AUSTIN & ANOR v COMMONWEALTH OF AUSTRALIA

Members:
Gleeson CJ
Gaudron J
Gummow J
Hayne J
McHugh J
Kirby J

Tribunal:
Full High Court

MEDIA NEUTRAL CITATION: [2003] HCA 3

Decision date: 3 February 2003

---

Gleeson CJ

The plaintiffs, who are serving State judicial officers, have commenced proceedings to test their liability to pay a Federal tax, described as a superannuation contributions surcharge. The first plaintiff is a judge of the Supreme Court of New South Wales. The second plaintiff is a Master of the Supreme Court of Victoria. The tax is the subject of the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Imposition Act 1997 (Cth) and the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (Cth) (``the Acts''). The plaintiffs are not members of any superannuation fund as that expression is ordinarily understood; and no contributions are made to any such fund for their benefit. By State legislation, they are conditionally entitled to pension and related benefits, which are paid out of Consolidated Revenue. However, the Acts construct a notional scheme by reference to which they are taxed as if such contributions were made. This is part of a wider legislative scheme imposing a tax that was described in argument, by the Commonwealth, as a tax on the value (ie quantum) of the annual increase in the liability of an employer with respect to superannuation benefits payable to an employee.

2. Two questions have been reserved for the consideration of a Full Court. Question (1) asks whether the Acts, on their true construction, make each plaintiff liable to pay the tax for certain years. That question raises a number of issues as to the meaning and effect of the legislation. Question (2), which only arises if question (1) is answered affirmatively in respect of at least one of the plaintiffs, asks whether the Acts are invalid in respect of their application to that plaintiff. A number of possible grounds of alleged invalidity are set out in the question.

3. The facts, the legislation in issue, and the wider legislative scheme of which it is a part, appear from the reasons for judgment of Gaudron, Gummow and Hayne JJ (``the joint judgment''). I agree with the answers to question (1) proposed in the joint judgment, and with the reasons given. I also agree with what is said in the joint judgment concerning the grounds of potential invalidity raised by pars (b), (c), (d) and (e) of question (2).

4. Because of the answer proposed in relation to question (1)(b) it is unnecessary to make further reference to the second plaintiff when discussing the operation of the Acts.

5. Paragraph (a) of question (2) asks whether the Acts are invalid in their application to the first plaintiff:

``on the ground that they so discriminate against the States of the Commonwealth, or so place a particular disability or burden upon the operations and activities of the States, as to be beyond the legislative power of the Commonwealth.''

6. The question raises an issue of federalism. It concerns the relationship between the constituent political entities of the federal union, and limitations on the legislative power of the Parliament of the Commonwealth that flow from that relationship. The laws in question are laws with respect to taxation, within the meaning of s 51(ii) of the Constitution. It is not suggested that they discriminate between States or parts of States. They do not infringe s 114 by imposing a tax on property belonging to a State. No other express limitation on the legislative power of Parliament is invoked. What is relied upon is an implied limitation on power, the nature of which is reflected in the language of (a), said to result from the federal nature of the Constitution as a matter of necessary implication.

7. In the course of argument, reference was made to various aspects of the legal effect of the tax as it operates in relation to judicial pensions. The primary matters to which the plaintiffs drew attention were the nature of judicial pension entitlements, and the differences between such entitlements and those of members of ordinary superannuation funds; the fact that (subject to a qualification arising from State legislation enacted following, and in consequence of, the Acts) such pensions cannot be commuted in whole or in part; the fact that

---

ATC 4046

the pensions are non-contributory and unfunded; the fictional nature of the notional contributions upon which the tax is based; the circumstance that the notional contributions are calculated by reference to actuarial assumptions that may have no relationship to the personal situation of a particular taxpayer; and the principal difference between the operation of the Acts and that of the wider legislative scheme in relation to the superannuation contributions surcharge, which is that the tax presently in question is imposed directly upon ``members'' of the notional ``funds'', rather than upon a superannuation provider.

8. Some actuarial calculations were included in the case stated. Bearing in mind that the projected figures are expressed in dollars of the time to which they relate, and are based on assumptions as to inflation, they show that, at the time when the first plaintiff will have served 10 years and attained an age of not less than 60 (in his case, 62), his accumulated superannuation surcharge debt will be $310,885. If he retires, at that time, he will commence to receive a pension which in the first year will amount to $179,957, on which he will be liable to income tax at the marginal rate. If he remains in office until the age of compulsory retirement, 72, his accumulated superannuation surcharge debt will be $550,780, and he will be entitled to a gross annual pension of $267,433. Allowing for income tax on the pension, it will take approximately four years before his net pension receipts equal his surcharge liability; a liability he will have to discharge at the time he commences to receive the pension. And, depending upon when he dies, whether he is survived by a widow, and when she dies, total pension receipts could amount to a smaller sum than the total surcharge liability.

