1. We are asked to advise whether the draft Bills for the Income Tax Assessment Act 1942 and the Income Tax (War-Time Arrangements) Act 1942 are in any respect ultra vires, and generally on the constitutional aspects of the proposals for uniform income taxation for the duration of the war and one year thereafter.

We wish to suggest some minor modifications in the two Bills, but subject to those modifications, and perhaps even without them, both measures are in our opinion valid, and would be upheld by the Courts.

It will be convenient to place most of these suggestions separately in a schedule, but the modifications which we think should be made in the new section introduced by cl. 26 of the Income Tax Assessment Bill are more important, and we will mention these in the body of our Opinion.

2. The provisions that have seemed to us to call for special attention fall into three main groups:
1. Those which give to Commonwealth income tax during the war period priority over State income tax (Income Tax Assessment Bill 1942 cl. 26).
2. Those which provide for the transfer to the Commonwealth during the war period of the function of collecting all income tax in Australia (including arrears): Income Tax (War-Time Arrangements) Bill cll. 3–15; especially cll. 3,10,11, 13,15.
3. Those which grant financial assistance to the States during the war period, on condition of their withdrawal from the income tax sphere: Income Tax (War-Time Arrangements) Bill cll. 16–17.

Each group of provisions seems to us to rest to some extent on a different constitutional foundation. It will therefore be convenient to discuss each separately. But it will be necessary also to consider the effect on the validity of each group of provisions of the fact that it is intended to form a part only of a general scheme or plan.

Priority for Commonwealth Income Tax

3. The first question as to cl. 26 of the Income Tax Assessment Bill is whether it can be supported by reference to the taxation power. In our opinion it can. The matter appears never to have been squarely raised for judicial decision. The precise point however was discussed in the recent case of F.C.T. v. The Official Liquidator of E.O. Farley (1940) 63, C.L.R. 278. The question in that case was whether section 59 of the Income Tax Assessment Act purported to give to a debt due to the Commonwealth, in respect of income tax, priority in a liquidation over a debt due likewise to a State in respect of State income tax. All the Justices of the High Court agreed that on its true construction the section did not purport to do so, and neither Latham C.J. nor Rich J. Starke J. or McTiernan J. discussed the question of power. Dixon and Evatt J.J. did, but reached opposite conclusions. Dixon J. was of opinion that the Commonwealth’s taxation power would certainly extend to enable the Commonwealth to confer a statutory priority on Commonwealth tax as against private debts; but that it could not postpone the claim of a State, both because of the strictly coordinate status of Commonwealth and State in a federal structure, and also because of the equal rank enjoyed by the prerogative right that each Government was exercising. Evatt J. on the other hand was of opinion that the Commonwealth could give priority to its claim even as against the equal claim of a State. He said, at p. 324:

I think that Commonwealth legislation upon the topic of ‘taxation’ may lawfully provide for any method of enforcement designed to ensure payment in full of the debt which ex hypothesi has been lawfully created by the Commonwealth. Such legislation may include novel methods of enforcing the debt. Obviously the legislation may require payment to the Commonwealth in preference to other private creditors, because that merely produces a result corresponding to that produced by the exercise of the royal prerogative of preferential payment. As a matter of expediency, it may be thought undesirable to trench upon the similar prerogative exercisable by the State Governments. But the power cannot be so restricted ... No doubt there are some limits upon the taxation power of the Commonwealth. Presumably it could not in purported exercise of the taxation power exempt individuals and corporations from State laws imposing taxation; for the power contained in s.51(ii) deals with Commonwealth taxation, and as was pointed out by Sir Robert Garran: ‘It can hardly be questioned that these words refer only to Commonwealth taxation, uniform throughout the Commonwealth for Commonwealth purposes, and do not cover control of State taxation’ (The Case for Union 1934, p. 27) ...

But legislation which merely cuts down the States’ prerogative of prior payment in relation to taxes owing to the Commonwealth does not go nearly as far as the Commonwealth Financial Emergency (State Legislation) Act 1932, which Sir Robert Garran deemed invalid, or as s.52B of the Commonwealth Inscribed Stock Act 1911, which was held to be valid in Commonwealth v. Queensland.⁽²⁾ Further although it is a decision on the Canadian Constitution, the case of In re Silver Bros. (1932) A.C. 514 suggests not obscurely that, under the taxation power, the Commonwealth Parliament is competent to enact that its taxation assessments shall be paid in priority to debts owing by the same debtor to the State Governments. Such an enactment is strictly relevant to the subject of taxation for Commonwealth purposes. It would be otherwise if it attempted to destroy altogether the States’ claim to priority over private creditors; for in such a case a Commonwealth enactment could no longer be regarded as sufficiently connected with the subject matter of Commonwealth taxation mentioned in s.51(ii) of the Constitution.

