South Australia and Ors v Commonwealth and Anor
(1942) 65 CLR 373[1942] HCA 14
(Judgment by: Starke 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 JMcTiernan J
Williams J
Judgment date: 23 July 1942
Judgment by:
Starke J
The States of Victoria, South Australia, Queensland, and Western Australia, and the Attorney-General of each State, have brought actions against the Commonwealth of Australia and its Treasurer claiming a declaration that the whole or some one or more or some part or parts of the Income Tax Act 1942 (No. 23 of 1942 ), Income Tax Assessment Act 1942 (No. 22 of 1942 ), States Grants (Income Tax Reimbursement) Act 1942 (No. 20 of 1942), and Income Tax (War-time Arrangements) Act 1942 (No. 21 of 1942 ) are or is ultra vires the Parliament of the Commonwealth and/or that the scheme of uniform taxation embodied in the said Acts is invalid, and also claiming ancillary relief.
The plaintiffs moved for interlocutory injunctions, but were ordered to deliver statements of claim, to which the defendants demurred and also pleaded. By consent it was ordered that the case be argued before the Full Court upon the notices of motion for interlocutory injunctions, the pleadings and various affidavits, subject to all proper objections, and on the matter coming on for hearing before the Court the parties agreed that the motions for injunctions should be treated as the trial of the actions and turned into motions for decrees. Actions in the form adopted in these cases have the sanction of decisions of this Court (Attorney-General for N.S.W. v. Brewery Employees Union of N.S.W. [F118] ; The Commonwealth v. Queensland [F119] ; Tasmania v. Victoria [F120] ), with which may be compared the decision of the Supreme Court of the United States of America in Massachussetts v. Mellon [F121] , and the rules collected by Brandeis J. in Ashwander v. Tennessee Valley Authority [F122] .
The Acts were challenged on the ground that they constituted a legislative scheme of taxation, the object and operation whereof was to constitute the Commonwealth the exclusive taxing authority in Australia in respect of income tax, and to prevent the States from exercising their constitutional powers in relation thereto. The Report of a Committee on Uniform Taxation, and also the speech of the Treasurer of the Commonwealth introducing into Parliament the Bills which became the Acts attacked in this case, were tendered in support of this allegation, and also in support of an allegation that the scheme effected discriminatory taxation between the States contrary to the provisions of the Constitution. But they were rejected. The intention, object, or purpose of a legislative body can only be legitimately ascertained from what it has chosen to enact either in express words or by reasonable and necessary intendment (Salomon v. Salomon & Co. [F123] ; Assam Railways and Trading Co. v. Commissioners of Inland Revenue [F124] ; W. R. Moran Pty. Ltd. v. Deputy Commissioner of Taxation [F125] ; R. v. West Riding of Yorkshire County Council [F126] ; Sydney Municipal Council v. The Commonwealth [F127] ). But the Court is not precluded from looking at the state and operation of the law when the legislation was passed (Macmillan & Co. v. Dent [F128] ), nor from considering matters illustrating the operation of that legislation. Evidence for these purposes was used and may be found in the affidavits filed by the parties and in tables comparing the taxation under the Commonwealth legislation with taxation then in force in both the Commonwealth and the States.
The States Grants (Income Tax Reimbursement) Act and the Income Tax (War-time Arrangements) Act, and the Income Tax and the Assessment Acts are numbered in sequence, which indicates the order in which the Bills for this legislation were presented to Parliament and passed into law, but nothing turns on this order. It is desirable, I think, to consider each Act separately before considering it together with other Acts as part of a scheme.
1. The Tax and Assessment Acts (No. 23 of 1942 and No. 22 of 1942)
Subject to the provisions of the Constitution, secs. 86-95, the Commonwealth and the States have concurrent taxing power. That power, within the limits of their several jurisdictions, is unlimited in its range both as to the kind of tax, the subject upon which it shall be imposed, and the amount of the tax, but so, in the case of the Commonwealth, as not to discriminate between States or parts of States, and so that the Commonwealth shall not by any law or regulation of revenue give preference to one State or any part thereof over another State or any part thereof (Constitution, secs. 51 (ii.) and 99). The Tax and Assessment Acts do not on their face contravene these provisions of the Constitution. The tax is graduated, rising steeply on the higher rates of income. But the Constitution only prohibits discrimination between the States or parts of States, or giving preference by any law or regulation of revenue to one State or any part thereof over another State or part thereof, and does not require equality of burden: See Moran's Case [F129] .
