AUSTIN & ANOR v COMMONWEALTH OF AUSTRALIA

Judges: Gleeson CJ
Gaudron J
Gummow J
Hayne J

McHugh J
Kirby J

Court:
Full High Court

MEDIA NEUTRAL CITATION: [2003] HCA 3

Judgment date: 3 February 2003

---

McHugh J

205. The first issue in this case stated under s 18 of the Judiciary Act 1903 (Cth) is whether the plaintiffs are liable under two federal laws to pay a ``superannuation contributions surcharge'' in respect of ``surchargeable contributions''. If they do, a further question arises as to whether those laws validly apply to the plaintiffs.

206. The joint judgment of Gaudron, Gummow and Hayne JJ states the material facts and summarises the relevant legislation. It is unnecessary for me to repeat them. I agree with their Honours that the federal laws, properly construed, apply to the first plaintiff but not the second plaintiff. But, for slightly different reasons, in my opinion those laws cannot validly apply to the first plaintiff. That is because he is a judge of the Supreme Court of New South Wales and the federal laws burden the constitutional functions of the State of New South Wales, a burden that the Commonwealth Constitution prohibits.

Federalism

207. A federal system of government involves a distribution of legislative power between a central and regional governments with the result that no government has the same legislative authority as a government in a unitary system of government. ^[246] Dicey, Introduction to the Study of the Law of the Constitution , 10th ed (1959) at 171-172 cited in Blackshield and Williams, Australian Constitutional Law and Theory , 3rd ed (2002) at 245-246. The sovereignty of a federated nation ``is divided on a territorial basis''. <sup>[247]</sup> Gillespie, ``New Federalisms'', in Brett, Gillespie and Goot (eds), Developments in Australian Politics , (1994) at 60 cited in Blackshield and Williams, Australian Constitutional Law and Theory , 3rd ed (2002) at 241. What a legislature can do under a unitary system of government may be denied to either the central or regional governments and, sometimes as s 92 of our Constitution shows, to both the central and regional governments.

208. As Dicey pointed out: ^[248] Introduction to the Study of the Law of the Constitution , 10th ed (1959) at 151 cited in Blackshield and Williams, Australian Constitutional Law and Theory , 3rd ed (2002) at 245.

``The object for which a federal state is formed involves a division of authority between the national government and the separate States. The powers given to the nation form in effect so many limitations upon the authority of the separate States, and as it is not intended that the central government should have the opportunity of encroaching upon the rights retained by the States, its sphere of action necessarily becomes the object of rigorous definition.''

209. Thus, each legislative authority ``is merely a subordinate law-making body, whose laws are of the nature of by-laws, valid whilst within the authority conferred upon it by the constitution, but invalid or unconstitutional if they go beyond the limits of such authority''. ^[249] Dicey, Introduction to the Study of the Law of the Constitution , 10th ed (1959) at 150 cited in Blackshield and Williams, Australian Constitutional Law and Theory , 3rd ed (2002) at 245.

210. This distribution of functions and powers is an essential element of federalism. But the system is unlikely to work well - or perhaps at all - unless somebody has the power to define the functions and powers belonging to the central and regional governments respectively. The general terms of the constating document of the federation are never clear enough to avoid disputes concerning

---

ATC 4085

the limits of their functions and powers. As a result most federal systems - including Australia - have an ultimate judicial ``umpire'' whose interpretations of the constating document bind the central and regional governments and define the boundaries of their powers and functions. As the Constitutional Commission pointed out: ^[250] Australia, Constitutional Commission, Final Report of the Constitutional Commission , (1988) vol 1 at 53 [ 2.16] cited in Blackshield and Williams, Australian Constitutional Law and Theory , 3rd ed (2002) at 248.

``It would seem that the minimal essential features of a federal system as it has come to be understood in Australia are a high degree of autonomy for the governmental institutions of the Commonwealth and the States, a division of power between these organisations, and a judicial `umpire'.''

211. In Australia, the ultimate judicial umpire is this Court. Its judgments ultimately define the powers and functions of the federal and State governments. So in this case, it is for this Court to decide whether expressly or by necessary implication, the Constitution prohibits the Parliament of the Commonwealth from imposing the superannuation contributions surcharge on State judicial officers. The Parliament accepts or assumes that it could not require the States to pay the surcharge in respect of State judicial pensions. And in my opinion, it cannot impose the surcharge by requiring State judges rather than the States to pay it.

