South Australia and Ors v Commonwealth and Anor
(1942) 65 CLR 373[1942] HCA 14
(Decision by: Latham CJ)
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 CJRich J
Starke J
McTiernan J
Williams J
Judgment date: 23 July 1942
Decision by:
Latham CJ
The States of South Australia, Victoria, Queensland and Western Australia and their respective Attorney-Generals sue the Commonwealth and Joseph Benedict Chifley, the Treasurer of the Commonwealth, for a declaration that certain Acts passed by the Commonwealth Parliament are invalid, and for an injunction restraining the Treasurer and other Ministers of State and Commonwealth officers from putting the Acts into operation. Applications, supported by affidavits, were made for an interlocutory injunction. Pleadings have been delivered in which, in addition to raising defences, the defendants have demurred to the statements of claim upon the ground that the challenged Acts are within the constitutional powers of the Parliament of the Commonwealth. It was ordered that the cases be argued before the Full Court. All parties have consented that the applications for interlocutory injunctions should be treated as the trials of the actions.
The challenged Acts are the following:-States Grants (Income Tax Reimbursement) Act 1942 No. 20; Income Tax (War-time Arrangements) Act 1942 No. 21; Income Tax Assessment Act 1942 No. 22; Income Tax Act 1942 No. 23.
The plaintiffs contend that these Acts constitute a scheme for the purpose of compelling the States to abandon their constitutional right to impose taxation on incomes. The compulsion is brought about by the imposition of a Commonwealth income tax at very high rates, rising to 18s. in the pound upon that part of any income which exceeds £4,000. This Act, it is said, makes it practically impossible for any State to impose a State tax upon income. The amount which, it is contemplated, will be collected under the Commonwealth Income Tax Act (No. 23) is admitted to be approximately equal to the total of the amounts which would have been raised by the Commonwealth and the several States from income tax under the Commonwealth and State Acts which were in operation up to 30th June last. The result of this Act is that the States, being practically unable to tax incomes, will lose (taking the average) 63 per cent of their total tax revenue. The States which have imposed high income taxes, such as Queensland and New South Wales, will lose 67 to 68 per cent of their total taxation revenue (taken on receipts during the year ending on 30th June 1941), and the States which have imposed relatively lower income taxes will lose a smaller proportion of such revenue-Victoria 53 per cent and Tasmania about 47 per cent. Thus, it is urged, the Commonwealth Income Tax Act places the States in a helpless financial position.
The Commonwealth Parliament then, it is said, purports to redress the position which it has created by offering grants of money to the States by the States Grants (Income Tax Reimbursement) Act, No. 20. This Act is to continue until the last day of the first financial year after the war (sec. 8). The annual grants are made to each State upon condition of that State not imposing any tax upon incomes in each relevant year (sec. 4). The grants are shown by the title of the Act to be reimbursements in respect of income-tax revenue lost by the States. The amounts have been fixed by taking the average collections of tax by each State during the years 1939-1940 and 1940-1941. Provision is made (secs. 4 and 5) for adjustments in respect of arrears of tax which may be collected by States under past income-tax Acts.
It is objected that these Acts constitute an attack by the Commonwealth Parliament upon the constitutional power and function of the States to legislate for the imposition of income tax; that taxation is not only a normal, but an essential activity of government; that the Commonwealth Parliament has no power to impede, weaken or destroy that activity; and that the Acts are therefore invalid.
Other objections are that the Acts involve discrimination contrary to sec. 51 (ii.) of the Constitution, and preference contrary to sec. 99, and that the Grants Act is, by reason of the condition of abstinence from imposing income tax attached to the grants, not a valid exercise of the power conferred by sec. 96 of the Constitution to give financial assistance to States. These objections are, it is contended, supported and reinforced by a consideration of the other two Acts which are challenged. They are relied upon to demonstrate the reality of the "scheme," and, it is argued, they fall with the scheme. But they are also the subject of further specific objections which, it is said, show their invalidity, even if the Acts are not regarded together as constituting a single scheme.
The Income Tax (War-time Arrangements) Act 1942 No. 21 is prefaced by a preamble which recites that the Act is enacted with a view to the public safety and defence of the Commonwealth and for the more effective prosecution of the war in which His Majesty is engaged. Sec. 4 provides that the Treasurer may by notice in writing addressed to any State Treasurer bring about the temporary transfer to the Public Service of the Commonwealth of any specified officers of the State service who have been engaged in duties which, in the opinion of the Treasurer, are connected with the assessment or collection of taxes upon incomes. A recommendation from the Commonwealth Public Service Board is required, and the Treasurer must in the notice state that the taking over of the officers is, in his opinion, necessary for certain purposes connected with the war or otherwise for the defence of the Commonwealth (sec. 4). Other sections provide for the retransfer of officers after the Act ceases to operate, for the preservation of the rights of officers, for the control of them while serving the Commonwealth, retirement, and superannuation rights. Sec. 11 is intended to enable the Commonwealth, upon the Treasurer giving to the State Treasurer a notice similar to that already mentioned, to acquire the possession and the use of "any office accommodation, furniture and equipment specified in the notice." Sub-sec. 2 of sec. 11 provides that the compensation for such possession and use shall be as agreed between the Commonwealth and the States or as determined by arbitration. Sec. 13 provides for the transfer to the Commonwealth, as from the commencement of the Act, of all returns and records relating wholly or in part to the assessment or collection of Commonwealth income tax which are in the possession of a State. Sec. 14 is a penalty section. The Act is to continue in operation during the same period as that prescribed for Act No. 20.
The plaintiffs object that this Act cannot be justified under any heading of Commonwealth legislative power, and that it is a direct and deliberate attack upon the essential activities of the States by depriving them of their income tax departments-officers, offices equipment and records, for most of the records relate to State income tax as well as to Commonwealth income tax.
Finally, sec. 31 of the Income Tax Assessment Act 1942 No. 22 is challenged. It is at least intended to give priority to the Commonwealth over the States in respect of payment of income tax. The plaintiffs contend that, upon the true construction of the section, it does more than that, and that it makes it an offence hereafter to pay any State income tax. It is argued that the Commonwealth cannot give itself priority, and, a fortiori , cannot make it an offence to pay State income tax lawfully imposed.
These two latter Acts, it is contended, carry out the scheme which is really sufficiently apparent in the Tax Act and the Grants Act-a scheme to force the States, against their will, out of the income-tax tax field and therefore to interfere with the powers and functions of State Parliaments in legislation and of State Governments in administering the various services of the States for which taxation revenue-determined in both quantity and quality by State Parliaments-is indispensable.
The defendants contend that the four Acts are each valid; that to describe them as a "scheme" is merely to use a dyslogistic description which has no legal significance; that, even if they are considered as constituting a scheme, they are nevertheless valid; and that they are properly enacted under powers specifically conferred upon the Commonwealth Parliament by the Constitution (sec. 51 (ii.)-taxation, sec. 51 (vi.)-defence, and sec. 96-financial assistance to States).
The foregoing summary does not mention all the points which have been argued or all the questions which have been raised-they must be dealt with in due course-but it is sufficient to indicate the nature and importance of the legal problem which is submitted to this Court.