9. These matters are of relevance only to the extent to which they bear upon the ground of invalidity asserted in (a). Whether the tax might operate in a harsh and unreasonable manner in its incidence upon the first plaintiff is beside the point. ^[1] DFC of T v Truhold Benefit Pty Ltd 85 ATC 4298 at 4301; (1985) 158 CLR 678 at 684 . Unreasonableness is not a ground of invalidity of a tax.

10. Some reference was made in argument to an explanation given to Parliament by the responsible Minister concerning the reason for the introduction of a superannuation contributions surcharge; a reason that does not appear to have anything to do with judicial pension arrangements. That also is a matter of no legal consequence. The considerations advanced for or against a taxation measure in the course of political debate do not give rise to a justiciable issue. I would assume that the principal object of the superannuation contributions surcharge is the same as the principal object of most taxes: to raise revenue for government. Taxation involves an exercise of power, by which the burden of compulsory contribution to the revenue is distributed, often unequally, amongst taxpayers. The pattern of distribution is determined by the political process. Subject to one overriding qualification, it is for Parliament to decide what form of distribution is expedient. The qualification is that, although Parliament has power to make laws with respect to taxation, its power is not unlimited. It is for this Court to decide whether, in a given case, the limits have been exceeded. That is the context in which it becomes necessary to consider the legal nature and effect of the tax.

11. It is contended that the tax is discriminatory. Since what is involved is a Federal tax upon a member of the Supreme Court of New South Wales, bearing the character of a tax on the value of the annual increase in the liability of the State for pension benefits payable to judges, the contention raises a potential constitutional issue. It will be necessary to examine more closely what the concept of discrimination involves, and to consider the place of discrimination in the wider principle invoked by the first plaintiff. That the Acts treat the first plaintiff, and other State judges, differently from the manner in which other ``high-income earners'' generally are treated for the purpose of taxing the value of the annual increases in the liability of their superannuation providers, and differently again from the manner in which Federal judges are treated, is not in dispute. There is a question whether the differences involve relevant and impermissible discrimination. Federal judges in respect of whom the surcharge applies have their pensions, when they ultimately become payable, reduced, at the time of each pension payment, by a certain amount. No personal liability is incurred; no accumulated debt is payable by the judge; and there is no possibility that surcharge liability could exceed benefits. As to other high income earners, in their case the tax is imposed on the superannuation

---

ATC 4047

provider, no doubt in the expectation that it will be passed on to the member in the form of reduced benefits. Paradoxically, the explanation for the difference in treatment of taxpayers in the position of the first plaintiff is what is described in the titles of the Acts as a constitutional protection. The Commonwealth, acknowledging the differences in the manner in which State judges, and some other State office holders, are treated, as compared with members of superannuation funds generally, asserts that ``(t)he differences in application are dictated by constitutional limitations and by the design of the superannuation schemes''.

12. As to the design of superannuation schemes, the New South Wales Parliament, after the enactment of the Acts, altered the design of that State's judicial pension scheme in one significant respect. Before the alteration, and at the time the Acts came into force, the principal characteristics of the scheme were as follows. The primary benefits were periodical pension payments commencing upon retirement and ceasing on death. The payments were fixed by reference to judicial salaries at the time of payment. The schemes were unfunded and non- contributory. Entitlements could not be commuted, either in whole or in part. Qualification for pension entitlement required a minimum of 10 years service, and the attainment of the age of 60. After satisfaction of those requirements, continuation in judicial office brought no increase in benefits. On the contrary, it necessarily resulted in a decrease of the period during which a pension would be payable. The scheme also involved other entitlements, including a right in certain circumstances to a modest lump sum payment, disability benefits, and benefits for a surviving spouse and eligible children. However, the most significant component in the value of a judge's entitlements was the periodical pension payable between retirement and death. The change made in response to the Acts was that judges became entitled, on retirement, to commute their entitlements to the extent necessary to provide them with an amount equal to their superannuation contributions surcharge debt, with, of course, a corresponding reduction in pension payments.

13. As is explained in the joint judgment, under the Acts, the first plaintiff will have the option, while in office, of paying the amount of his annual surcharge, or leaving the debt to accumulate, with compound interest, until his retirement, when benefits first become payable. This will give a judge in the position of the first plaintiff an added reason to leave office upon becoming entitled to a pension rather than to serve out his or her full term. The Commonwealth points out that the design of the judges' pension scheme already provided a reason for leaving office sooner rather than later, if pension benefits were a major factor in such a decision. Judges' pension schemes, State or Federal, are not designed to reward long service, except to the extent that there is a minimum qualifying period. Remaining in office after that period diminishes pension benefits. This was already an aspect of the New South Wales scheme. It is difficult to measure the practical significance of this aspect of the Acts, and it probably varies in individual cases.