Next it was contended that the following provision of the Assessment Act is invalid:-
"For the better securing to the Commonwealth of the revenue required for the efficient prosecution of the present war-
- (a)
- a taxpayer shall not pay any tax imposed by or under any State Act on the income of any year of income in respect of which tax is imposed by or under any Act with which this Act is incorporated until he has paid that last-mentioned tax or has received from the Commissioner a certificate notifying him that the tax is no longer payable" (Act No. 22 of 1942 , sec. 31).
It was said that the Commonwealth had no power to give itself priority in payment of its income taxes over the taxes of the States. But that contention, despite some dicta to the contrary, is precluded by the decision of this Court in The Commonwealth v. Queensland [F130] , and by the decision of the Judicial Committee in In re Silver Brothers Ltd. [F131] . The taxing power gives the Commonwealth authority to make its taxation effective and to secure to it the full benefit thereof. In my opinion, there is no distinction in principle between the Commonwealth giving itself priority in the administration of assets in bankruptcy and in giving itself priority in payment of the personal obligations imposed by an income tax. The dicta above referred to may be found in Federal Commissioner of Taxation v. Official Liquidator of E. O. Farley Ltd. [F132] and West v. Commissioner of Taxation (N.S.W.) [F133] , but the contrary view appears to have been expressed by the same justice in Federal Commissioner of Taxation v. Farley [F134] , and note Graves v. New York [F135] .
It was also contended that sec. 31 prohibits taxpayers from paying to the States any taxation whatever. If that were the proper construction of sec. 31 the Commonwealth would, I think, transcend its authority, but I cannot so construe the section. The tax imposed is for a financial year, that is, for the twelve months beginning on 1st July, but it is in every year assessed upon the year of income preceding the year of tax: See Tax Act, No. 23 of 1942, sec. 7; Assessment Act 1936-1942 , secs. 17 and 6; Acts Interpretation Act 1901-1937, sec. 22. But there is nothing in sec. 31 which prohibits or precludes a taxpayer from paying State taxes so soon as his liability for Commonwealth income tax in any financial year has been discharged. The section prescribes priority of payment, and it operates to that extent and no further, both in law and in fact.
2. The States Grants (Income Tax Reimbursement) Act 1942 (No. 20 of 1942)
By sec. 96 of the Constitution the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit. This section does not prohibit discrimination or preference (Victoria v. The Commonwealth [F136] ; Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. [F137] ).
The States Grants Act in sec. 4 provides:
"In every financial year during which this Act is in operation in respect of which the 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."
And there are other provisions for further assistance which may be found in the Act, but which it is unnecessary to detail. This device could be made effective, as well in time of war as in time of peace, to control State legislation, and the administration of State laws, and ultimately to control and supervise all State functions. The danger to the States is obvious enough, but this Court has nothing to do with political policies or remedies; its sole function is to determine whether the States Grants Act, in its present form, is warranted by the Constitution.
The government of Australia is a dual system based upon a separation of organs and of powers. The maintenance of the States and their powers is as much the object of the Constitution as the maintenance of the Commonwealth and its powers. Therefore it is beyond the power of either to abolish or destroy the other. The limited grant of powers to the Commonwealth cannot be exercised for ends inconsistent with the separate existence and self-government of the States, nor for ends inconsistent with its limited grants (R. v. Barger [F138] ; In re Insurance Act of Canada [F139] ; Attorney-General for Alberta v. Attorney-General for Canada [F140] ).
The States Grants Act, it is said, leaves the States perfectly free to exercise their constitutional powers, though the exercise by the Commonwealth of its powers of taxation may render the exercise by the States of their powers difficult or impracticable from an economic standpoint, which it is the object of the States Grants Act to relieve: Cf. Massachusetts v. Mellon [F141] ; Steward Machine Co. v. Davis [F142] .
