Constitutional basis of taxation in Australia

The constitutional basis of taxation in Australia is based on a group of powers in the Australian Constitution: sections 51(ii), section 90, section 53, section 55, and section 96. This encyclopaedia article deals with these sections, as interpreted by the High Court of Australia.

Constitutional Provisions

Commonwealth Taxing Ability

Section 51(ii) of the Australian Constitution

Australia is a federation and legislative power is distributed between the Commonwealth and the States. Section 51 enumerates areas of Commonwealth power. These powers are concurrent, and states can legislate, but Section 109 holds Commonwealth laws prevail in circumstances of inconsistency.

Section 51(ii) allows the Commonwealth to enact laws implementing:

Taxation, but so not as to discriminate between States or parts of states.

The non-discrimination limitation repeats the more general prohibition found in Section 99 that the Commonwealth cannot discriminate between states in laws on trade, commerce, or revenue.

The broad power in s51(ii) to impose ‘taxation’ must be read subject to the start of s51 which grants the powers ‘subject to this constitution’. S51(ii) must be considered in combination with s90.

Section 90 of the Australian Constitution

Section 90 gives the Commonwealth the exclusive, as opposed to concurrent with the States, power to impose ‘duties of customs and of excise’. Any state taxing law on this power will be unconstitutional. The definition of ‘customs and excise’ has therefore been an important, and litigated, constitutional issue. Generally, a customs duty is a tax imposed on goods entering a jurisdiction. An excise is a type of sales goods, and the High Court of Australia has interpreted this power extremely broadly so as to limit state taxing power.

The major purpose of section 90 was that important objectives of federation was achieved: uniform trade relations with other countries; and free trade between the states. However, in application and interpretation section 90 has led to a revenue imbalance. That is, section 90 limits the states ability to raise money even though they have considerable funding obligations (e.g. education and schools).

Section 114

Section 114 merely provides that the Commonwealth cannot tax state property, nor States tax Commonwealth property.

Procedural requirements of tax legislation

Sections 53 and Sections 55 prescribe procedural limitations on tax legislation.

Section 53 of the Australian Constitution

Section 53, in part, prevents the Senate from introducing or amending taxation bills. (section 53 also applies to revenue and appropriation bills). This limits the power of the Senate and reflects a constitutional distinction between the House of Representatives, as popular house, and the Senate, as the states house.

Section 53 does not apply to bills imposing or appropriating fines or other pecuniary penalty. A litigated issue has been when is a charge a fine or penalty, and when is it a tax (e.g. an airport entrance charge).

Section 55 of the Australian Constitution

Section 55 requires that legislation imposing tax deals only with imposing tax, and that other provisions are of no effect. Laws imposing taxation shall deal with ‘one subject only’, laws imposing customs only customs, and laws of excise only excise. The purpose of this section is to enhance the powers of the Australian senate. As section 53 limits the power of the senate to reject taxation bills, this section prevents the House of Representatives majority attempting to tack on other issues. This section explains why Australian tax law is made up of several pieces of legislation: different acts prescribe how and when tax is paid, and another is required to impose the tax.

Vertical Fiscal Imbalance: The Redundancy of State Taxing Power

Although the text of the Australian Constitution allows both States and the Commonwealth to raise revenue, subsequent constitutional interpretation and political developments have limited state taxing powers and led to a vertical fiscal imbalance. Vertical fiscal imbalance means that the revenue-raising abilities of the governments do not coincide with their spending responsibilities. As Section 51 and other provisions of the constitution (such as s52 and s90) prescribe only limited legislative powers to the Commonwealth, Australian states have considerable obligations. For example, Australian states primarily fund schools and hospitals. The result of the limitations on state taxing power is that the Commonwealth collects the money through taxes, and distributes that money to states. The power to distribute funds to states, on conditions, is contained in Section 96 of the Australian Constitution. As a result, the sphere of Commonwealth power has expanded through dictating policy through conditional grants. This limits the autonomy and power of the states in controlling policy.

The Loss of State Income Taxing Power

Prior to 1942, consistent with the concurrent power in s51(ii), the states collected income tax. The Commonwealth also levied tax. However, in 1942 the Commonwealth attempted to gain a monopoly on income taxes by passing the Income Tax Act 1942 and the States Grants (Income Tax Reimbursement) Act 1942. The first act purported to impose Commonwealth income tax. The latter act said Commonwealth funding would only be provided to the States if they imposed no income tax. This latter act was premised on section 96 of the Australian Constitution Act.

Section 96 of the Australian Constitution provides:

… the Parliament may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit

The States Grant Act therefore placed the ‘term and condition’ that states did not tax at all as a pre-requisite to funding. The Income Tax Act 1942, by setting high tax rates (i.e. that would reflect the combined current commonwealth and state taxes) made imposing current tax rates unattractive or impossible for state governments. This was because the Income Tax Assessment Act 1942 said that individuals had to pay Commonwealth tax prior to State taxes. In effect, the scheme meant either the states had to accept grants and stop taxing, or decline grants and try to collect tax at rates which were unsustainable.

The High Court has interpreted ‘terms and conditions’ very broadly. In South Australia v Commonwealth (First Uniform Tax Case) (1942) 65 CLR 373 the scheme was upheld. There is a perspective that the scheme, introduced in 1942, was upheld on the basis of the defence power in Section 51(vi). The Commonwealth re-enacted the scheme at the conclusion of the war, and was subject to a second constitutional challenge. The scheme was upheld, on the basis of section 96, in Victoria v Commonwealth (Second Uniform Tax Case) (1957) 99 CLR 575.

Since 1942 no state has imposed income taxes and has relied largely on section 96 grants. In introducing the Goods and Services Tax (GST) the Commonwealth agreed with the States to distribute, according to a formula, GST revenues to the states

State Sales Taxes, Section 90, and the interpretation of ‘excise’

As a result of the loss of income taxing powers, states turned to other taxation powers such as sales taxes. As ‘excise’ taxes are an exclusive Commonwealth power in section 90 of the constitution, the interpretation of excise became a critical issue.

The High Court has interpreted ‘excise’ to mean any tax imposed up to and including the point of sale. The result of this interpretation is to prevent state sales taxes. In Ha v New South Wales (1997) state excise and franchise tax regimes were struck down as an excise.

Sources

Michael Kobestky, Income Tax: Text, Materials and Essential Cases, (Sydney: The Federation Press 2005) ISBN 1 86287 545 6
Cheryl Saunders, The Australian Constitution (annotated), (Carlton: Constitutional Centenary Foundation) ISBN 0 9586908 1 2

External Sources

Denis James for the Australian Parliamentary Library, Current Issues Brief 1 1996-7, Federalism Up in Smoke? The High Court Decision on State Tobacco Tax – deals with s90 and interpretation of ‘excise’
APH Tax Law Resources