14. The feature of the Acts which is of greatest significance to a judge in the position of the first plaintiff is the incurring and accumulation of a liability to pay a substantial capital sum, on retirement, in discharge of an accrued superannuation contributions surcharge debt, at a time when payment of the pension is commencing. The relationship between the debt, and the amount of the pension payments, has been referred to above. The difference between the position of State judges, and that of Federal judges, who face a reduction in the amount of their periodical pension payments, or that of other high income earners, who incur no personal liability, and who may be entitled to lump sum benefits, or who may be able to commute their entitlements in whole or in part, is obvious. To ameliorate that difference, the New South Wales Parliament altered the pension scheme. The first plaintiff submits that this is evidence of the interference with State governmental functions constituted by the Federal tax; the imposition of the tax forced the State to make a significant amendment to its pension arrangements for judges. The Commonwealth submits that the fact that the tax imposed no substantial burden on the State is demonstrated by the State's ability to mitigate the problem by appropriate legislation.

15. The constitutional limitations said to have dictated the differences in application between the surcharge as it applies to State judges, and the surcharge as it applies to others entitled to superannuation benefits, are those found in s 114 of the Constitution.

---

ATC 4048

16. Section 114 prohibits a State from imposing any tax on property of any kind belonging to the Commonwealth, and it also prohibits the Commonwealth from imposing any tax on property of any kind belonging to a State. The latter prohibition is the constitutional protection referred to in the title to the Acts, and is said to have dictated the differential treatment of certain people, including State judges. Although, in the course of argument, there were references to the possibility that there were other means by which the Parliament could have imposed a tax in respect of annual increases in the value of a State's liability to pay pension benefits to judges, without the need to resort to the fiscal regime involved in the Acts, with the implication that the assertion that the regime was dictated by s 114 was at least an exaggeration, there was no explanation of exactly why s 114 had the effect claimed for it. It is not self-evident that, subject to the argument in ground (a), the State of New South Wales could not be taxed as a superannuation provider in the case of unfunded pension schemes. The Commonwealth submitted that the legislation ``makes the member him or herself liable to pay the tax, because the superannuation provider of the scheme is `the State' for the purposes of s 114 of the Constitution''. However, s 114 only prohibits a tax on property. The Commonwealth validly imposed pay-roll tax, <sup>[2]</sup> Victoria v The Commonwealth (1971) 122 CLR 353 . and fringe benefits tax, <sup>[3]</sup> State Chamber of Commerce and Industry & Ors v The Commonwealth (The Second Fringe Benefits Tax Case) 87 ATC 4745 ; (1987) 163 CLR 329 . on the States. The New South Wales judges' pension scheme is unfunded. The submissions of South Australia, which was one of a number of States intervening in support of the plaintiffs to challenge the validity of the legislation, outlined a history of inter-governmental negotiations in the course of which the implications of the decision in The State of South Australia & Anor v The Commonwealth & Anor <sup>[4]</sup> 92 ATC 4066 ; (1991-1992) 174 CLR 235. were considered. The facts of that case show that the South Australian government conducts a funded superannuation scheme for the payment of superannuation benefits to statutory officers and public sector employees. It was held that a tax on the net capital gain derived on the disposal of an asset of the fund was a tax on property within s 114. It is far from clear what that has to do with the arrangements relating to pensions for New South Wales judges. However, reg 177 of the Income Tax Regulations 1936 lists the Judges' Pensions Act 1953 (NSW) among constitutionally protected funds, the income of which is, by s 271A of the Income Tax Assessment Act 1936 (Cth), exempt from tax. It is one thing to say that some apprehension as to the possible effect of s 114 at least partly explains the Acts. It is another thing to say that the differential treatment of the first plaintiff and others was ``dictated'' by s 114. And, even if that were the case, the circumstance that the Commonwealth is constitutionally prohibited from taxing the State of New South Wales as a superannuation provider, is, at first sight, a curious justification for discrimination, if such differential treatment is properly regarded as discrimination. Whether it is properly so regarded is a question which needs to be considered in the light of the wider constitutional principle upon which the first plaintiff's argument depends.