212. Most commentators agree that the decision of this Court in Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (``the Engineers' Case '') <sup>[251]</sup> (1920) 28 CLR 129. dramatically extended the powers of the federal Parliament. First, the Engineers' Case held <sup>[252]</sup> (1920) 28 CLR 129 at 152 per Knox CJ, Isaacs, Rich and Starke JJ. that the ``one clear line of judicial inquiry as to the meaning of the Constitution must be to read it naturally in the light of the circumstances in which it was made, with knowledge of the combined fabric of the common law, and the statute law which preceded it''. Second, the Engineers' Case rejected the doctrine of the immunity of governmental instrumentalities that had prevailed up to that time. Under that doctrine, the federal and State governments were seen as sovereign within their respective spheres of power and entitled to carry out their operations without legislative or executive interference from each other. Given that premise, the immunity was seen as arising from a necessary implication of the Constitution that prohibited the State and the federal governments from controlling the activities of each other. The genesis of the rule was a dictum of Marshall CJ, delivering the opinion of the United States Supreme Court, in McCulloch v Maryland . ^[253] 4 Wheat 316 at 436 (1819) [ 17 US 159 at 213]. There, the Chief Justice said that ``the States have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control, the operations of the constitutional laws enacted by congress to carry into execution the powers vested in the general government''. Marshall CJ saw the rule as a necessity in a federal system. Nineteenth century United States cases held that the prohibition was reciprocal. One year after the setting up of this Court in 1903, it applied the prohibition in favour of the Commonwealth in Deakin v Webb ^[254] (1904) 1 CLR 585. and in favour of the States in The Federated Amalgamated Government Railway and Tramway Service Association v The New South Wales Railway Traffic Employ é s Association . ^[255] (1906) 4 CLR 488. However, the Engineers' Case rejected the doctrine of immunity of instrumentalities and held that, with limited exceptions, every grant of power to the federal Parliament authorised laws affecting the operations of the States and their agencies. The exceptions concerned the taxation power and powers affecting the prerogatives of the Crown. Thus, the emphasis on the text of the Constitution and the rejection of the principles of implied prohibition and immunity of instrumentalities enlarged the power of the federal government to deal with matters affecting the States as well as enlarging its power generally.

213. Despite this change, it soon became apparent that the Engineers' Case did not preclude the drawing of constitutional implications concerning the power of the States and the Commonwealth to bind each other. Isaacs J was the principal author of the judgment in the Engineers' Case . Yet not long after the decision in that case, his Honour pointed out - although in a dissenting judgment - in Pirrie v McFarlane ^[256] (1925) 36 CLR 170 at 191. (original emphasis) that a fundamental principle of federalism was that, ``where by the one Constitution separate and exclusive governmental powers have been allotted to two distinct organisms, neither is intended, in the absence of distinct provision to the contrary, to destroy or weaken the capacity or functions expressly conferred on the other''. Five years later, in Australian Railways Union v Victorian Railways Commissioners , ^[257] (1930) 44 CLR 319 at 390. Dixon J declared:

---

ATC 4086

`` [ U]nless, and save in so far as, the contrary appears from some other provisions 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 .''

(emphasis added)

214. In Melbourne Corporation v The Commonwealth , ^[258] (1947) 74 CLR 31. this Court held that the Commonwealth's power with respect to banking did not authorise a discriminatory law prohibiting a bank from conducting any banking business for a State or for any authority of the State unless the Treasurer of the Commonwealth had consented in writing to the conduct of the business. Although the law was directed to the private banks, the Court unanimously held that it burdened the functions of the States in a constitutionally impermissible way. In a much cited passage, Dixon J said: ^[259] (1947) 74 CLR 31 at 78-79.

``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 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.''