Nature of the Problem.-The problem for the Court is a legal problem which is unknown in countries with a unitary form of government and a supreme legislature. It arises only when legislative powers are divided between legislatures, so that the powers of a law-making agency are limited. That is the case in Australia, where the Commonwealth Parliament, unlike the Parliament at Westminster, depends for its existence and for its powers on a written Constitution. The Constitution says that the Commonwealth Parliament shall have power to make laws with respect to certain subjects (e.g., sec. 51 and other sections such as secs. 73, 77, 78, 79, 96, 122), that it shall have exclusive power to make laws with respect to certain other subjects (secs. 52 and 90), and that it shall not make certain laws at all (e.g., the limitations expressed in secs. 51 (ii.) and (iii.), 92, 99, 114, 116, 117). The Constitution of each State continues, subject to the Commonwealth Constitution (sec. 106), and the State Parliaments continue to possess all their powers not exclusively given to the Commonwealth Parliament by the Constitution or withdrawn from them by the Constitution (sec. 107). If either the Commonwealth Parliament or a State Parliament attempts to make a law which is not within its powers, the attempt fails, because the alleged law is unauthorized and is not a law at all. When both the Commonwealth Parliament and a State Parliament have power to make laws then, in case of inconsistency, the Commonwealth law prevails and the State law, to the extent of the inconsistency, is invalid (sec. 109).
Common expressions, such as: "The courts have declared a statute invalid," sometimes lead to misunderstanding. A pretended law made in excess of power is not and never has been a law at all. Anybody in the country is entitled to disregard it. Naturally he will feel safer if he has a decision of a court in his favour-but such a decision is not an element which produces invalidity in any law. The law is not valid until a court pronounces against it-and thereafter invalid. If it is beyond power it is invalid ab initio .
Thus the controversy before the Court is a legal controversy, not a political controversy. It is not for this or any court to prescribe policy or to seek to give effect to any views or opinions upon policy. We have nothing to do with the wisdom or expediency of legislation. Such questions are for Parliaments and the people. It has been argued that the Acts now in question discriminate, in breach of sec. 51 (ii.) of the Constitution, between States. The Court must consider and deal with such a legal contention. But the Court is not authorized to consider whether the Acts are fair and just as between States-whether some States are being forced, by a political combination against them, to pay an undue share of Commonwealth expenditure or to provide money which other States ought fairly to provide. These are arguments to be used in Parliament and before the people. They raise questions of policy which it is not for the Court to determine or even to consider.
Evidence
There is no material dispute as to facts. The affidavits which have been filed differ in the opinions which are expressed by the deponents rather than in the facts stated. The affidavits are important only in so far as they show the state of facts to which the various Acts apply. Most of the facts mentioned in the affidavits can be ascertained by reference to statutes of the Commonwealth and the States containing provisions as to taxation and estimates or records of revenue and expenditure. These facts are conveniently summarized in the affidavits, and there is no dispute as to them. Neither is there any dispute as to the intention of the defendants to put the Acts, alleged to be invalid, into operation. That fact is the foundation of the plaintiffs' actions.
Admissibility of Evidence
In order to establish the reality of the "scheme" in pursuance of which the Acts are alleged to have been enacted, the plaintiffs sought to put in evidence the report of a Committee on Uniform Taxation and speeches made by the defendant Treasurer in Parliament when moving the second reading of the Bills for the four Acts. This evidence was rejected. The words of a statute, when applied to the state of facts with which the statute deals, speak for themselves. They express the intention of Parliament. A statute may be based upon the report of a committee or of many committees, or upon cabinet memoranda, or upon a resolution of a political party or of a public meeting, or upon an article in a newspaper. The intention of Parliament as expressed in the statute cannot be modified or controlled in a court by reference to any such material. If a statute refers to such material the case is different (Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd.; [F1] and on appeal. [F2] On the general question of the admissibility of reports of commissions & c., see Salkeld v. Johnson; [F3] R. v. West Riding of Yorkshire County Council; [F4] Assam Railways and Trading Co. Ltd. v. Commissioners of Inland Revenue. [F5] The practice as to admitting such evidence is the same in the United States, except that the procedure of Congress in relation to the reports of Congressional Committees has led to the admission in evidence of these reports, but only where the language of an Act is doubtful or obscure (Willoughby on the Constitution of the United States, 2nd ed. (1929), vol. 1, pp. 57 et seq.; Railroad Commission of Wisconsin v. Chicago B. & Q. R. Co.). [F6]
Reports of speeches in Parliament are also irrelevant and inadmissible. There are two Houses of Parliament in the Commonwealth. They consist of one hundred and ten voting members belonging to different parties or to no parties. Members of Parliament frequently have differing opinions, not only as to the merits and real objects of Bills presented, but as to their meaning. Neither the validity nor the interpretation of a statute passed by Parliament can be allowed to depend upon what members, whether Ministers or not, choose to say in parliamentary debate. The Court takes the words of Parliament itself, formally enacted in the statute, as expressing the intention of Parliament (Richards v. McBride; [F7] R. v. Comptroller-General of Patents; [F8] Sydney Municipal Council v. The Commonwealth; [F9] Administrator-General of Bengal v. Prem Lal Mullick). [F10] Possibly the case may be different if the bona fides of Parliament or of the Crown in Parliament can be (Joseph v. Colonial Treasurer (N.S.W.)) [F11] and is challenged: See the cases referred to in Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. [F12] An interesting example of the irrelevance to the question of the validity of a statute of the motives, objects or intentions of the members of a legislature is to be found in Fletcher v. Peck, [F13] where it was alleged that members had been bribed and that the legislature was corrupt. In the present case no question of bona fides arises.
The Acts as a Scheme
In the first place it is contended by the plaintiffs that the Acts together constitute a "scheme" directed towards an unlawful object, namely, the exclusion of State Parliaments from the sphere of legislation upon income tax. Reference is made to Attorney-General for Alberta v. Attorney-General for Canada, [F14] and to Deputy Commissioner of Taxation v. Moran. [F15] The contention that an Act which does not refer to or incorporate any other Act, and which when considered by itself is not invalid, may be held to be invalid by reason of the enactment of other Acts, whether valid or invalid, meets many difficulties. Parliament, when it passes an Act, either has power to pass that Act or has not power to pass that Act. In the former case it is plain that the enactment of other valid legislation cannot affect the validity of the first-mentioned Act if that Act is left unchanged. The enactment of other legislation which is shown to be invalid equally cannot have any effect upon the first-mentioned valid Act, because the other legislative action is completely nugatory and the valid Act simply remains valid.
It is not necessary, however, in the present case to examine these questions. The Tax Act imposes a tax at rates such that there is left little practical room for State income tax. The Grants Act shows the intention of the Commonwealth Parliament that the Parliaments of the States should cease to tax income. The War-time Arrangements Act shows the intention of the Commonwealth Parliament that the Commonwealth should take over the officers and the physical means which are necessary for administering any system of State taxation upon income. As soon as a State which refused to abandon income tax formed a department to collect the tax the Commonwealth could take it over. Sec. 31 of the Income Tax Assessment Act is manifestly designed to make sure that the Government collects Commonwealth income tax, whatever may happen to any claim of a State for income tax, but it is independent of the general "scheme" of excluding the States altogether from the income-tax field. The intention to get rid of State income tax and of State income tax departments is clear in the case of the three first-mentioned Acts, and if such an intention is fatal to the validity of Commonwealth legislation it is not necessary to allege or prove any "scheme." Accordingly, in the present case full weight can be given to the plaintiffs' case without any reference to any "scheme." The defendants do not seek to conceal the scheme: they assert it and justify it. There is here no question of any pretence of doing one thing under the guise of doing another. The legislation which is attacked is not colourable-it admits its character upon its face.
The Tax Act
The Income Tax Act is in its terms an ordinary tax Act, except that it imposes a very high rate of tax. It may be assumed, in favour of the plaintiffs, that the rates of tax which are imposed make it politically impossible for the States to impose further income tax. But it is not possible for the Court to impose limitations upon the Parliament as to the rate of tax which it proposes to impose upon the people. There is no legal principle according to which a tax of 10s. in the pound should be held to be valid, but a tax of 11s. or 15s. or 18s. or 20s. should be held to be invalid. Indeed, it was not disputed by the plaintiffs that, if the Tax Act had been passed without the Grants Act, it would have been unchallengeable, whatever the result might have been in making it impossible for a State to impose or collect income tax.