17. The federal system involves the coexistence of national and state or provincial governments, with an established division of governmental powers; legislative, executive and judicial. As in the United States, the national government was given limited, specified powers. An approach to constitutional interpretation which stressed a reservation of State powers flourished for a time after federation, but was reversed by the Engineers' Case in 1920. ^[5] Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920) 28 CLR 129 . Even so, as in the United States, the federal nature of the Commonwealth has been held to limit the capacity of the Federal Parliament to legislate in a manner inconsistent with the constitutional role of the States. ^[6] For recent United States examples of the issues generated by such a principle, see New York v United States 505 US 144 (1992) ; Printz v United States 521 US 898 (1997) . In both countries, the taxation power has provided a battleground upon which contests as to the nature and extent of that limitation have been fought. Here, as in the United States, a concept of immunity of governments and government instrumentalities from taxation has waxed and waned. In both countries, significance has been attached to a characterisation of a tax as either discriminatory or non-discriminatory. In New York v United States , ^[7] 326 US 572 (1946) at 584-585. Rutledge J said that he took the limitation against discrimination ``to mean that state functions may not be singled out for taxation when others performing them are not taxed or for special burdens when they are''. In the same case, but with reference to a different power, Frankfurter J said that ``discrimination'' was ``not a code of specifics but a continuous process of application''. <sup>[8]</sup> 326 US 572 (1946) at 583. Non- discriminatory taxes were described by Stone CJ as taxes ``laid on a like subject matter, without regard to the personality of the

---

ATC 4049

taxpayer, whether a State, a corporation or a private individual''. ^[9] 326 US 572 (1946) at 587. That was said in the course of acknowledging that there may be non- discriminatory taxes which, when laid on a State, would impair its constitutional status. ^[10] 326 US 572 (1946) at 587.

18. The Engineers' Case marked a turning point in Australian constitutional interpretation. The decision involved a rejection of some previously understood implications, including what was described in the leading judgment as ``the doctrine of mutual non-interference''. ^[11] (1920) 28 CLR 129 at 145. However, when, in 1930, Dixon J expressed his understanding of the rule established by that case, he added an important qualification. He said: ^[12] Australian Railways Union v Victorian Railways Commissioners (1930) 44 CLR 319 at 390 . See also West v C of T (NSW) (1937) 4 ATD 275 at 290-291; (1936-1937) 56 CLR 657 at 681-682 ; Essendon Corporation v Criterion Theatres Ltd (1947) 74 CLR 1 at 23 .

``This rule I understand to be that, unless, and save in so far as, the contrary appears from some other provision of the Constitution or from the nature or the subject matter of the power or from the terms in which it is conferred, every grant of legislative power to the Commonwealth should be interpreted as authorizing the Parliament to make laws affecting the operations of the States and their agencies, at any rate if the State is not acting in the exercise of the Crown's prerogative and if the Parliament confines itself to laws which do not discriminate against the States or their agencies.''

19. The qualification was developed and applied in Melbourne Corporation v The Commonwealth . ^[13] (1947) 74 CLR 31. One of the most striking differences between that case, decided in 1947, and the Engineers' Case , is the approach to United States authority. In the joint judgment of Knox CJ, Isaacs, Rich and Starke JJ in the Engineers' Case there was an emphatic and, it might be thought, extravagant rejection of the possibility of guidance from that source. ^[14] (1920) 28 CLR 129 at 147. Yet in Melbourne Corporation all the judgments paid careful attention to United States authority. Both nations have what Latham CJ described as ``a constitution establishing not only a federal Government with specified and limited powers, but also State Governments which, in respect of such powers as they possess under the Constitution, are not subordinate to the federal Parliament or Government''. ^[15] (1947) 74 CLR 31 at 50. Such a constitution necessarily gives rise to a problem as to whether, and to what extent, a federal law, which on its face is a law with respect to a subject of federal legislative power, may burden or affect a State government.

20. In Melbourne Corporation the Court held invalid a law of the Parliament, enacted pursuant to its power to make laws with respect to banking, which prohibited banks, without the consent of the Federal Treasurer, from conducting banking business for a State or a State agency. The reasons of the Justices were expressed in various ways. Latham CJ examined the meaning of the concept of discrimination, and concluded that it meant ``singling out another government and specifically legislating about it''. <sup>[16]</sup> (1947) 74 CLR 31 at 61. Presumably the reference to government included a government agency. Laws of that kind may be held to be invalid; as may laws which ``unduly interfere'' with State functions of government, although he had reservations about the vagueness of the content of such a test. ^[17] (1947) 74 CLR 31 at 60-62. Dixon J elaborated upon what he had earlier said as to the qualification to the rule established by the Engineers' Case . He said: ^[18] (1947) 74 CLR 31 at 78-79.