215. However, this celebrated passage does not represent the ratio decidendi of the case. Latham CJ and Williams J saw the case as turning on the proper characterisation of the section which they thought was not a law ``with respect to'' banking. Latham CJ said <sup>[260]</sup> (1947) 74 CLR 31 at 62. that ``the invalidity of a federal law which seeks to control a State governmental function is brought about by the fact that it is in substance a law with respect to a subject as to which the Commonwealth Parliament has no power to make laws''. Starke J said ^[261] (1947) 74 CLR 31 at 75. ``in the end the question must be whether the legislation or the executive action curtails or interferes in a substantial manner with the exercise of constitutional power by the other''. Rich J said ^[262] (1947) 74 CLR 31 at 66. that a federal law:

``may be invalid in two classes of case, one, where the Commonwealth singles out the States or agencies to which they have delegated some of the normal and essential functions of government, and imposes on them restrictions which prevent them from performing those functions or impede them in doing so; another, where, although the States or their essential agencies are not singled out, they are subjected to some provision of general application, which, in its application to them, would so prevent or impede them.''

216. The issue of the Parliament's power to bind the States in respect of their functions arose again in Victoria v The Commonwealth (``the Payroll Tax Case ''). <sup>[263]</sup> (1971) 122 CLR 353. Barwick CJ, with whose judgment Owen J agreed, saw the issue as turning on the characterisation of the federal law. In his view <sup>[264]</sup> (1971) 122 CLR 353 at 373. when a law is invalid because it interferes with the powers or functions of a State, it is because of ``lack of an appropriate subject matter''. Windeyer J rejected the characterisation approach. He said ^[265] (1971) 122 CLR 353 at 403. that the validity of such laws were to be decided by implications arising from the existence of the States as part of the Commonwealth. Those implications ``relate to the use of a power not to the inherent nature of the subject matter of the law''. His Honour said that a law, although made with respect to a designated subject matter, was not valid ``if it be directed to the States to prevent their carrying out their functions as parts of the Commonwealth''. Gibbs J ^[266] (1971) 122 CLR 353 at 424. adopted the view of Sir Owen Dixon, that ``a Commonwealth law is bad if it discriminates against States, in the

---

ATC 4087

sense that it imposes some special burden or disability upon them, so that it may be described as a law aimed at their restriction or control''. However, his Honour went on to say that he was not disposed to agree that ``a law which is not discriminatory in this sense is necessarily valid if made within one of the enumerated powers of the Commonwealth''. He said that `` [ a] general law that would prevent a State from continuing to exist and function as such would in my opinion be invalid''.

217. In The Commonwealth v Tasmania (``the Tasmanian Dam Case ), ^[267] (1983) 158 CLR 1. Mason J accepted the formulation of the principles expounded by Dixon J in Melbourne Corporation . His Honour said: ^[268] (1983) 158 CLR 1 at 128.

``The only relevant implication that can be gleaned from the Constitution... is that the Commonwealth cannot, in the exercise of its legislative powers, enact a law which discriminates against or `singles out' a State or imposes some special burden or disability upon a State or inhibits or impairs the continued existence of a State or its capacity to function.''

218. His Honour held that the principle arose from an implied prohibition in the Constitution. He specifically rejected the view of Barwick CJ in the Pay-roll Tax Case ^[269] (1971) 122 CLR 353 at 372-373. that the invalidity of federal laws that interfered with State functions or discriminated against the State was the result of the characterisation of the relevant Commonwealth power.

219. The view expounded by Mason J in the Tasmanian Dam Case prevailed in Queensland Electricity Commission v The Common- wealth . ^[270] (1985) 159 CLR 192. Mason J said: ^[271] (1985) 159 CLR 192 at 217.

``This review of the authorities shows that the principle is now well established and that it consists of two elements: (1) the prohibition against discrimination which involves the placing on the States of special burdens or disabilities; and (2) the prohibition against laws of general application which operate to destroy or curtail the continued existence of the States or their capacity to function as governments.''

220. Gibbs CJ, ^[272] (1985) 159 CLR 192 at 206-207. Wilson J, ^[273] (1985) 159 CLR 192 at 222. Deane J ^[274] (1985) 159 CLR 192 at 247-248. and Dawson J ^[275] (1985) 159 CLR 192 at 260-262. also took the view that the principle had two elements - discrimination and preventing or impeding essential functions.

221. In Australian Capital Television Pty Ltd v The Commonwealth ^[276] (1992) 177 CLR 106 at 199, 202. Dawson J again accepted that the principle had two elements - discrimination in the sense of subjecting the States to a special burden or disability not imposed on persons generally and undue interference with the capacity of the States to perform their constitutional functions.