It cannot be doubted that the Commonwealth cannot expressly prohibit the States from exercising their powers of taxation, and that those powers cannot, subject to the provisions of the Constitution, sec. 51 (xxxviii.), be appropriated by the Commonwealth nor abdicated by the States. The question in this case comes back to this: What is the object and operation of the States Grants Act? It purports in sec. 4 to grant financial assistance to the States, but is it linked up with an object that is beyond the powers of the Commonwealth, namely, to control the exercise by the States of their powers to impose taxes upon income? The title of the Act itself is States Grants (Income Tax Reimbursement) Act. The amounts of the grants set forth in the schedule to the Act are, it is admitted in the pleadings, substantially the average of the amounts raised by each State by means of income tax in the financial years of each respective State ended 30th June 1940 and 30th June 1941. Further, the tax imposed under the Federal Act on the lower grades of income is moderate as compared with the tax imposed upon higher grades of income. Consequently it was open for the States to exploit this field of taxation, but if they do so the Grants Act deprives them of the financial assistance thereby provided.
In my opinion, the object of the Act is not merely to grant financial assistance to the States, but there is linked up in it an object and an end that is inconsistent with the limited grant of power given by sec. 96 to the Commonwealth, namely, making the Commonwealth the sole effective taxing authority in respect of incomes and compensating the States for the resulting loss in income tax. The argument that the States Grants Act leaves a free choice to the States, offers them an inducement but deprives them of and interferes with no constitutional power, is specious but unreal. And it does not meet the substance of the States' position that the condition of the Act relates to a matter in respect of which the Commonwealth has no constitutional power whatever, and yet by force of the condition and not as a consequence of the exercise of any power conferred upon the Commonwealth, the grant of assistance to the States is withdrawn unless they comply with its terms. The real object of the condition is that already stated, and it is in my judgment neither contemplated by nor sanctioned by the Constitution, and in particular by sec. 96 thereof. As I have said, all State legislation and functions might ultimately be so controlled and supervised. The possibility of the abuse of a power is not, however, an argument against the existence of a power. But if the extent of the power claimed by the Commonwealth leads to "results which it is impossible to believe ... the statute contemplated ... there is ... good reason for believing that the construction which leads to such results cannot be the true construction of the statute" (The Queen v. Clarence [F143] ). A legitimate use of the powers contained in sec. 96 may be found in the Road Grants Case (Victoria v. The Commonwealth [F144] ), where the Commonwealth and the State of Victoria entered into an agreement, the object of which was to aid the State in the construction and reconstruction of certain roads. Incidentally the making of roads would be an aid to trade and commerce, and possibly also to defence: See Federal Aid Roads Act 1926 (No. 46 of 1926). No doubt means can be found to give the States financial assistance without crippling them in the exercise of their powers of self-government if the Commonwealth taxation creates economic difficulties for them. But I cannot agree that the provisions of sec. 96 enable the Commonwealth to condition that assistance upon the States abdicating their powers of taxation or, which in substance is the same thing, not imposing taxes upon income. In my opinion, it follows that the States Grants (Income Tax Reimbursement) Act 1942 is not within the power or authority of the Commonwealth Parliament.
3. Income Tax (War-time Arrangements) Act 1942 (No. 21 of 1942)
By this Act officers of the State service who have been engaged on duties connected with the assessment or collection of income tax may be temporarily transferred to the Public Service of the Commonwealth, and are by force of a notice given pursuant to the Act transferred accordingly. Any officer may be retransferred to the State, which is obliged to reinstate that officer in a position in the State service upon such terms and conditions as are not less favourable than the terms, conditions, and rights to which he would have been entitled if the Act had not been passed, and his service as a transferred officer were service with the State. And where during the period of his transfer the transferred officer dies or resigns he is deemed to have been retransferred to the State service immediately prior to his death or the acceptance of his resignation, and all rights of pension, payment, and other benefits arising in respect of the officer's service shall be ascertained as if the Act had not been passed and his service as a transferred officer were service with the State. The liability of the transferred officer to contribute to any State fund established for the purpose of providing superannuation or other benefits is continued, but there are provisions for adjustments as between the Commonwealth and the States. Further, notice may be given to the States that the Commonwealth requires the possession and use of their office accommodation, furniture, and equipment specified in the notice, particularly or in general terms, and the Commonwealth then by force of the Act is given possession and exclusive use thereof accordingly. Provision is made for compensation to the State. And where any returns or records relating either wholly or partly to the assessment or collection of any tax imposed upon incomes by the Parliament of the Commonwealth are in the possession of a State those returns and records are from the commencement of the Act transferred to the possession of the Commonwealth provided that the States shall have access to, and may copy such returns and records as relate to the assessment or collection of any tax imposed upon incomes by or under any law of that State.
