec. 4 and the provisions relating to the transfer of office accommodation, furniture, equipment and records operate with the full force of their words as valid Commonwealth laws. There is no special provision in the Constitution exempting the States or State officers from the operation of Commonwealth legislation under sec. 51 (vi.), that is, the defence power. The reasoning of the Court in the Engineers' Case [F181] applies to sec. 51 (vi.). There the Court was dealing with the question whether Commonwealth legislation under sec. 51 (xxxv.)-"industrial disputes"-bound the Crown in right of a State when party to an industrial dispute. The Court said:-
"Sec. 51 (xxxv.) is in terms so general that it extends to all industrial disputes in fact extending beyond the limits of any one State, no exception being expressed as to industrial disputes in which States are concerned; but subject to any special provision to the contrary elsewhere in the Constitution. The respondents suggest only sec. 107 as containing by implication a provision to the contrary. The answer is that sec. 107 contains nothing which in any way either cuts down the meaning of the expression industrial disputes in sec. 51 (xxxv.) or exempts the Crown in right of a State, when party to an industrial dispute in fact, from the operation of Commonwealth legislation under sec. 51 (xxxv.). Sec. 107 continues the previously existing powers of every State Parliament to legislate with respect to (a) State exclusive powers and (b) State powers which are concurrent with Commonwealth powers. But it is a fundamental and fatal error to read sec. 107 as reserving any power from the Commonwealth that falls fairly within the explicit terms of an express grant in sec. 51, as that grant is reasonably construed, unless that reservation is as explicitly stated" [F182] .
Sec. 107 does not cut down the natural meaning or general operation of sec. 51 (vi.). The assumption that has to be adopted is that in the present emergency the transfer of officers experienced in the assessment or collection of tax from the State to the Commonwealth service for the duration of the war is capable of conducing to defence. It follows that the Income Tax (War-time Arrangements) Act is a law with respect to defence, and binding on those officers and on the States. The Act is in substance and effect a law of defence, and with respect to matters incidental to the execution of that power. There is nothing in its provisions to support the contention that it is part of a legislative scheme which is in excess of the powers of the Commonwealth Parliament. The Act does not take away from the States their constitutional powers of taxation nor purport to do so. It is nothing to the point to mention the difficulties and trouble which the States may have in engaging other persons to take the place of the officers who are transferred to the Commonwealth service or to replace the material things taken over by the Commonwealth.
I agree that the Treasurer's speech is inadmissible in this action. It would be contrary to well-settled principle for the Court to embark on an inquiry into the motives or purposes which the Parliament had for passing these Acts, or the Minister had for introducing the Bills proposing them. The only question to be decided is a question of power. Did the Parliament have power under the Constitution to pass the Acts? In my opinion that question should be answered in favour of the defendants, and there should be judgment for them in each case.