222. In Victoria v The Commonwealth (``the Industrial Relations Act Case ''), ^[277] (1996) 187 CLR 416. five members of this Court again recognised ^[278] (1996) 187 CLR 416 at 500, 541-542 per Brennan CJ, Toohey, Gaudron, McHugh and Gummow JJ. that the Melbourne Corporation principle had two elements.

223. Given this long line of judicial exposition of the principle, I am unable to agree with that part of the reasons of the joint judgment ^[279] Reasons of Gaudron, Gummow and Hayne JJ at [ 124]. that the Melbourne Corporation principle involves only ``one limitation, though the apparent expression of it varies with the form of the legislation under consideration''. With respect, since Queensland Electricity Commission it has been settled doctrine that there are two rules arising from the necessary constitutional implication. It is true that the joint judgment of six members of this Court, including myself, in Re Australian Education Union; Ex parte Victoria <sup>[280]</sup> (1995) 184 CLR 188 at 227 per Mason CJ, Brennan, Deane, Toohey, Gaudron and McHugh JJ. said that it was unnecessary in that case to decide whether ``there are two implied limitations, two elements or branches of one limitation, or simply one limitation''. But that statement provides no basis for rejecting the statement of Mason J in Queensland Electricity Commission ^[281] (1985) 159 CLR 192 at 217. that ``the principle is now well established and that it consists of two elements''. Nor does it provide any basis for rejecting the statement of Gibbs CJ in the same case <sup>[282]</sup> (1985) 159 CLR 192 at 206. that ``it is clear, however, that there are two distinct rules, each based on the same principle, but dealing separately with general and discriminatory laws''.

224. Perhaps nothing of substance turns on the difference between holding that there are two rules and holding that there is one limitation that must be applied by reference to ``such criteria as `special burden' and `curtailment' of `capacity' of the States `to function as governments'''. ^[283] Reasons of Gaudron, Gummow and Hayne JJ at [ 124]. If there is a difference in content or application, it may lead to unforeseen problems in an area that is vague and difficult to apply. If there are no differences, no advantage is to be gained by jettisoning the formulation of Mason J in Queensland Electricity Commission .

---

ATC 4088

225. As the present case is concerned with legislation imposing burdens on State judicial officers, the federal legislation is not directed at the States themselves. But that fact does not prevent the application of the Melbourne Corporation principle. In Melbourne Corporation itself, the legislation was directed at the private banks. But it was invalid because it restricted the banking choices open to State governments and their authorities. It prevented them - because it prevented the private banks - from entering into relationships concerning the use and placement of State government funds and borrowings.

226. In Queensland Electricity Commission , after referring to the principle of Melbourne Corporation , Mason J said: ^[284] (1985) 159 CLR 192 at 218.

``The object of the implied prohibition is to protect the State in the exercise of its functions from the operation of discriminatory laws whether the functions are discharged by the executive government or by an authority brought into existence by the State to carry out public functions even if the authority acts independently and is not subject to government direction and even if its assets and income are not property of the State.''

227. Similarly in Re Australian Education Union , this Court held certain awards in relation to the terms and conditions of employment of certain public servants invalid. This Court held that the federal arbitration power did not authorise the Commission to make awards concerning the terms and conditions of employment of high level office holders and senior public servants. The Court said: ^[285] (1995) 184 CLR 188 at 233 per Mason CJ, Brennan, Deane, Toohey, Gaudron and McHugh JJ.

``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.''

228. The federal legislation in the present case is concerned with a superannuation contributions surcharge - taxation - and not directly with the terms and conditions of employment of State judicial officers. But that is a difference without relevant constitutional meaning. Nothing in the Constitution or in the principle of Melbourne Corporation prevents the federal Parliament from subjecting State judicial officers to general taxation, provided that it does not discriminate against them as State judicial officers. But the matter is constitutionally different when federal legislation taxes State judicial officers in a way that differs from other income earners. Such a law will be invalid unless the discrimination is such that it has no practical impact on the relationship between the State and the judicial officer. The matter may be one of degree. Drawing the line between a law that treats State judicial officers differently from other income earners and is valid and a law that disadvantages them in a real sense and is invalid may not always be easy. But it must be drawn if the States are to be free from federal laws that impose special burdens or disabilities on their constitutional arrangements relating to the administration of justice.