The taxation departments of the States, excepting Western Australia, had for some years, by arrangement with the Commonwealth, assessed and collected income tax on behalf of the Commonwealth. Many taxpayers made only one return in which there were two columns, one for particulars for State income-tax purposes, and the other for Commonwealth income-tax purposes. But taxpayers with income derived from more than one State sometimes made two or more returns, one to the Commonwealth, the other or others to the States. In the case of Western Australia the Commonwealth by arrangement with the State assessed and collected tax both for itself and the State. But except in the case of Western Australia the returns and records belong, I take it, to the States, and are exceedingly valuable, if not essential, for the purpose of collecting, assessing and checking income taxes.
It was faintly contended that the Income Tax (War-time Arrangements) Act was authorized by the taxation power conferred upon the Commonwealth under the Constitution, but the main argument in support of the Act was based upon the defence power, as was inevitable from the terms of the Act. The preamble recites that it is necessary or convenient to provide for the matter contained in the Act with a view to the public safety and defence of the Commonwealth and States and the more effectual prosecution of the war, and in secs. 4 and 11 the authorities there given are declared to be 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. But the defence power is subject to the Constitution just as are the other powers conferred by sec. 51 of the Constitution.
The content of the defence power never changes, though war will, no doubt, enlarge the area of its operation (Andrews v. Howell [F145] ). But the defence power does not, any more than any other power contained in sec. 51, enable the Commonwealth to abolish or destroy the States. Nor can the Commonwealth exercise that power for ends inconsistent with the existence of the States or the exercise of their powers or their functions as self-governing bodies. The Commonwealth can marshal the manpower and resources of the Commonwealth for the purposes of war, and it is said that the Income Tax (War-time Arrangements) Act does no more. According to the argument the Act has a "close and substantial," a direct and not an indirect, a proximate and not a remote, relation to defence, and consequently is within the power. But such a standard is only one of degree and in the end becomes a rule of expedience: See Santa Cruz Fruit Packing Co. v. National Labor Relations Board [F146] .
The Act, as already set forth, takes power to the Commonwealth at its discretion, to transfer to its service, and appropriate to its own purpose, all the officers, accommodation, and records of the States which constitute their departments of income tax. It preserves all the rights of such officers against the States. It enables the Commonwealth at its discretion to retransfer such officers to the States, and, in any case, when the Act ceases to operate the Act retransfers such officers to the States, and compels the States to reinstate the officers on terms not less favourable than they would have been entitled to had the Act not been passed. It also, on the resignation or death of any transferred officers, automatically retransfers them to the States and prescribes that all rights of pension and other benefits arising in respect of an officer's service shall be ascertained as if the Act had not been passed and his service as a transferred officer were service with the State. These powers are wholly inconsistent with the exercise by the States of their powers and of their functions as self-governing bodies. An important department-indeed an essential department-of the Executive Government of the States may be taken from them, and all its officers, accommodation, and records bodily transferred to the Commonwealth. And obligations are imposed upon the States by force of the Act in relation to the officers transferred. The Commonwealth assumes the right to regulate the relation of the States and the transferred officers, and thus to override any provision the States may consider necessary or expedient in the matter. And it may be noted that the income tax departments of the States are not among those departments transferred to the Commonwealth by force of the Constitution, and in respect of which it has exclusive power to legislate (Constitution, secs. 69 and 52 (ii.)).