``This Court has adopted a rule of construction with reference to the application to the States of the specific powers conferred by the Constitution upon the Parliament of the Commonwealth. It is a prima- facie rule of construction and its operation may be displaced by sufficient indications of a contrary intention whether found in the nature or subject matter of the power, in the manner in which it is expressed, in the context or elsewhere in the Constitution.

The prima-facie rule is that a power to legislate with respect to a given subject enables the Parliament to make laws which, upon that subject, affect the operations of the States and their agencies. That, as I have pointed out more than once, is the effect of the Engineers' Case stripped of embellishment and reduced to the form of a legal proposition. It is subject, however, to certain reservations and this also I have repeatedly said. Two reservations, that relating to the prerogative and that relating to the taxation power, do not enter into the determination of this case and nothing need be said about them. It is, however, upon the third that, in my opinion, this case turns. The reservation relates to the use of federal legislative power to make, not a general law which governs all alike who come within the area of its operation whether they are subjects of the Crown or the agents of the

---

ATC 4050

Crown in right of a State, but a law which discriminates against States, or a law which places a particular disability or burden upon an operation or activity of a State, and more especially upon the execution of its constitutional powers. In support of such a use of power the Engineers' Case has nothing to say. Legislation of that nature discloses an immediate object of controlling the State in the course which otherwise the Executive Government of the State might adopt, if that Government were left free to exercise its authority. The control may be attempted in connection with a matter falling within the enumerated subjects of federal legislative power. But it does not follow that the connection with the matter brings a law aimed at controlling in some particular the State's exercise of its executive power within the true ambit of the Commonwealth legislative power. Such a law wears two aspects. In one aspect the matter with respect to which it is enacted is the restriction of State action, the prescribing of the course which the Executive Government of the State must take or the limiting of the courses available to it. As the operation of such a law is to place a particular burden or disability upon the State in that aspect it may correctly be described as a law for the restriction of State action in the field chosen. That is a direct operation of the law.

In the other aspect, the law is connected with a subject of Commonwealth power. Conceivably that connection may be made so insubstantial, tenuous or distant by the character of the control or restriction the law seeks to impose upon State action that it ought not to be regarded as enacted with respect to the specified matter falling within the Commonwealth power. If so, the law fails simply because it cannot be described as made with respect to the requisite subject matter. But, if in its second aspect the law operates directly upon a matter forming an actual part of a subject enumerated among the federal legislative powers, its validity could hardly be denied on the simple ground of irrelevance to a head of power. 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.''

21. Dixon J discussed the special problem of a federal tax falling on State operations and, in particular, a tax which is discriminatory in the sense that a State is singled out for taxation or for a special burden of taxation in respect of acts or things when others are not taxed or not so burdened in respect of the same act or things. After noting that this may not exhaust the range of potential problems involved in the taxation power, he went on: ^[19] (1947) 74 CLR 31 at 81.

``What is important is the firm adherence to the principle that the federal power of taxation will not support a law which places a special burden on the States. They cannot be singled out and taxed as States in respect of some exercise of their functions. Such a tax is aimed at the States and is an attempt to use federal power to burden or, may be, to control State action. The objection to the use of federal power to single out States and place upon them special burdens or disabilities does not spring from the nature of the power of taxation. The character of the power lends point to the objection but it does not give rise to it. The federal system itself is the foundation of the restraint upon the use of the power to control the States.''

22. Non-discriminatory federal taxes which applied to the States in their capacity as employers were held valid in Victoria v The Commonwealth ^[20] (1971) 122 CLR 353. (pay-roll tax) and State Chamber of Commerce and Industry v The Commonwealth ^[21] 87 ATC 4745 ; (1987) 163 CLR 329. (fringe benefits tax). In the first of those cases, Windeyer J added to the lexicography by defining discrimination as ``an adverse distinction with regard to something or somebody''. <sup>[22]</sup> (1971) 122 CLR 353 at 404. The pay-roll tax was not discriminatory, and, to use the words of Menzies J, did not ``operate to interfere with a State carrying out its constitutional functions of government''. ^[23] (1971) 122 CLR 353 at 392. That being so, there was no occasion for the Justices to state more precisely what might constitute impermissible interference. A majority of the Court accepted the principles stated by Dixon J in Melbourne Corporation but found it unnecessary further to refine or elaborate them. Gibbs J said that the source of the implication is ``what is required to

