Constitutional basis of taxation in Australia
Encyclopedia
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 article deals with these sections, as interpreted by the High Court of Australia
.
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 on them, or on any topic not specifically prohibited them by the Constitution (e.g. section 53 specifically enumerates areas, such as the federal public service, where states may not legislate), but Section 109
holds Commonwealth laws prevail in circumstances of inconsistency.
Section 51(ii) allows the Commonwealth to enact laws implementing:
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.
has interpreted this power broadly.
The major purpose of section 90 was that important objectives of federation were achieved: uniform trade relations with other countries; and free trade between the states. However, section 90 limits the states' ability to raise money, when they have considerable funding obligations (e.g. schools and hospitals). Therefore, section 90 and section 96 — which allows the Commonwealth to impose "terms and conditions" on grants — have led to a vertical fiscal imbalance.
Section 53 does not apply to bills imposing or appropriating fines or other pecuniary penalties, or fees for licensing or services. The question of when a charge (e.g., an airport entry charge) is a tax, as opposed to a fine or a fee, has been a litigated issue.
on money bills, such as are common in the United States, and also ensures that Australian tax law is made up of several pieces of legislation: some acts prescribe how and when tax is to be paid, while others actually impose the tax.
. 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, primarily, Australian states 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.
Section 96 of the Australian Constitution provides:
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; the states have instead relied largely on Section 96 grants. In introducing the Goods and Services Tax
(GST), the Commonwealth agreed to distribute GST revenues to the States according to a formula.
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.
High Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
.
Section 51(ii) of the Australian Constitution
Australia is a federationFederation
A federation , also known as a federal state, is a type of sovereign state characterized by a union of partially self-governing states or regions united by a central government...
and legislative power is distributed between the Commonwealth and the States. Section 51
Section 51 of the Australian Constitution
Section 51 of the Constitution of Australia grants legislative powers to the Australian Parliament only when subject to the constitution. When the six Australian colonies joined together in Federation in 1901, they became the original States and ceded some of their powers to the new Commonwealth...
enumerates areas of Commonwealth power. These powers are concurrent, and states can legislate on them, or on any topic not specifically prohibited them by the Constitution (e.g. section 53 specifically enumerates areas, such as the federal public service, where states may not legislate), but Section 109
Section 109 of the Australian Constitution
In Australia, legislative power is held concurrently by the Commonwealth and the States. In the event of inconsistency between Commonwealth and State laws, section 109 of the Constitution of Australia provides that the laws of the Commonwealth shall prevail over those of a State to the extent of...
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 tax on goods, and the High Court of AustraliaHigh Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
has interpreted this power broadly.
The major purpose of section 90 was that important objectives of federation were achieved: uniform trade relations with other countries; and free trade between the states. However, section 90 limits the states' ability to raise money, when they have considerable funding obligations (e.g. schools and hospitals). Therefore, section 90 and section 96 — which allows the Commonwealth to impose "terms and conditions" on grants — have led to a vertical fiscal imbalance.
Section 114
Section 114 provides merely that the Commonwealth cannot tax state property, nor States tax Commonwealth property without consent of the other.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 any bill dealing with taxation, revenues or appropriation. This section limits the power of the Senate and reflects a constitutional distinction between the House of Representatives, as the house of the people and the chamber to which the government is responsible, and the Senate, as the house of the states. However, the Senate may still request omissions from or amendments to any such bill (in which case the House of Representatives deals with the request as it sees fit), or block its passage entirely.Section 53 does not apply to bills imposing or appropriating fines or other pecuniary penalties, or fees for licensing or services. The question of when a charge (e.g., an airport entry charge) is a tax, as opposed to a fine or a fee, has been a litigated issue.