The Income Tax (War-time Arrangements) Act is beyond the power conferred upon the Commonwealth to make laws for the peace, order and good government of the Commonwealth with respect to defence, or any other power conferred by the Constitution. Perhaps I ought to refer to the Engineers' Case (Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd.) [F147] and to Andrews v. Howell [F148] , which the Commonwealth relied upon during the argument. Prior to the decision of this Court in the Engineers' Case [F149] the doctrine had been propounded of the immunity of the instrumentalities and agencies of government, both Federal and State, from interference by the other, an immunity based upon a prohibition implied from the structure of the Constitution. The Engineers' Case [F150] overruled this doctrine, which was contrary to the decision of the Judicial Committee in Webb v. Outtrim [F151] , which had not been applied consistently in this Court, and which was attended with difficulty in the working of the Constitution. The substance of the decision is stated in the Engineers' Case [F152] : "The doctrine of implied prohibition finds no place where the ordinary principles of construction are applied so as to discover in the actual terms of the instrument their expressed or necessarily implied meaning." The Court did not say that in interpreting the Constitution no implications of any sort should be made, and the passage quoted makes that, I hope, sufficiently clear. Critics however arose; one of them, however, happily assures us that the decision was inevitable and a wise one however it was reached: See West v. Commissioner of Taxation (N.S.W.) [F153] . And it is noteworthy that this doctrine of "implied prohibition" seems also recently (1939) to have been abandoned by the Supreme Court of the United States (Graves v. New York [F154] ). Some implications are necessary from the structure of the Constitution itself, but it is inevitable also, I should think, that these implications can only be defined by a gradual process of judicial decision. Andrews v. Howell [F155] is irrelevant to the matter under review, but it illustrates the wide range of the defence power.
4. Severability
The invalidity of the States Grants (Income Tax Reimbursement) Act 1942 and the Income Tax (War-time Arrangements) Act 1942 does not, however, also render invalid the Income Tax Act 1942 nor the Income Tax Assessment Act 1942 . These last-mentioned Acts are in themselves consistent, workable and effective, they deal with a subject matter within the power of the Commonwealth, and are not connected with nor dependent upon the validity of the other Acts as conditions, considerations or compensations. Moreover, the provisions of the Acts Interpretation Act 1901-1937, sec. 15A, can also be called in aid (Roughley v. New South Wales [F156] ; Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. [F157] ).
5. The Acts as part of a scheme
The Judicial Committee in Moran's Case [F158] observed that "where there is admittedly a scheme of proposed legislation, it seems to be necessary when the pith and substance or the scope and effect of any one of the Acts is under consideration, to treat them together and to see how they interact. The separate parts of a machine have little meaning if examined without reference to the function they will discharge in the machine." It was not disputed, I think, that the object of the Acts was to introduce into Australia a uniform income tax having priority over State taxes upon income, paying to the States, which retired from the field of income taxation, compensation substantially equal to the average of the amounts raised by that State by means of income tax in the financial years ended June 1940 and 1941. The States, however, insist that the scheme operates to destroy their constitutional powers to raise revenue by way of income tax; to discriminate in taxation between them; and to give preference by a law or regulation of revenue to those States which vacate the income-tax field over the States that do not vacate that field. But the scheme of legislation is, I think, unimportant unless the legislation is connected together and the provisions of the legislative Acts are dependent the one upon the other, which is not, as I think, the case here. Assume, however, that the States Grants Act be valid, does it, coupled with the Taxation Acts, discriminate between or prefer one State over another contrary to the provisions of the Constitution? The provisions of the Acts taken together operate, it is said, as a sort of rebate of taxation (Attorney-General for British Columbia v. McDonald Murphy Lumber Co. [F159] ) contrary to the provisions of the Constitution. Moran's Case [F160] itself supplies an answer to the argument: See the report [F161] . The grants of assistance, if valid, are for the purpose of compensating the States for the losses they would each sustain from the imposition of uniform taxation and preventing unfairness or injustice to the States. The taxation is applicable in all States and parts of States alike, but the losses sustained by the States by the operation of the Tax Acts are not alike, and are adjusted by the Grants Act.
In my judgment, the States Grants (Income Tax Reimbursement) Act 1942 and the Income Tax (War-time Arrangements) Act 1942 should be declared invalid, but otherwise the relief claimed in the several actions should be denied.