We think that the reasoning of Evatt J. is correct, and would be adopted by the High Court if the matter arose for direct decision.

4. If this opinion is erroneous, it would still be necessary to consider whether cl. 26 can be supported under some power other than the taxation power. There are several decisions of the High Court in which a power of the Commonwealth to restrict the operation of a State in a taxation field have been upheld. The recognition of such a power is implicit in the course of judicial decision and legislation in connection with the controversy which occurred in the early days of the Commonwealth over the imposition of a State income tax on the salaries of Commonwealth public servants. See Baxter v. Commissioner of Taxation (N.S.W.), 4 C.L.R. 1087; the Commonwealth Salaries Act 1907; and Chaplin v. Commissioner of Taxation (S.A.), 12 C.L.R. 375. Such a power was also upheld in Commonwealth v. Queensland 29 C.L.R. 1, and by a majority of the court in West v. Commissioner of Taxation (N.S.W.), 56 C.L.R. 657. In Chaplin’s case the matter was related to the Commonwealth’s power to legislate with respect to its own Public Service. It was related to the same power in West’s case by Latham C.J. and the other Judges who were of the same opinion. In Commonwealth v. Queensland it was related to the power conferred by s. 51(iv) to borrow money on the public credit of the Commonwealth.

The dissenting judgment of Evatt J. in West’s case implies in our opinion no dissent from the general proposition here stated. A passage in that judgment in which he discusses Pirrie v. McFarlane (36 C.L.R. 170) may perhaps serve to illustrate his general view:

The point left outstanding in Pirrie v McFarlane is whether the Commonwealth could validly confer upon its servants a special immunity from the operation of State traffic legislation and regulations ... I do not see how the grant of general exemptions from obedience to the requirements of State traffic legislation could possibly be regarded as a valid law with respect to defence; although if the legislation were limited to occasions of emergency or military necessity the results might be different (56 C.L.R. at pp. 708–9).

It may be noted also that in Farley’s case Dixon J., while thinking that priority could not be conferred under the taxation power, appears to have agreed that it could be conferred under some other power, e.g. bankruptcy; see 63 C.L.R. pp. 313–4.

As the new s. 221 stands it might be difficult to justify it by reference to the defence power of the Commonwealth, because not only does it contain no reference to the exigencies of defence but it is unlimited in operation in respect of time, and indeed cl. 27 of the Bill expressly makes it applicable to all assessments for the financial year beginning on 1st July 1942 and all subsequent years. Probably this was an oversight since the new s. 221 is put forward as part of a general scheme, the remaining elements in which (in the other Bill) are limited in operation to the war period.

We suggest that the new s. 221 should be introduced by some words indicating that the purpose of the provision is identical with that stated in cl. 3 of the Income Tax (War-Time Arrangements) Bill. It might be prefaced, for instance, by the words: ‘In order to facilitate the collection of revenue required for the efficient prosecution of the war’. We suggest also that a third sub-section should be added, in some such terms as the following:

This section shall have operation during the present war and until the last day of the first financial year to commence after the date on which His Majesty ceases to be engaged in the present war.

This suggestion would of course require some consequential amendment in cl. 27 of the Bill.

In view of the recent decision of the High Court in Andrews v. Howell ([1941] A.L.R. 185)⁽³⁾ we entertain no doubt whatever that the defence power is at least wide enough to support proposed new s. 221 with such amendments as we have suggested. The necessity of any particular measure for the defence of the Commonwealth is a matter for assessment by the Parliament and not by the Court. It would in our opinion be hopeless to contend that this measure cannot reasonably be regarded as conducive to national defence, and this is the test which the High Court has consistently adopted; see Farey v. Burvett,⁽⁴⁾ Pankhurst v. Kiernan,⁽⁵⁾ and Andrews v. Howell.

The Collection of Income Tax

5. Logically cl. 15 of the Income Tax (War-Time Arrangements) Bill should first be considered, since it gives power to suspend the existing agreements with the States with regard to income tax collection, without giving the six months’ notice required by the agreements. We recognise that such a proposal may perhaps be open to political or moral objections, but we entertain no doubt whatever of its legal validity. The agreements rest on Acts of the Parliament of the Commonwealth and those of the States concerned. The agreements themselves are contractual in their nature as between the Governments. Apart from some special legal provision such as s. 105A of the Commonwealth Constitution an agreement of this type is in our opinion entirely at the mercy of the legislature either of the Commonwealth or of the State. Either Parliament can simply put an end, or authorise the Executive itself to put an end, to the Executive’s power to carry out the agreement.
6. Next in order must be considered the validity of the clauses which enable the Commonwealth to requisition the services of State personnel and the use of State premises and equipment for the assessment and collection of Commonwealth income tax during the war period (see especially cll. 3,10 and 11), and which enable the Commonwealth to make an agreement with the State for collecting arrears of income tax (cl. 13). These clauses as a whole, and subject to what we say below as to cll. 10 and 13, can in our opinion be supported only by reference to the defence power, but that power does in our view authorise the Commonwealth to make such a law as is proposed.