But it is said that if the object of the Tax Act is to accomplish indirectly what the Commonwealth Parliament cannot do directly, the Act is invalid. The object is not only to collect revenue and to make grants to the States, but to prevent the States imposing taxation upon incomes. This, as has been said, appears to be obvious enough. But the validity of legislation is not to be determined by the motives or the "ultimate end" of a statute. In R. v. Barger [F16] there was an acute difference of opinion as to the true nature of the legislation there in question. But all the justices agreed that, when a legislative power was granted, neither the indirect effect of its exercise nor the motive or object of the legislature in exercising it were relevant to the question of the validity of its exercise in a particular case: See Barger's Case (majority judgment; [F17] per Isaacs J.; [F18] per Higgins J.); [F19] Radio Corporation Pty. Ltd. v. The Commonwealth. [F20]
The Tax Act is a law with respect to taxation. It simply exacts from citizens a contribution to the public revenue. It contains no provisions relating to any other matter. The argument which was successful in Barger's Case [F21] (that what professed to be a Tax Act was shown by its own terms not really to be such an Act) is not available here. The Act is merely and simply an Act imposing taxation upon incomes. The Commonwealth power to legislate is subject to certain limitations. There must be no discrimination between States or parts of States (Constitution, sec. 51 (ii.)), the requirements of sec. 55 must be satisfied: See also secs. 92, 99, 114 and 117. It is clear that the Tax Act does not infringe any of these provisions. It is argued that the Commonwealth cannot use its taxing power so as to prevent the States exercising their taxing power. It may be conceded that the Commonwealth Parliament has no power to prohibit a State exercising its taxing power. But there is no such prohibition in this Tax Act. As already stated, there is no sure foothold for an argument that the Commonwealth Parliament cannot impose so high a tax in relation to a particular subject matter that there is no room for any additional State impost. This argument was not put by the plaintiffs.
The Commonwealth will raise by the Tax Act an amount approximately equivalent to that which would be raised by Commonwealth and State income-tax legislation as formerly operative. The Commonwealth proposes, under the Grants Act, to reimburse the States for lost income tax by paying to them the sums set out in the schedule to the Act, amounting to £33,489,000. Upon the basis of these facts it is argued for the plaintiffs that the Tax Act really raises money for State purposes and not for Commonwealth purposes-to which the power conferred by sec. 51 (ii.) of the Constitution is limited: See Sydney Municipal Council v. The Commonwealth. [F22] But the reply to the plaintiffs' argument is that the Constitution plainly permits the Commonwealth to raise money in order to pay it over to or for the States: See secs. 87, 89, 93, 94, 96, 105, 105A. Payment of money to the States is clearly a possible and proper Commonwealth purpose.
Another argument for the plaintiffs is that the Commonwealth Parliament by its Tax Act excludes the States from necessary sources of revenue, and so itself creates the need for assistance which it then purports to relieve by financial grants. It is urged that such grants do not fall within sec. 96 of the Constitution. But the need for financial assistance to States not infrequently results from Commonwealth policy as expressed in Commonwealth laws (Deputy Federal Commissioner of Taxation (N.S.W.) v. W. A. Moran Pty. Ltd.; [F23] same case on appeal). [F24] Thus the mere fact that a Commonwealth law creates a "need" in a State does not prevent the Commonwealth Parliament from relieving the need by granting financial assistance to a State under sec. 96.
It is further argued for the plaintiffs that the object of the Tax Act, at least to the extent of an amount of £33,489,000 of the revenue to be raised thereby, is to raise money to meet the payment of that amount under the Grants Act; that the Grants Act is invalid for reasons which will be referred to later; that therefore the Tax Act is designed to raise money for an unconstitutional purpose and accordingly is invalid. I assume for the purpose of considering this argument that the Grants Act is for some reason invalid.
In fact the money raised by the Tax Act is not earmarked in any way. It is doubtful whether Commonwealth revenue can be earmarked except at the point of expenditure (i.e., not as revenue) by an appropriation Act-and there is no appropriation section in the Tax Act. The Constitution, sec. 81, provides: "All revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue Fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution." Sec. 83 provides that no money shall be drawn from the Treasury of the Commonwealth except under appropriation made by law. Separate constitutional provisions apply to appropriation Acts (secs. 54 and 56) and to laws imposing taxation (sec. 55). Sec. 54 provides that: "The proposed law which appropriates revenue or moneys for the ordinary annual services of the Government shall deal only with such appropriation." Sec. 55 provides that: "Laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect."
Thus no provision imposing taxation can be included in an appropriation Act and no appropriation of money can be made by any Act imposing taxation. All taxation moneys must pass into the Consolidated Revenue Fund (sec. 81), where their identity is lost, and whence they can be taken only by an appropriation Act. An appropriation Act could provide that a sum measured by the receipts under a particular tax Act should be applied to a particular purpose, but this would mean only that the sum so fixed would be taken out of the general consolidated revenue. Thus there can be no earmarking in the ordinary sense of any Commonwealth revenue.
In this case, however, no attempt has been made to provide that any moneys received under the Tax Act shall be applied towards meeting the payments under the Grants Act. Neither Act contains any such provision. The appropriation made by the Grants Act is made out of the Consolidated Revenue Fund (Grants Act, sec. 7).
It is not necessary in this case to consider the general question whether the Commonwealth appropriation power is limited so that some appropriations would be invalid, not because of an infringement of sec. 54 of the Constitution, but because they were applicable to some unauthorized object. But, even if it can be assumed that an appropriation can be invalid (as here contended with reference to the Grants Act), such invalidity cannot reflect back upon any tax Act so as to make it invalid. Commonwealth Government receipts consist of proceeds of taxation and loans and of payments for services, and they all go into one fund (Constitution, sec. 81). Suppose the Commonwealth Government were, under invalid legislation, or without any pretended legislative justification, to make a payment of one million pounds or one thousand pounds to a person who had no right to receive it. Can it be contended that because the payment might have been made out of receipts from income tax that therefore the income-tax laws of the Commonwealth are invalid? The argument might with equal force be applied to the customs tariff, or the Estate Duties Act, or the Land Tax Act, or to any Act which brings in the money some of which has been or may have been unlawfully expended. It is impossible to accept a contention the necessary result of which, if logically applied, would be that any unauthorized expenditure of Commonwealth money would invalidate all the Acts under or by virtue of which moneys come into the consolidated revenue. Thus the objections made to the Tax Act specifically must be held to fail.
The Grants Act
It is now necessary to deal with the far-reaching and fundamental general objection which is made to the Tax Act considered in association with the other Acts, but which is particularly directed against the Grants Act.
This objection is based upon the following principle which, it is argued, applies to all Commonwealth legislative powers, namely-the Commonwealth cannot direct its legislative powers towards destroying or weakening the constitutional functions or capacities of a State. (A corresponding rule should, it is said, be applied in favour of the Commonwealth as against the States.) In another form the principle is said to be that the Commonwealth cannot use its legislative powers to destroy either "the essential governmental functions" or "the normal activities" of a State.
Before considering sec. 4, which is the main provision of the Grants Act, reference may be made to an objection to the validity of sec. 6. This section enables the Treasurer of the Commonwealth, subject to a maximum limit to be stated in a recommendation of the Commonwealth Grants Commission, to increase the grants to the States. It is objected by the plaintiffs that this provision is not a valid exercise of the power given to the Commonwealth Parliament to grant financial assistance to States under sec. 96 of the Constitution, because it involves an unconstitutional delegation to the Treasurer of legislative power. This objection, however, is answered by Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. [F25]
The principal provision of the Grants Act is sec. 4, which is in the following terms: "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 to this Act against the name of that State, less an amount equal to any arrears of tax collected by or on behalf of that State during that financial year."