---

ATC 4051

preserve and protect the position of the States as independent members of the federation''. ^[24] (1971) 122 CLR 353 at 423. In the second case, the argument that the fringe benefits tax was invalid was advanced under rubrics corresponding to those that appear in ground (a) in the present case. ^[25] 87 ATC 4745 at 4756; (1987) 163 CLR 329 at 355-356. First, it was said the legislation singled the States out for special treatment. It required them to pay tax in respect of benefits paid to people such as Ministers, parliamentarians and judges, who were not employees. In that respect the obligation was peculiar to States and had no counterpart in relation to non-government employers. This argument was answered by reference to the nature of the tax. It was not a tax on benefits paid to people who were in a master-servant relationship. It was a tax on benefits paid in addition to salary or wages, whether or not there was a strict relationship of employment. In order words, a decision as to whether the tax was discriminatory involved an examination of the wider scheme of which it was part, and an exercise in characterisation. Secondly, it was said that the legislation interfered with, impaired or curtailed the States or the exercise of their functions of government. This argument was answered by the observation that the imposition of a general income tax on the salaries or wages of State officials or employees is valid, and familiar, and the fringe benefits tax was no different in its effect on the States. ^[26] 87 ATC 4745 at 4756; (1987) 163 CLR 329 at 356.

23. The concept of discrimination was also developed in the judgments of Brennan J and Deane J in Queensland Electricity Commission v The Commonwealth . ^[27] (1985) 159 CLR 192. In that case a Commonwealth law, enacted pursuant to the conciliation and arbitration power, singled out, for the imposition of special and disadvantageous treatment, an agency of the Queensland government. It was held invalid on the basis of the Melbourne Corporation principle. Brennan J ^[28] (1985) 159 CLR 192 at 240. said that if a law discriminates against a State in that it imposes some special burden or disability, there may be no real, as distinct from formal, discrimination if the law is calculated to provide for particular circumstances affecting the State. Some forms of discrimination may be justified by circumstances. Special circumstances may require special treatment and, in such cases, it is for the legislation to decide what special treatment is appropriate. Deane J ^[29] (1985) 159 CLR 192 at 251. referred to circumstances where a head of power authorises the singling out of a particular object or situation for special legislative treatment and a State or State agency is affected by reason of its particular involvement in an activity or situation. He gave as an example the involvement of a State or State agency in a particular industrial dispute where the power to legislate with respect to conciliation and arbitration for the purposes of that dispute might be seen to authorise special treatment of the State or State agency.

24. Discrimination is an aspect of a wider principle; and what constitutes relevant and impermissible discrimination is determined by that wider principle. In Queensland Electricity Commission , ^[30] (1985) 159 CLR 192 at 218. Mason J, in the course of explaining why the implied limitation on Commonwealth powers applies in relation to State agencies as well as States, said that the foundation for the implication is ``the constitutional conception of the Commonwealth and the States as constituent entities of the federal compact having a continuing existence reflected in a central government and separately organized State governments''. Federal legislation that would be inconsistent with that conception includes, but is not limited to, legislation aimed at the destruction of the States or State agencies, or of one or more of their governmental attributes or capacity. Dawson J expressed the general proposition that arises by implication from the federal structure of the Constitution as being that ``the Commonwealth Parliament cannot impair the capacity of the States... to function effectually as independent units''. ^[31] (1985) 159 CLR 192 at 260. He regarded discrimination, and the placing of a special burden on the States by a law of general application, as two examples of potential contravention of that limitation on power. A law which singles out a State or State agency may have as its object to restrict, burden or control State activity. ^[32] (1985) 159 CLR 192 at 207 per Gibbs CJ. Or a law of general application may so interfere with or impede State activity as to impose an impermissible burden on the exercise of its functions. It is not possible to state exhaustively every form of exercise of Commonwealth legislative power that might be contrary to the general proposition stated above. Just as the concept of discrimination needs to be understood in the light of the general principle, so also does the concept of burden. The adverse financial impact on the States of the pay-roll tax, or the fringe benefits tax, both of which were held valid, far

---

ATC 4052

exceeded the financial consequences of the laws held invalid in Melbourne Corporation or Queensland Electricity Commission . It was the disabling effect on State authority that was the essence of the invalidity in those cases. It is the impairment of constitutional status, and interference with capacity to function as a government, rather than the imposition of a financial burden, that is at the heart of the matter, although there may be cases where the imposition of a financial burden has a broader significance.

25. Putting discrimination aside, an illustration of a Commonwealth law of general application which operated to impair the capacity of the States to function as governments, was the federal law, enacted pursuant to the conciliation and arbitration power, empowering the Industrial Relations Commission to make awards in relation to terms and conditions of employment, considered in Re Australian Education Union; Ex parte Victoria . ^[33] (1995) 184 CLR 188. The law was held invalid in its application to the States and their agencies in relation to certain, although not all, aspects of the terms and conditions of employment of public servants, including redundancy. It was also held that it did not empower the Commission to make awards in relation to the terms and conditions of employment of such persons as Ministers, ministerial assistants and advisers, heads of department, senior office holders, parliamentary officers and judges. Mason CJ, Brennan, Deane, Toohey, Gaudron and McHugh JJ said: ^[34] (1995) 184 CLR 188 at 233.

