PART 3 of "The Tax Reform Bill and the Constitutional Problem"
Open Letter by David Keane, November 1998


The Commonwealth government has no Constitutional authority to financially pressure the States, by selectively administering money derived from collection of income tax, or GST [Goods and Services] tax, or by directing the manner in which the States should acquire their revenues.

The plain fact is that the Commonwealth government does not have exclusive Constitutional authority to collect income tax, GST tax, or other taxes apart from customs and excise.  Before 1942, both Commonwealth and States collected income tax, and the constitutional validity of this arrangement has never been disputed.

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In Uniform Tax (1942) the High Court held valid all the essential elements by which the Commonwealth forced the States out of the income tax field. The measure under which the Commonwealth compulsorily acquired the State income tax departments, was valid only under the 'hot war' defence power.

It is vital that we consider the Uniform Tax (1942) case in greater depth. Several sections of the Constitution were ruled upon;

Section 51.  The Parliament shall, subject to this Constitution, have power to make laws for the peace, order and good government of the Commonwealth with respect to:- (ii)Taxation, but so as not to discriminate between States or parts of States.

Section 96.  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.

Section 99.  The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.

Section 106.  The Constitution of each State of the Commonwealth shall, subject to this Constitution, continue as at the establishment of the Commonwealth, or as at the admission or establishment of the State, as the case may be, until altered in accordance with the Constitution of the State.

Section 107.  Every power of the Parliament of a Colony which has become or becomes a State, shall, unless it is by this Constitution exclusively vested in the Parliament of the Commonwealth or withdrawn from the Parliament of the State, continue as at the establishment of the Commonwealth, or as at the admission or establishment of the State, as the case may be.

The Commonwealth had earlier that year enacted several Acts of Parliament, whose combined effect was clearly (this was openly conceded by the Commonwealth) to give full control over income tax to the Commonwealth government for the duration of the war.

In the Tax Act, the Commonwealth raised the level of Commonwealth income tax to equal the combined total of the amounts which would have been raised by the Commonwealth and State Acts which were in operation till the preceding June 30th.  The effect was that, on average, the States lost 63% of their total tax revenue, because the Commonwealth tax was so high that the States were afforded very little room to raise their own income tax.

The Court agreed that the Commonwealth Parliament had no power to prohibit a State exercising its taxing power.  They pointed to sections 106 and 107 of the Constitution, which do not confer powers upon a State government, but rather preserve existing powers.  After conceding that the States have every right under the Constitution to collect tax (apart from customs and excise which are exclusively vested in the Commonwealth) Justice Latham continued;

"These provisions (sections 106 and 107) 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."

On this point, Justice Latham noted that there was no provision in the Tax Act to prohibit State taxation, and that therefore there was no reason why the Commonwealth should not be free to review the level of its income tax to any level it chooses.

The Commonwealth sought to redress the position which it had created by offering grants of money to the States by the State Grants Act.  This Act was to continue until the last day of the first financial year after the war.  The annual grants were made to each State upon the condition of that State not imposing any tax upon incomes in each relevant year.  The States objected that the Acts involved discrimination contrary to Section 51(ii) and preference contrary to Section 99 of the Constitution, and that the Grants Act was, by reason of the condition of abstinence from imposing income tax attached to the grants, not a valid exercise of the power conferred by Section 96 of the Constitution to give financial assistance to the States.

Justice Latham pointed out that there was nothing in the Grants Act which deprived a State Parliament of the power to impose income tax.  He continued, "Notwithstanding the Grants Act 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."  He continued, "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.  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."

He clarified the State's position in these words, "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."

He pointed out that revenues collected under the Tax Act were not earmarked, but went into the Consolidated Revenue Fund.  It was from this Fund that State grants were financed.  He went on to say that there was no discrimination between States and preference to States under Section 96 "because that section is not subject to any limitation with respect to discrimination."

In conclusion, he ruled the Grants Act valid, saying: "The section (96) contains no express or implied prohibition against any kind of discrimination.  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."

The War-Time Arrangements Act showed an intention of the Commonwealth Parliament that the Commonwealth should take over the officers and the physical means which were necessary for the 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.  It was this Act which did in the most direct fashion compel the States to abandon their separate income taxes, and it was held valid only by a majority of 3 to 2, Justices Latham and Starke dissenting by reason of the doctrine of implied immunities developed in the Public Service cases.  The measure under which the Commonwealth compulsorily acquired the State income tax departments, was valid only under the 'hot war' defence power.

Once the collection of income tax was entrusted to the Commonwealth, the system has maintained itself by its own economic and political momentum.  Even though, since the end of the Second World War, with the ending of the special 'hot war' conditions, there has been no constitutional reason for the States not to resume collection of income tax, nor for the States to be bound to accept Commonwealth dominance in economic affairs.

In theory, the States could in peace-time re-impose income tax at any time.  They could do it in practice if they all combined together to give the Commonwealth an ultimatum as to time and method of resumption, but there are formidable difficulties in the way of any one State or a small group of States acting separately.  In part, this is because under sections 51 (ii) and 99 of the Constitution, the Commonwealth would be unable to impose income tax at different rates in different States.

If the States ever did team together to re-impose State controlled income tax, then the States would have re-asserted their constitutionally valid financially equitable position with the Commonwealth.  NEXT

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Document 9:  Internet address =
Electoral Authorisation: David Keane, PO Box 582, Gosnells, W.A., 6110, Australia.