Upon this provision the following preliminary comments may be made:-
- (a)
- The Act does not purport to repeal State income-tax legislation. The Commonwealth Parliament cannot do this. It cannot repeal an Act which it has no power to enact: See Attorney-General for Ontario v. Attorney-General for the Dominion; [F26] Great West Saddlery Co. v. The King. [F27] Plainly the Commonwealth Parliament could not enact separate income-tax Acts for separate States. Nor can it repeal such Acts enacted by the States.
- (b)
- The Grants Act does not require, in order that a State should qualify for a grant, that the State-or rather the State Parliament-should abdicate, or purport to abdicate, its power to impose taxes upon incomes. A State Parliament could not bind itself or its successors not to legislate upon a particular subject matter, not even, I should think, by referring a matter to the Commonwealth Parliament under sec. 51 (xxxvii.) of the Constitution-but no decision upon that provision is called for in the present case. The grant becomes payable if the Treasurer is satisfied that a State has not in fact imposed a tax upon incomes in any particular year during the operation of the Acts.
- (c)
- The Act does not purport to deprive the State Parliament of the power to impose an income tax. The Commonwealth Parliament cannot deprive any State of that power: see Constitution, secs. 106, 107. Notwithstanding the Grants Act a State Parliament could at any time impose an income tax. The State would then not benefit by a grant under the Act, but there is nothing in the Grants Act which could make the State income-tax legislation invalid.
- (d)
- The Grants Act offers an inducement to the State Parliaments not to exercise a power the continued existence of which is recognized-the power to impose income tax. The States may or may not yield to this inducement, but there is no legal compulsion to yield.
The Commonwealth may properly induce a State to exercise its powers (e.g. the power to make roads: See Victoria v. The Commonwealth) [F28] by offering a money grant. So also the Commonwealth may properly induce a State by the same means to abstain from exercising its powers. For example, the Commonwealth might wish to exercise the powers given by the Constitution, sec. 51 (xiii.) and (xiv.) to legislate with respect to banking, other than State banking, and insurance, other than State insurance. The Commonwealth might wish to set up some Federal system of banking or insurance without any State competition. If the States were deriving revenue from State banking or State insurance, they might be prepared to retire from such activities upon receiving what they regarded as adequate compensation. The Commonwealth could properly, under Commonwealth legislation, make grants to the States upon condition of them so retiring. The States could not abdicate their powers by binding themselves not to re-enter the vacated field, but if the Commonwealth, aware of this possibility, was prepared to pay money to a State which in fact gave up its system of State banking or insurance, there could be no objection on this ground to the validity of the Commonwealth law which authorized the payment.
But the position is radically different, it is urged, if the so-called inducement practically amounts to coercion. Admittedly the Commonwealth Parliament could not pass a law compelling a State to surrender the power to tax incomes or prohibiting the exercise of that power by a State. Equally, it is said, the Commonwealth cannot lawfully make an offer of money to a State which, under the conditions which actually exist, the State cannot, on political or economic grounds, really refuse.
This identification of a very attractive inducement with legal compulsion is not convincing. Action may be brought about by temptation-by offering a reward-or by compulsion. But temptation is not compulsion. A person whose hand is physically propelled by another person against his will so that it strikes a blow is not guilty of assault. But it would be no defence to allege that he really could not help striking the blow because he was offered £1,000 for doing it.
This question has been considered in the Supreme Court of the United States of America: See Massachusetts v. Mellon, [F29] where it was held that a Federal statute making money available to States which were willing to co-operate with Congress in reducing maternal and infant mortality imposed no obligation, but simply extended "an option which the State is free to accept or reject." On the other hand, in United States v. Butler (The Hoosac Mills Case, a New Deal case) [F30] it was said that an offer to a farmer the refusal of which may involve financial ruin to him amounts to coercion-"coercion by economic pressure. The asserted power of choice is illusory." Stone J., dissenting with Brandeis and Cardozo JJ., took a contrary view: "Threat of loss, not hope of gain, is the essence of economic coercion". [F31]
A somewhat similar question, but in a different form, arose in Carter v. Carter Coal Co., [F32] where the majority took the view that an offer of exemption from a penalty amounted to compulsion. The authority of the latter two cases is, however, greatly diminished, if not destroyed, by the more recent case of Steward Machine Co. v. Davis. [F33] A Federal law provided for a rebate to taxpayers of up to 90 per cent of a Federal tax if the taxpayer contributed to a State unemployment scheme approved by the Secretary of the Federal Treasury. It was urged that this was an unconstitutional attempt to coerce the States into enacting unemployment legislation approved by the Federal Government-that Government itself having no power to legislate upon the subject of unemployment. The contention was rejected. It was said:-
"Every rebate ... is in some measure a temptation. But to hold that motive or temptation is equivalent to coercion is to plunge the law in endless difficulties". [F34]
Sutherland J. (dissenting) agreed in this view:-
"I agree that the States are not coerced by the Federal legislation into adopting unemployment legislation. The provisions of the Federal law may operate to induce the State to pass an employment law if it regards such action to be in its interest. But that is not coercion". [F35]
Thus the now prevailing opinion of the Supreme Court of the United States is in accord with the view which has been stated above. The Grants Act does not compel the States to abandon their legislative power to impose a tax upon incomes. States which do not abstain from imposing income tax cannot be said to be acting unlawfully. There is no command that they shall not impose such a tax.
State Functions and Capacities.-It is clear, however, that the Grants Act is intended to bring about the result that the State shall not impose such a tax. The Act therefore must meet the challenge of the plaintiffs that the Commonwealth cannot direct its legislative powers against the constitutional functions or capacities-against the essential functions or the normal activities-of a State.
This statement reminds one who has followed the development of Australian constitutional law of "the rule in D'Emden v. Pedder1(1904) 1 C.L.R. 91 .", which was stated in the following terms: "When a State attempts to give to its legislative or executive authority an operation which, if valid, would fetter, control, or interfere with, the free exercise of the legislative or executive power of the Commonwealth, the attempt, unless expressly authorized by the Constitution, is to that extent invalid and inoperative". [F37] A corresponding rule was held to apply against the Commonwealth in favour of the States in the Railway Servants' Case. [F38]
Thus the doctrine of the reciprocal immunity of Federal and State instrumentalities was introduced. The latter case was overruled in the Engineers' Case, [F39] and the exercise of Commonwealth legislative powers was held not to be subject to any implied prohibition prescribing non-interference with State instrumentalities, though, as pointed out in the Engineers' Case, [F40] and again in West v. Commissioner of Taxation (N.S.W.) [F41] (per Dixon J.; [F42] per Evatt J.), [F43] the nature of the State power or Commonwealth power concerned must be considered in each case. In the Engineers' Case [F44] the rule in D'Emden v. Pedder, [F45] distinctly stated as a limitation upon the exercise of the powers of the States only, was held to be sound on the basis of sec. 109 of the Constitution, which provides that: "When a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid."
Questions relating to the non-statutory prerogative were left open in the Engineers' Case. [F46] No question affecting such prerogative arises in the present case.
It is argued for the plaintiffs that the authorities as they now stand leave it open to the Court to hold that, while there is no general principle of exemption of State instrumentalities from the exercise of Federal power, the Federal nature of the Constitution, involving as it does the continued existence of the States, does involve the principle that the Commonwealth cannot use its legislative powers to destroy or weaken the constitutional functions or capacities or to control the normal activities of the States. It will be convenient to quote certain passages from cases upon which the plaintiffs rely which will show the plaintiffs' contention in its full strength. R. v. Barger.
"It is an inherent consequence of the division of powers between governmental authorities that neither authority is to hamper or impede the other in the exercise of their respective powers" (R. v. Barger, [F47] per Isaacs J.).