``In our view,... critical to a State's capacity to function as a government is its ability, not only to determine the number and identity of those whom it wishes to engage at the higher levels of government, but also to determine the terms and conditions on which those persons shall be engaged. Hence, Ministers, ministerial assistants and advisers, heads of departments and high level statutory office holders, parliamentary officers and judges would clearly fall within this group. The implied limitation would protect the States from the exercise by the Commission of power to fix minimum wages and working conditions in respect of such persons and possibly others as well. And, in any event, Ministers and judges are not employees of a State.''

26. To a substantial extent, these principles were expressed in summary form by Starke J in his statement of the grounds of his decision in Melbourne Corporation : ^[35] (1947) 74 CLR 31 at 75.

``It is a practical question, whether legislation... on the part of [ the] Commonwealth... destroys, curtails or interferes with the operations of [ a State], depending upon the character and operation of the legislation... No doubt the nature and extent of the activity affected must be considered and also whether the interference is or is not discriminatory but in the end the question must be whether the legislation... curtails or interferes in a substantial manner with the exercise of constitutional power by [ the State]. The management and control by the States and by local governing authorities of their revenues and funds is a constitutional power of vital importance to them. Their operations depend upon the control of those revenues and funds. And to curtail or interfere with the management of them interferes with their constitutional power.''

27. Legislating to deprive States and State agencies of the capacity to bank with any bank other than the Commonwealth Bank might or might not have been to their financial disadvantage. That was not the point. The point was that it substantially impaired their capacity to decide where to place their funds and, in that respect, it impaired their capacity to act as governments. As was pointed out in the opinion of the Supreme Court of the United States in Printz v United States , ^[36] 521 US 898 (1997) at 931-932. in a case where it is claimed that the incidental application to the States of a federal law of general application excessively interferes with the function of state governments, it may be material to measure the burden imposed. But where the argument is that a federal law compromises the structural framework of the federal system, in such a way that the principle of federalism is offended, then the outcome of that argument cannot depend upon a comparative assessment of the governmental interests that are advanced or affected.

28. It is plain, and was accepted in the Australian Education Union Case , that quite apart from the consideration that they are not employees, the conciliation and arbitration power does not extend to enable the Parliament directly or indirectly to dictate to the States the

---

ATC 4053

terms and conditions of engagement of judges. An attempt to do so would be an impermissible interference with the capacity of States to function as governments. For the same reason, the Parliament's power to make laws with respect to taxation does not extend to enable it to legislate to single out State judges for the imposition of a special fiscal burden. Judges, like other citizens, are subject to general, non- discriminatory taxation, and the mere fact that the incidence of taxation has a bearing upon the amount and form of remuneration they receive does not mean that federal taxation of State judges is an interference with State governmental functions. It is otherwise when, as here, a federal law with respect to taxation treats State judges differently from the general run of high income earners and federal judges, and to their practical disadvantage. That differential treatment is constitutionally impermissible, not because of any financial burden it imposes upon the States, but because of its interference with arrangements made by States for the remuneration of their judges. The practical manifestation of that interference is in its capacity to affect recruitment and retention of judges to perform an essential constitutional function of the State. Evidence of that capacity is to be found in the legislative response which the State of New South Wales was, in effect, forced to make. The Parliament could never have compelled the State of New South Wales to alter the design of its judicial pension scheme. Indeed, at the time of the Acts, the State judicial pension scheme was not materially different from the federal judicial pension scheme. But the State scheme was substantially altered as a result of the practical necessity that followed from the subjection of State judges to a discriminatory federal tax.

29. The validity of the Acts is to be determined as at the time of their enactment. They were not rendered valid by subsequent State legislative action. However, the Commonwealth argues that any burden on the State of New South Wales, in consequence of the fiscal imposition on its judges, could be, and was, ameliorated by legislation of the kind that was subsequently enacted by the State. For the reasons already given, it is not a question of any financial burden on the States. Judges are relatively few in number, and the arrangements made for their remuneration are not of major significance in any government budget. The issue is one of interference; of impairment of the constitutional integrity of a State government. Such interference is not denied by pointing out that a State could and did make a substantial alteration to the design of its judicial pension scheme; on the contrary, the need to make such alteration demonstrates the interference.