229. Here the federal law discriminates against State judicial officers in a way that interferes in a significant respect with the States' relationships with their judges. It interferes with the financial arrangements that govern the terms of their offices, not as an incidence of a general tax applicable to all but as a special measure designed to single them out and place a financial burden on them that no one else in the community incurs. The Commonwealth does not dispute that the relevant federal legislation treats the first plaintiff and other State judicial officers differently from the way federal laws concerned with the superannuation contributions surcharge deal with other ``high income earners''. Private ``high income earners'' do not have the surcharge imposed on them. In their case, the surcharge is imposed on their superannuation provider. The federal legislation assumes - no doubt with good reason - that the surcharge will be passed on to the high income earner in his or her capacity as a member of the superannuation scheme in the form of reduced benefits. But in so far as the federal legislation deals with these private ``high income

---

ATC 4089

earners'', it does not impose any surcharge on them personally. It does not make them liable to pay a debt of hundreds of thousands of dollars, as these federal laws make State judicial officers liable to pay.

230. Similarly, federal judges - as ``high income earners'' - are treated differently by the federal legislation from State judicial officers. Federal judges incur no personal liability. When they leave office they do not have the burden of an accumulated debt arising from the imposition of the surcharge. Federal judges who are subjected to the surcharge merely have their pensions reduced at the time of each payment by a specified amount. Their position is very different from State judicial officers who are subjected to the surcharge.

231. The evidence in this case shows, for example, that, when the first plaintiff turns 62 and can retire with a judicial pension, he will have an accumulated superannuation contributions surcharge debt of over $300,000. He will receive a pension on retirement at 62 of about $180,000. The pension will be taxed at the marginal rate. If, instead of retiring at 62, he remains in office until he is required to retire at 72, he will have accumulated a superannuation contributions surcharge debt to the Commonwealth of over $550,000. At age 72, the actuarial evidence indicates that he will have a pension of about $267,000. After paying income tax on his annual pension, four years will pass before his pension receipts match his surcharge debt. If he should die within that four-year period or earlier and is survived by a widow, the pension receipts will be even smaller but the debt owed by the first plaintiff's estate will remain the same.

232. Thus, if the first plaintiff were to serve beyond the age of 62, when he can retire with a judicial pension, it will result in him incurring a debt of an additional $240,000 if he should remain until he is 72. Hence, the federal legislation operates to provide a strong incentive for the first plaintiff and other State judicial officers to retire as soon as they are entitled to a pension. It is true that, independently of the federal legislation, the value of a judge's pension decreases with each day the judge stays in office after becoming eligible to retire with a pension. In that respect, the pension scheme, by entitling a judge to retire after turning 60 and serving for 10 years, has an inherent incentive for retirement on entitlement to the pension. But the legislation in issue in this case provides an additional and greater incentive for the judge to retire early. Thus, the legislation operates so as to hamper the capacity of State governments to retain the services of their judicial officers. More than that, it must also hamper the ability of the States to get suitable persons to take appointments to State judicial offices. Any person approached for appointment to State judicial office knows that under this legislation he or she will incur a significant and increasing financial debt to the Commonwealth upon taking office.

233. So serious was the likely effect on the relationship between State judicial officers and the State of New South Wales that the State felt compelled to enact the Judges' Pensions Amendment Act 1998 (NSW). That Act amended the Judges' Pensions Act 1953 (NSW) to provide for the commutation of pensions to enable the payment of the superannuation contributions surcharge. As the New South Wales Attorney-General pointed out in his Second Reading Speech in the Legislative Council, ^[286] New South Wales, Legislative Council, Parliamentary Debates (Hansard), 2 June 1998 at 5507. the amendments were ``essential to provide judges and other persons entitled to a pension or reversionary pension under the Act with a mechanism to pay the superannuation contributions surcharge from the benefit they are entitled to receive''. Thus, the result of the present federal legislation concerning superannuation contributions surcharges is that the State of New South Wales and other States have been forced for practical reasons to a enact legislation to pay a lump sum to their judges who retire so that they can if they wish commute part of their benefits to pay the surcharge debt. Thus, the practical effect of the federal legislation is to require the States to pay a sum of money to a retiring State judge to be paid to the Commonwealth, a payment that the Commonwealth accepts or assumes it could not directly require the States to pay.

234. The federal legislation in question in this case violates the principles enshrined in Melbourne Corporation . It is invalid in so far as it applies to the first plaintiff. I agree with the answers to the questions proposed by Gaudron, Gummow and Hayne JJ.