It should be observed, however, that this statement is completed by the following important addition:-
"But that doctrine has no relation to the extent of the powers themselves; it assumes the delimitation aliunde. It is contrary to reason to shorten the expressly granted powers by the undefined residuum. As well might the precedent gift in a will be limited by first assuming the extent of the ultimate residue". [F48] This proposition anticipates the decision in the Engineers' Case [F49] that express Commonwealth powers cannot be limited by reserved State powers.Pirrie v. McFarlane.
"I can find" (in certain Canadian cases) "no principle governing this case, unless it be the natural and fundamental principle 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. Such attempted destruction or weakening is prima facie outside the respective grants of power" (Pirrie v. McFarlane, [F50] per Isaacs J., quoted by Dixon J. in West v. Commissioner of Taxation (N.S.W.)). [F51] In this passage emphasis is placed upon the grant of exclusive powers to both Dominion and Provinces-a feature which is absent from the Commonwealth Constitution.West v. Commissioner of Taxation.
"It must at least be implied in the Constitution, as an instrument of Federal Government, that neither the Commonwealth nor a State legislature is at liberty to direct its legislation toward the destruction of the normal activities of the Commonwealth or States. Such a principle is not inconsistent with the rejection by the Engineers' Case1(1920) 28 C.L.R. 129 . of the earlier doctrine of immunity of instrumentalities" (per Evatt J. in West v. Commissioner of Taxation (N.S.W.)). [F53]
"It is quite erroneous to regard the Engineers' Case1(1920) 28 C.L.R. 129 . as having established a new and valid constitutional principle, under which, either by direct declaration as to the termination of specified State legislation, or as to the States' legislative power, or by indirectly creating conditions or qualities under Commonwealth legislation which will achieve the same objectives, the Commonwealth Parliament is enabled, by the exercise of its own legislative power, to rid itself of any State legislative interference or impediment. This constitutional principle or doctrine is a dangerous feature of the Engineers' Case1(1920) 28 C.L.R. 129 . and any proposed application of it should be most carefully watched" (also per Evatt J. in the same case). [F56]Caron v. The King.
"In Great West Saddlery Co. v. The King4[1921] 2 A.C. 91. ... a general principle was laid down that no Provincial legislature could use its special powers as an indirect means of destroying powers given by the Parliament of Canada. By parity of reason the Parliament of Canada could not exercise its power of taxation so as to destroy the capacity of officials lawfully appointed by the Province" (Caron v. The King). [F58]James v. The Commonwealth.
"The powers of the States were left unaffected by the Constitution except in so far as the contrary was expressly provided; subject to that each State remained sovereign within its own sphere. The powers of the State within those limits are as plenary as are the powers of the Commonwealth" (James v. The Commonwealth). [F59]
The discussion of the question may begin with a consideration of the last-quoted passage. It is unnecessary in the present case-and probably unnecessary in any purely legal controversy-to consider in what sense a State which is part of a Federal Commonwealth under the British Crown can be said to be "a sovereign State": See The Commonwealth v. New South Wales, [F60] and West v. Commissioner of Taxation (N.S.W.). [F61] The legislative powers of the States depend upon their Constitutions, which, speaking generally, give power to legislate for the peace, order and good government of the States. There are certain limitations upon these powers:-(a) They must not be exercised to pass laws which are repugnant to applicable Imperial laws: See Colonial Laws Validity Act 1865, sec. 2. (b) Some powers (Constitution, sec. 107) which State Parliaments would otherwise possess have been exclusively vested in the Parliament of the Commonwealth (see, e.g., secs. 52, 90) or withdrawn from the Parliaments of the States (see, e.g., such prohibitions as are contained in secs. 92, 114, 115, 117). (c) Laws of the State which are inconsistent with laws of the Commonwealth are invalid to the extent of the inconsistency (sec. 109). Thus if both the Commonwealth Parliament and the State Parliaments have power to pass a law with respect to a certain subject-e.g., bankruptcy-the Commonwealth law prevails in the event of inconsistency. The powers of the States are, it is true, "plenary within their limits," but those limits may be determined in many matters by Commonwealth laws which may make State laws invalid.
The Commonwealth Parliament is limited in its legislation by the grants of power made by the Constitution and by the prohibitions contained in the Constitution, as well as by the Colonial Laws Validity Act, (the Statute of Westminster 1931 not having been adopted by the Commonwealth). But no law which is within a Commonwealth power can be rendered invalid by any State law, though a State law which, apart from action by the Commonwealth Parliament, would be valid, may be invalid by reason of inconsistent provisions in a Commonwealth law (sec. 109).
In this case the plaintiffs do not rely on any express provision in the Commonwealth Constitution for the purpose of showing that the Tax Act and the Grants Act, as well as the other Acts considered together with them, are invalid. They rely upon the alleged implied prohibition as to non-interference by the Commonwealth with State constitutional functions, capacities or activities. They point to secs. 106 and 107 of the Constitution, which have already been quoted. These sections, however, do not confer any powers upon a State or upon a State Parliament. They preserve existing powers, but, as to State Constitutions (sec. 106) "subject to the" (Commonwealth) "Constitution," and, as to State legislative powers, (sec. 107) only after withdrawals and exclusions effected by the Constitution, and then subject to the effect of overriding Commonwealth laws where the Commonwealth Parliament has power to legislate (sec. 109). These provisions cannot be relied upon to limit by either express or implied prohibition any provision conferring powers upon the Commonwealth. They do make it clear that the Commonwealth possesses only the powers granted by the Constitution. But they do not limit the sphere or restrict the operation of the powers which are so granted.
The Engineers' Case [F62] did not deny the existence of implied powers or prohibitions (see the report). [F63] Should then the particular implication for which the plaintiffs contend be made upon some ground other than the express terms of secs. 106 and 107 of the Constitution?
In the first place it may be admitted that revenue is essential to the existence of any organized State, and that there cannot be either reliable or sufficient revenue without power of taxation. The power of taxation may fairly be said to be an essential function of a State.
But this admission states a universal opinion. There is no universal or even general opinion as to what are the essential functions, capacities, powers, or activities of a State. Some would limit them to the administration of justice and police and necessary associated activities. There are those who object to State action in relation to health, education, and the development of natural resources. On the other hand, many would regard the provision of social services as an essential function of government. When Lord Watson said in Coomber v. Justices of Berks [F64] that "the administration of justice, the maintenance of order, and the repression of crime are among the primary and inalienable functions of a constitutional government," he was not purporting to give an exhaustive definition of the functions of government. In a fully self-governing country where a parliament determines legislative policy and an executive government carries it out, any activity may become a function of government if parliament so determines. It is not for a court to impose upon any parliament any political doctrine as to what are and what are not functions of government, or to attempt the impossible task of distinguishing, within functions of government, between essential and non-essential or between normal or abnormal. There is no sure basis for such a distinction. Only the firm establishment of some political doctrine as an obligatory dogma could bring about certainty in such a sphere, and Australia has not come to that.
Thus the principle for which the plaintiffs contend must be applied, if at all, in protection of all that a State chooses to do, and it must mean that Commonwealth legislation cannot be directed to weaken or destroy any State function or activity whatsoever.
But it cannot be denied that Commonwealth legislation may be valid though it does in fact weaken or destroy, and even is intended to weaken or destroy, some State activity. Sec. 109 shows that this must be so in many cases. Commonwealth laws have in fact put an end to the existence of State Courts of Bankruptcy and State Patent, Trade Mark and Copyright Departments. The Commonwealth laws are not invalid on that account. They have produced the results stated just because they are valid.