30. The wider fiscal regime, of which the Acts form part, imposes what the Commonwealth has characterised as a tax on increases in the amount of the liability of superannuation providers to pay superannuation benefits. In its operation in relation to most high income earners, it is imposed on the superannuation providers. The sole justification advanced for its imposition directly on State judges is that s 114 of the Constitution is said to prevent the imposition of such a tax on States in their capacity as providers of superannuation benefits to judges. As noted above, that proposition has not been demonstrated to be correct. However, let it be assumed in favour of the Commonwealth's argument that it is correct. It means that the explanation for creating the fiction of contributions to a notional fund, and imposing directly upon State judges the liability that, in the ordinary incidence of the tax, would be imposed upon the State, is that to impose the tax upon the State would be unconstitutional. The assumed constitutional prohibition upon taxing the States in the same way as other superannuation providers is said to justify taxing State judges differently from other recipients of superannuation benefits. Section 114 is a particular instance, covered by express prohibition, of federal taxation inconsistent with the federal nature of the Constitution. What would otherwise be covered by the implied prohibition recognised in Melbourne Corporation and other cases cannot be justified on the ground that it is an indirect means of achieving that which is prohibited by s 114.

31. Brief reference was made in argument to some relatively recent North American decisions dealing with an argument that certain legislation affecting judges violated constitutional imperatives of judicial independence. Because no argument about judicial independence was raised in this case, those decisions were rightly regarded by the parties as being of only marginal relevance. However, if only to make it clear that they were

---

ATC 4054

about a different issue, they should be mentioned.

32. R v Beauregard ^[37] [ 1986] 2 SCR 56. concerned legislation enacted by the Federal Parliament in Canada altering the pension arrangements that applied to federally appointed judges. In Canada, judges of superior Provincial courts, as well as federal judges, are appointed by the federal government, and their remuneration is fixed by the Federal Parliament. There was no limitation on the Federal Parliament's law-making capacity, based on federalism, of the kind invoked in the present case. However, it was argued that it was inconsistent with judicial independence that federal judicial pensions, which had previously been non-contributory, should, in relation to judges appointed after a certain date, be made contributory. That argument was rejected by the Supreme Court of Canada. No similar argument is involved in the present case; rather, the issue here is one of federalism. It is unnecessary to examine the detail of the legal arguments based on the claimed interference with judicial independence. It may be noted, however, that Dickson CJ said: ^[38] [ 1986] 2 SCR 56 at 77.

``The power of Parliament to fix salaries and pensions of superior court judges is not unlimited. If there were any hint that a federal law dealing with these matters was enacted for an improper or colourable purpose, or if there was discriminatory treatment of judges vis- à -vis other citizens, then serious issues relating to judicial independence would arise and the law might well be held to be ultra vires s 100 of the Constitution Act, 1867 .''

33. Issues of judicial independence, and the arrangements for fixing and altering judicial remuneration that might be established consistently with such independence, were again examined by the Supreme Court of Canada in Re Provincial Court Judges . ^[39] [ 1997] 3 SCR 3. Once again, that was not a case that raised issues of federalism of the kind with which we are presently concerned; and it is not argued that the federal legislation under challenge in the present case threatens the independence of State judges.

34. The Supreme Court of the United States, in United States v Hatter ^[40] 532 US 557 (2001). also considered the application of federal laws to federal judges. The laws were claimed to violate the United States Constitution's prohibition against diminishing the remuneration of federal judges during their term of office. No such issue is involved in the present case. Our Constitution, in s 72, contains a similar prohibition, but it has nothing to do with the effect of federal laws on State judges. In Hatter , some of the laws under challenge were held valid, and some were held invalid. The valid laws imposed non- discriminatory taxes upon judges and other citizens. The invalid laws were discriminatory, singling out federal judges for unfavourable treatment. The Court held that the Constitution did not forbid Congress to enact a law imposing a non-discriminatory tax on judges. The invalid taxes were discriminatory. It is of interest to note the attempted justification advanced for the discrimination, and rejected by the Court. The supposed justification was that the singling out of judges for disadvantageous treatment was ``necessary to offset advantages related to constitutionally protected features of the judicial office''. <sup>[41]</sup> 532 US 557 (2001) at 576. It was pointed out by Breyer J that, if such a justification were accepted, it would authorise the legislature to ``equalize away'' ^[42] 532 US 557 (2001) at 576. the very protection given by the Constitution. To the extent that Hatter has similarities to the present case, they appear to me to be to the disadvantage of the Commonwealth's argument.

35. The challenge to the validity of the Acts on the ground stated in par (a) of Question 2 has been made out.

36. I would answer the questions in the case stated as follows:

• 1. (a) Yes
  • (b) No
• 2. (a) Yes.
• 3. The defendant should pay the costs of the plaintiffs.