Section 55 of the Australian Constitution
Section 55 requires that legislation imposing tax deal only with imposing tax and that other purported provisions in a piece of taxation legislation be of no effect. Furthermore, laws imposing taxation (except customs duties or excise) shall deal with 'one subject of taxation only', while laws imposing customs shall deal only with customs, and laws of excise only excise. The purpose of this section is to protect the powers of the Senate to amend bills. According to section 53, the Senate cannot amend or originate taxation bills (see above). Thus, without the restrictions imposed by section 55, the House of Representatives could, by including taxation provisions in bills dealing with other subjects, prevent the Senate from amending any such bills at all. This section effectively prohibits ridersRider (legislation)
In legislative procedure, a rider is an additional provision added to a bill or other measure under the consideration by a legislature, having little connection with the subject matter of the bill. Riders are usually created as a tactic to pass a controversial provision that would not pass as its...
on money bills, such as are common in the United States, and also ensures that Australian tax law is made up of several pieces of legislation: some acts prescribe how and when tax is to be paid, while others actually 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 imbalanceFiscal imbalance
- Meaning and Types :Fiscal imbalance is the term used to denote a mismatch in the revenue powers and expenditure responsibilities of a government. In the literature on fiscal federalism, two types of fiscal imbalances are measured: Vertical Fiscal Imbalance and Horizontal Fiscal Imbalance...
. Vertical fiscal imbalance means that the revenue-raising abilities of the governments do not coincide with their spending responsibilities. As Section 51
Section 51 of the Australian Constitution
Section 51 of the Constitution of Australia grants legislative powers to the Australian Parliament only when subject to the constitution. When the six Australian colonies joined together in Federation in 1901, they became the original States and ceded some of their powers to the new Commonwealth...
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, primarily, Australian states 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 be provided to the States only 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
High Court of Australia
The High Court of Australia is the supreme court in the Australian court hierarchy and the final court of appeal in Australia. It has both original and appellate jurisdiction, has the power of judicial review over laws passed by the Parliament of Australia and the parliaments of the States, and...
has interpreted 'terms and conditions' very broadly. In South Australia v Commonwealth (First Uniform Tax Case)
South Australia v Commonwealth
South Australia v Commonwealth 65 CLR 373 is a High Court of Australia case that established the Commonwealth government's ability to impose a scheme of uniform income tax, ultimately arising in a vertical fiscal imbalance in the spending requirements and taxing abilities of the various levels of...
(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)
Section 51(vi) of the Australian Constitution
Section 51 of the Australian Constitution, commonly called the defence power, is a subsection of Section 51 of the Australian Constitution that gives the Commonwealth Parliament the right to legislate with respect to "the naval and military defence of the Commonwealth and of the several States, and...
. 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)
Victoria v Commonwealth (1957)
Victoria v Commonwealth 99 CLR 575 is a High Court of Australia case that affirmed the Commonwealth government's ability to impose a scheme of uniform income tax, ultimately arising in a vertical fiscal imbalance in the spending requirements and taxing abilities of the various levels of...
(1957) 99 CLR 575.
Since 1942 no state has imposed income taxes; the states have instead relied largely on Section 96 grants. In introducing the Goods and Services Tax
Goods and Services Tax (Australia)
The GST is a broad sales tax of 10% on most goods and services transactions in Australia. It is a value added tax, not a sales tax, in that it is refunded to all parties in the chain of production other than the final consumer....
(GST), the Commonwealth agreed to distribute GST revenues to the States according to a formula.
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.
See also
- Income tax in AustraliaIncome tax in AustraliaIncome tax in Australia is the most important revenue stream within the Australian taxation system.Income tax is levied upon three sources of income for individual taxpayers: personal earnings , business income and capital gains...
- Australian Taxation OfficeAustralian Taxation OfficeThe Australian Taxation Office is an Australian Government statutory agency and the principal revenue collection body for the Australian Government. The ATO has responsibility for administering the Australian federal taxation system and superannuation legislation...
- The First Uniform Tax CaseSouth Australia v CommonwealthSouth Australia v Commonwealth 65 CLR 373 is a High Court of Australia case that established the Commonwealth government's ability to impose a scheme of uniform income tax, ultimately arising in a vertical fiscal imbalance in the spending requirements and taxing abilities of the various levels of...
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 links
- 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