It is true that the Commonwealth Parliament has no power to make laws with respect to the capacity and functions of a State Parliament. It has already been stated that the Commonwealth Parliament could not pass a law to prohibit a State Parliament from legislating in general or from legislating upon some particular subject matter. But this limit upon the power of the Commonwealth Parliament does not arise from any prohibition or limitation to be implied from the Constitution. It is simply the result of the absence of power in the Commonwealth Parliament to pass laws with respect to the functions or powers of State Parliaments. The Commonwealth Parliament cannot legislate with respect to any subject whatever unless a power to do so is conferred on it by the Constitution. No power such as that mentioned is given by the Constitution to the Parliament.
But the Acts in question are not laws with respect to State functions. They do not command or prohibit any action by the State or by the State Parliament.
Indirect Effects of Laws
A law may produce an effect in relation to a subject matter without being a law with respect to that subject matter. Questions of motive and object are irrelevant to the question of the true nature of a law. The nature (or "substance" if that word is preferred) of a law is to be determined by what it does, not by the effect in relation to other matters of what the law does. A prohibition of import or a very high duty in a customs tariff may bring about the closing of business enterprises in a State. But the tariff is not a law with respect to those enterprises. Similarly a State law may prohibit the carrying on of occupations with the result that they are necessarily abandoned, with perhaps great consequential loss to the Commonwealth in customs duties or income-tax receipts. But the State law does not for this reason become a law with respect to customs duties or income tax. The true nature of a law is to be ascertained by examining its terms and, speaking generally, ascertaining what it does in relation to duties, rights or powers which it creates, abolishes or regulates. The question may be put in these terms: "What does the law do in the way of changing or creating or destroying duties or rights or powers?" The consequential effects are irrelevant for this purpose. Even though an indirect consequence of an Act, which consequence could not be directly achieved by the legislature, is contemplated and desired by Parliament, that fact is not relevant to the validity of the Act (R. v. Barger; [F65] Osborne v. The Commonwealth; [F66] Attorney-General for Queensland v. Attorney-General for the Commonwealth; [F67] Sonzinsky v. United States, [F68] and see note in the Lawyers' Edition). [F69]
This principle should be remembered when it is said that a Parliament of limited powers cannot do indirectly what it cannot do directly. This proposition is of value when (as has not infrequently happened in Canada) it is contended that an Act is colourable in character in that, under the guise or pretence of doing something permitted, it is in reality doing something prohibited or beyond power. The relevant Canadian cases generally deal with the difficulties arising from the grant of exclusive powers to both Dominion and Provinces. The emphasis placed upon this point may be noted in John Deere Plow Co. Ltd. v. Wharton; [F70] Great West Saddlery Co. v. The King; [F71] Attorney-General for Ontario v. Reciprocal Insurers. [F72] When the areas of such competing powers overlap, and the challenged law is, for example, both a law relating to insurance (Provincial power) and to crime (Dominion power), a court must make a choice as to the category to which the law should be assigned: See, e.g., Attorney-General for Ontario v. Reciprocal Insurers; [F73] In re Insurance Act of Canada, [F74] where the decision against the Dominion was assisted by the fact that the Dominion Parliament has sought to give itself power by a palpably "false definition"-a provision that a company should be deemed to "immigrate" into Canada if it sent to Canada a document appointing an agent there: see the report. [F75] Upon this difficult question the Privy Council has ultimately decided to abstain from laying down any general principle, leaving the question of ultra vires to "be determined in each case as it arises, for no general test applicable to all cases can safely be laid down" (Attorney-General for Alberta v. Attorney-General for Canada). [F76] The Commonwealth Constitution does not confer any exclusive powers upon the States. Subject to the Constitution the States are left with powers not given exclusively to the Commonwealth or withdrawn from the States (secs. 106, 107). Sec. 109 then gives to any Commonwealth law, whether made under an exclusive or under a concurrent power, overriding operation over any State law. Thus the difficulties of choosing between two heads of power, stated to be exclusive, but in fact overlapping, do not arise in Australia.
The problem, as explained in the Engineers' Case, [F77] is the different, though not always easy, problem of deciding whether a particular Commonwealth law falls within a head of Commonwealth power: if it does, it is immaterial that the States may also have power to legislate on the matter. If the law falls within the Commonwealth power, the law is valid and fully operative, notwithstanding any State law. Barger's Case [F78] is an illustration of the difficulty of deciding whether a particular law really does fall within a granted power, but, as already pointed out, Barger's Case [F79] in all the judgments rejects considerations of indirect consequences as being irrelevant material.
If the validity of a State law is in question, the Court has to decide whether the law is a law for the peace, order and good government of a State: if not (as if it purported to prohibit the Commonwealth Parliament from exercising its powers) it is invalid because beyond State power. If not beyond State power for this reason, it may be repugnant to applicable Imperial law (Colonial Laws Validity Act 1865, sec. 2) or trench upon Commonwealth exclusive power, or be opposed to a prohibition in the Constitution (e.g., secs. 92, 114), or be inconsistent with a valid Federal law (sec. 109). In any of these cases it is invalid. In none of the instances mentioned can any consideration of indirect consequences be relevant.
When a power is defined by reference to purpose, other considerations arise (Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd.). [F80] So also if there were a prohibition against attaining a result by any method whatever. If, for example, the Commonwealth Constitution contained a provision that no Commonwealth law should by any means bring about the result of a discrimination between States, the indirect consequential effects of the law would have to be examined. But the Constitution contains no such provision. For example, taxation laws may not discriminate between States (sec. 51 (ii.)); laws of trade, commerce or revenue may not give preference to a State (sec. 99). These provisions affect only laws of the stated character. Thus there may be discrimination between States and preferences to States under sec. 96-grants to States-because that section is not subject to any limitation with respect to discrimination (Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd.). [F81]
Thus, although the Commonwealth Parliament cannot validly pass laws limiting the functions of State Parliaments-and vice versa-the Tax Act and the Grants Act are not invalid on that ground. They do not give any command or impose any prohibition with respect to the exercise of any State power, legislative or other. The Tax Act simply imposes Commonwealth taxation, and is authorized by sec. 51 (ii.) of the Constitution. The Grants Act authorizes payments to States which choose to abstain from imposing income tax, and is valid by reason of sec. 96 of the Constitution, unless it is bad as involving some prohibited discrimination or preference. It is now necessary to deal specifically with that objection.
Discrimination
Sec. 96 provides that: "During a period of ten years after the establishment of the Commonwealth and thereafter until the Parliament otherwise provides, the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit." Plainly under this provision financial assistance could be given to a single State only. Thus variation in amounts given to different States is permissible. The section contains no express or implied prohibition against any kind of discrimination: See references to Moran's Case. [F82] Thus it is no objection to the Grants Act that States which abandon income tax are given a grant while those who retain income tax get nothing.
So also the indirect effect of varying grants upon the fortunes of taxpayers of different States is an irrelevant circumstance. The Tax Act itself is a general Act, applying to all persons in all States without discrimination. The States, not the taxpayers, receive varying amounts under the Grants Act. As taxpayers in some States will this year pay more in Commonwealth income tax than they did last year in both Commonwealth and State income tax, and taxpayers in other States will pay less than last year, it is said that the Tax Act, read with the Grants Act, discriminates between States. But a comparison of this year with last year or any past year is not to the point. If the Commonwealth had not enacted the challenged Acts, no-one can say what the Commonwealth or State rates of tax would have been this year. The question whether these facts unlawfully discriminate between States cannot be answered by any consideration of the actual position of taxpayers under past legislation (which was alterable by one Commonwealth and six State Parliaments severally) or by a speculation as to the taxation which would probably have been imposed by Commonwealth and States if the Acts in question had not been passed. Further, as already pointed out, the proceeds of the Tax Act simply go into general consolidated revenue, together with the receipts from other taxes and other moneys, such as the revenue derived from the post office. Then a portion of this general fund is applied, to the extent of £33,489,000, in making grants to States, if the States are willing to accept them. There is no reduction of Commonwealth income tax to taxpayers in particular States.
It is true that in Moran v. Deputy Commissioner of Taxation [F83] the Privy Council pronounced a warning that possibly (no decision was given on the question) a grant under sec. 96 might be used for the purpose of effecting discrimination in regard to taxation-"under the guise or pretence of assisting a State with money." It may be that, with a very misguided Parliament, such a case is perhaps conceivable. If the proceeds of a tax could be earmarked and if such proceeds were then distributed in whole or in part among the States upon a discriminatory basis the case apparently contemplated by the Privy Council would arise. Reference has however already been made to the difficulties which, under the Commonwealth Constitution, stand in the way of earmarking Commonwealth revenue in any respect. In the Hoosac Mills Case [F84] the Supreme Court of the United States considered such a case as that suggested. The Agricultural Adjustment Act was there held invalid because the proceeds of a tax were identified with a purpose to which the Act was applied, that purpose being held to be an unlawful purpose. It was held to be unlawful because it involved an invasion by the Federal Government of the reserved powers of the States. [F85] This decision depended upon the doctrine of immunity of State instrumentalities which, in Australia, was rejected in the Engineers' Case [F86] -See the discussion of this case in The Supreme Court and the National Will by Dean Alfange, pp. 180 et seq. If the proceeds of a Commonwealth tax were as such devoted to some unlawful purpose, the case contemplated by the Privy Council might arise and it would be similar to the Hoosac Mills Case. [F87] But it will not be easy to find a case where it can properly be held that an appropriation Act making grants to States is invalid because it involves an infringement of the provision that Acts with respect to taxation shall not discriminate between States or parts of States.
The Tax Act now under consideration does not so discriminate. It imposes the same tax at the same rates upon all persons in all States throughout Australia. It does not make any discrimination whatever between States-it does not even refer to any State. The Act is also a law of revenue, and therefore must not give preference to any State (sec. 99). The Act does not give preference to any State. The Grants Act is an Act dealing with expenditure-an appropriation Act. It does draw distinctions between States. There is no constitutional reason why it should not do so. There never has been and there cannot be uniformity in payments made by the Commonwealth in or to States or persons in States. Discrimination in expenditure between States is found in every Commonwealth budget and in many appropriation Acts. It has never been argued either that such differentiation should be avoided or that it could be avoided. Conclusion as to Tax Act and Grants Act
Thus the objections to the Tax Act and the Grants Act fail, whether those Acts are considered separately or as part of a scheme to bring about the abandonment by the States of the raising of revenue by taxation of incomes.
It is perhaps not out of place to point out that the scheme which the Commonwealth has applied to income tax of imposing rates so high as practically to exclude State taxation could be applied to other taxes so as to make the States almost completely dependent, financially and therefore generally, upon the Commonwealth. If the Commonwealth Parliament, in a grants Act, simply provided for the payment of moneys to States, without attaching any conditions whatever, none of the legislation could be challenged by any of the arguments submitted to the Court in these cases. The amount of the grants could be determined in fact by the satisfaction of the Commonwealth with the policies, legislative or other, of the respective States, no reference being made to such matters in any Commonwealth statute. Thus, if the Commonwealth Parliament were prepared to pass such legislation, all State powers would be controlled by the Commonwealth-a result which would mean the end of the political independence of the States. Such a result cannot be prevented by any legal decision. The determination of the propriety of any such policy must rest with the Commonwealth Parliament and ultimately with the people. The remedy for alleged abuse of power or for the use of power to promote what are thought to be improper objects is to be found in the political arena and not in the Courts.
Income Tax (War-time Arrangements) Act 1942
The provisions of this Act have already been stated. Under this Act, if it is valid, the Commonwealth can, during the war, and a stated period thereafter, take over all the personnel, present or future, of any State income tax department, with its office accommodation, present or future, and office equipment, present or future. Thus the operation of the Act would make the existence of such a department impossible.
Compensation for the possession and use of office accommodation, furniture and equipment is to be determined, in default of agreement, by an arbitrator appointed by the Governor-General (sec. 11 (3)). No provision is made for compensation in respect of returns and records (sec. 13). The Commonwealth Parliament has power to make laws with respect to the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws (Constitution, sec. 51 (xxxi.)). If this is the only power of the Parliament to legislate for the acquisition of property, it may be questioned whether the determination of compensation by an arbitrator appointed by the acquiring Commonwealth satisfies the requirement of just terms. The taking over of all returns and records, even with a right of access by the States (which is provided for by sec. 13), but without any compensation, might well be held not to be "on just terms." These questions, however, were not argued.
Commonwealth and State income taxes have been collected by a single staff in each State under agreements made between the Commonwealth and the States under the Commonwealth Income Tax Collection Act 1923-1940. The taxes have been collected by the Commonwealth in Western Australia, and in the other States by the States. The actual agreements are not before the Court. Sec. 12 of the War-time Arrangements Act provides that the agreements shall, notwithstanding any provisions contained in them, be suspended as from a date fixed by proclamation until the Act ceases to operate. No argument was heard as to the power of the Commonwealth Parliament to suspend these agreements. Probably they are political arrangements not creating legal obligations between the parties and are terminable at the will of either party. The effect of the application of the War-time Arrangements Act would be that the same staff or some of the same staff would continue to do the same work as if the Act had not been passed, but under Commonwealth control in all States instead of only in Western Australia. Any saving of manpower brought about by the simplification resulting from the abolition of future State income tax could be effected whether or not the War-time Arrangements Act was applied.
It is conceded that, under a general legislative provision, such as the Defence Act or reg. 4 of Statutory Rule No. 77 of 1942 (regulations under the National Security Act 1939-1940), the Commonwealth can in time of war, compel the services of any person (including State public servants) for any purpose connected with the defence of the country. But it is a different thing to select a particular class of persons as such and to compel their services only. For example, though under a defence Act the Commonwealth Government can call up citizens for service in the military forces, it would be quite a different thing to pass a law imposing liability to service upon the residents of certain specified States only. Such a law would be prohibited by sec. 117 of the Constitution, which provides that: "A subject of the Queen, resident in any State, shall not be subject in any other State to any disability or discrimination which would not be equally applicable to him if he were a subject of the Queen resident in such other State."
So also the Commonwealth can and does compel the services of citizens in the army irrespective of their religious beliefs. But it could not legislate to apply compulsion only to persons who professed a particular religion (sec. 116). Thus there is a very real difference between general legislation and legislation limited to a particular class.
Apart from the defence power it would hardly be argued that the Commonwealth could, as it were, forcibly seize a State department, its personnel, accommodation and equipment, under a law specifically directed to this object. The reason for the invalidity of such a law would be that it was a law with respect to a State department-a matter not within Commonwealth legislative powers. The Commonwealth can, whenever it chooses, establish its own income tax department. The Commonwealth can hire employees even if they belong to a State service, it can take property even if it belongs to a State: but to do these things under general legislation is a very different thing from completely and specifically liquidating a State department and preventing it from being re-established. There is no Commonwealth power to legislate upon such a matter-unless the defence power (sec. 51 (vi.)) can be called in aid.
The defence power was widely interpreted and applied in Farey v. Burvett. [F88] But that case shows that even this power has a limit-it is not sufficient to wave the flag as if that were a conclusive argument. The defence power itself is subject to the Constitution (sec. 51, introductory words). Both the extent of the power and the limitation to which it is subject appear from what was said in Farey v. Burvett. [F89] Griffith C.J. said:
"One test, however, must always be applied, namely: Can the measure in question conduce to the efficiency of the forces of the Empire, or is the connection of cause and effect between the measure and the desired efficiency so remote that the one cannot reasonably be regarded as affecting the other?". [F90]
Barton J. said that if the particular provision was capable of assisting in defence, that was enough. [F91] Isaacs J. said: "If the measure questioned may conceivably in such circumstances even incidentally aid the effectuation of the power of defence, the Court must hold its hand and leave the rest to the judgment and wisdom and discretion of the Parliament and the Executive it controls-for they alone have the information, the knowledge, and the experience and also, by the Constitution, the authority to judge of the situation and lead the nation to the desired end". [F92] So, also, per Higgins J.: "It is not for this Court to decide that the Act does aid defence, or how it aids defence; it is enough that it is capable of being an Act to aid defence, enough that the statement of Parliament is not necessarily untrue". [F93] Unless there is to be no definition whatever of defence, so that the defence power is absolutely unlimited, there could be no wider definition or description than in the passages quoted. But the Commonwealth can support legislation under the power only if it can satisfy a court that there is some connection between the legislation in question and the defence of the country.
What connection is here suggested? The preamble to the Act states that with a view to the public safety and defence of the Commonwealth and of the States and for the more effectual prosecution of the war it is necessary and convenient to make the provisions contained in the Act. The Court should treat this expression of the view of Parliament with respect. In a doubtful case it might turn the scale, the presumption being in favour of the validity of Acts rather than of invalidity. But such a declaration cannot be regarded as conclusive. A Parliament of limited powers cannot arrogate a power to itself by attaching a label to a statute. Similar considerations apply to the provisions contained in secs. 4 and 11 that the Treasurer may use powers under the Act if in his opinion it is necessary for the defence of the Commonwealth & c. to do so.
It is contended for the Commonwealth that a single system of Commonwealth income tax in substitution for the twenty-three income taxes now operating (six of which, it may be observed, are Commonwealth taxes) will improve general efficiency by simplifying income-tax administration and by making less onerous the duties of citizens in making returns, and so releasing manpower at a time when manpower is urgently needed for the war. But the War-time Arrangements Act has no relation to these objectives. The attainment of them depends upon the effect of the Tax Act and the Grants Act in establishing a single system of income taxation. If, as is expected, the uniform system reduces the work to be done by civil servants, accountants and clerks in relation to income tax, the Commonwealth will have at its disposal under other legislation the services of any persons whom it chooses to call up. The saving of the unnecessary and useless work will be exactly the same whether or not the Commonwealth takes over the State departments, the Commonwealth itself determining in either case what work is unnecessary or useless.
The only other argument used to show a connection between this Act and defence was the suggestion that the Commonwealth could organize and administer an income tax department more efficiently than the States, and that superior Commonwealth management would prevent waste of manpower. This proposition cannot be assumed-and it has not been proved. Further, such an argument would justify the Commonwealth in taking over any State department whatever under the defence power upon the plea that Commonwealth management was always more efficient than State management. The Court cannot base any decision upon an assumption so obviously disputable.
My conclusion, therefore, is that Act No. 21, the Income Tax (War-time Arrangements) Act 1942 is invalid, because it is beyond the powers of the Commonwealth Parliament.
Income Tax Assessment Act 1942, sec. 31
The provision in this Act which is attacked by the plaintiffs is sec. 31, which inserts a new sec. 221 in the principal Act. Sub-sec. 1, par. a, is as follows:-
"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."
Par. b gives effect to Commonwealth priority in payment of income tax in bankruptcy and in the liquidation of a company, and provides a penalty for infringement of the section of one hundred pounds or six months' imprisonment or both, together with payment of up to double the amount of tax due. Sub-sec. 2 prescribes the duration of the Act as in the case of the Grants Act, sec. 16.
Two objections are raised by the plaintiffs to this provision. First, it is contended that the Commonwealth Parliament has no power to give priority to the obligation to pay Commonwealth income tax over a lawful obligation to pay State income tax. Secondly, it is contended that, upon its true construction, this section does more than give priority. It is argued that it prevents any payment whatever of any future State income tax as long as the section is in operation.
The first objection cannot be supported. It is true that Dixon J. in Federal Commissioner of Taxation v. Official Liquidator of E. O. Farley Ltd. [F94] and Evatt J. in West v. Commissioner of Taxation (N.S.W.) [F95] expressed opinions which may be called in aid of the view that the Commonwealth cannot, by a law passed under the taxation power, give itself priority over the States. But the weight of authority is to the contrary effect: The Commonwealth v. State of Queensland [F96] (per Isaacs and Rich JJ. [F97] ; per Higgins J. [F98] ; per Gavan Duffy and Starke JJ. [F99] ); R. v. The Commonwealth Court of Conciliation and Arbitration [F100] (per Isaacs J. [F101] ; and per Gavan Duffy, Rich and Starke JJ. [F102] ); West v. Commissioner of Taxation (N.S.W.) [F103] (per Latham C.J. [F104] ; per Rich J. [F105] ; per Starke J. [F106] ); and per Evatt J. in Federal Commissioner of Taxation v. Official Liquidator of E. O. Farley Ltd. [F107] . Apart from these authorities the case of In re Silver Brothers Ltd. [F108] is really conclusive on the matter. The Parliament of the Dominion of Canada has power to make laws in relation to-"The raising of money by any mode or system of taxation" (British North America Act 1867, sec. 91 (3)). Apart from the power to make laws with respect to bankruptcy (see the report [F109] ) the Privy Council held that a provision was valid which made the liability for a Dominion war revenue tax a first charge upon the assets of the taxpayer, and also enacted that such liability should rank for payment in priority to all other claims of whatsoever kind with a certain exception. It was said: "The two taxations, Dominion and Provincial, can stand side by side without interfering with each other, but as soon as you come to the concomitant privileges of absolute priority they cannot stand side by side and must clash; consequently the Dominion must prevail" [F110] . This decision does not depend upon any special provisions of the Canadian Constitution. It is simply an interpretation of a power to make laws in relation to the subject of taxation. The decision is applicable to the Commonwealth Constitution. Thus the Commonwealth has power, by a properly framed law, to make Commonwealth taxation effective by giving priority to the liability to pay such taxation over the liability to pay State taxation. Accordingly the first objection fails.
The second objection depends upon the precise effect of the words of sec. 31. The defendants contend that they mean only that State income tax in respect of any year shall not be paid until Commonwealth income tax in respect of that year has been paid. The plaintiffs contend that, whatever may have been thought to be the effect of the section, it really provides that no State income tax can be paid for any year until Commonwealth income tax for that year and for future years has been paid. This result follows, it is said, from the fact that the Tax Act imposes tax on all future years of income (Tax Act, secs. 4, 7 (2)).
Sec. 31 provides that a taxpayer shall not pay State tax until he has paid some other Commonwealth tax. The State tax is described in the following words: "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." The Tax Act is an Act with which the Assessment Act is incorporated (Tax Act, sec. 3).
The Commonwealth tax which under penalty must be paid before the State tax, is "that last-mentioned tax," i.e., "a tax imposed by or under any Act with which this Act" (the Assessment Act) "is incorporated"-i.e., by the Tax Act.
The plaintiffs argue that as the Tax Act imposes tax for all future years, no State income tax can be paid on the income of any year until all future Commonwealth income taxes have been paid. Such an interpretation of the section should not be adopted unless no other interpretation is reasonably open. It is possible to construe the words "that last-mentioned tax" as referring only to Commonwealth tax upon the year of income previously mentioned. This construction produces a reasonable result and preserves the validity of the section. It should therefore be adopted.
In my opinion the declarations sought that the Tax Act, the Grants Act and sec. 31 of the Assessment Act are invalid should not be made but a declaration should be made that the War-time Arrangements Act is invalid, and an injunction limited to that Act should be granted in each action as asked. The opinion of the majority of the Court is that none of the declarations or injunctions sought by the plaintiffs should be made or granted. The result therefore is that the actions should be dismissed. There will be no order as to costs.
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