There is in our view nothing in the Constitution which expressly or by necessary implication confers on persons employed by, or property used by, a State a general immunity from the operations of the Commonwealth under the defence power. We have no doubt that the military service legislation and the general man power legislation of the Commonwealth would be held to apply to persons employed by the Crown in right of the State, with such exceptions only as the Commonwealth may think fit to provide. The personnel and equipment used by the States in the imposition of income tax cannot in our view stand on any different footing. In our opinion the clauses in question could validly be enacted by regulation under the National Security Act 1940, and we feel confident of the Parliament’s power to enact them in a separate Act.

The considerations mentioned above as to the nature and scope of the defence power are of course in point here also, and do not need repetition.

It may be noted that since cl. 11 provides merely for the possession and use by the Commonwealth of premises and equipment and does not provide for their actual acquisition no question arises under s. 51(xxxi) of the Constitution.

We think it possibly advisable to modify the terms of cll. 3 and 11 so as to state in more detail the circumstances both of revenue and of man power that justify the Commonwealth in treating these proposals as necessary for defence purposes.

In the Schedule we include suggestions to cover these and some other matters.

7. We think that cl.10 of the Bill providing for the transfer to the Commonwealth of records relating either wholly or partly to Commonwealth taxation may be supported by reference to the taxation power itself without the need of recourse to the defence power. We think however that as it is consequential upon the resumption by the Commonwealth of the function of assessing and collecting its own income taxes it would be preferable to place it after cl.15 of the Bill. Clause 12 would need to follow it.
8. As to cl.13 of the Bill it is sufficient to say that, altogether apart from the defence power, an agreement between the Commonwealth and the States for the collection by the Commonwealth of arrears of State taxation seems in our opinion to be authorised by the taxation power, while authority to receive these funds as loans with the consent of the States is to be found in the borrowing power (s. 51(iv)), which indeed could also be treated as authorising the agreement regarding the collection of the funds.

Financial Assistance to States

9. In our opinion the provisions of cl. 16, authorising a grant to the States during the war period of the financial assistance provided in the Schedule on condition that they withdraw from the imposition of income tax and agree with the Commonwealth under cl. 13 regarding the collection of arrears of income tax, appear to be plainly within the powers conferred on the Commonwealth by s. 96 of the Constitution. The conditions attached are undoubtedly of a much more stringent character than any which the Commonwealth has hitherto imposed in making grants under s. 96, for they amount to a complete exclusion of the States from the income tax field. This however is a mere matter of degree. In principle, the matter appears to be covered both by Victoria v. Commonwealth (38 C.L.R. 399) and by Moran v. F.C.T. (61 C.L.R. 735 (H.C.), 63 C.L.R. 338 (P.C.)).
10. There remains the question whether, conceding the validity of each of these groups of provisions separately, their inter-connection as provisions of a general financial scheme may not clothe them with a different, and unconstitutional, character. The suggestion may be made that the scheme as a whole ought to be regarded as in pith and substance a measure for excluding the States from the sphere of income tax. A similar view was expressed by Evatt J. in Moran’s case, and though his dissenting judgment was not adopted by the Privy Council their Lordships must, we think, be taken to have agreed that his method of approach was appropriate in determining the pith and substance of legislative schemes such as that now under consideration; see 63 C.L.R. at p. 341. After concluding that the legislation to implement the Flour Tax Agreement was valid, Lord Maugham remarked:

Cases may be imagined in which a purported exercise of the power to grant financial assistance under s.96 would be merely colourable. Under the guise or pretence of assisting a State with money, the real substance and purpose of the Act might simply be to effect discrimination in regard to taxation. Such an Act might well be ultra vires the Commonwealth Parliament (63 C.L.R. p.350).

Conceding this approach, however, and conceding also (contrary to our opinion) that the tax priority provisions are in pith and substance, when viewed in the light of the scheme as a whole, not a law with respect to Commonwealth taxation but a law for excluding the States from the field of income tax, the question has still to be faced whether even such an enactment is not within the defence power of the Commonwealth. We are of opinion that it would be. Once concede the reality of the connection between the measures proposed and the defence of the Commonwealth in time of war, and we think the fact that the activity regulated is the taxing power of the State does not suffice to exclude it from the ambit of Commonwealth authority. What the Commonwealth could in our opinion do directly, it can equally do indirectly.

As to the actual grants to the States provided for by cl. 16, we do not think their validity under section 96 of the Constitution can be seriously questioned. This legislation is markedly different from that in Moran’s case. Under the Flour Tax Agreement, the amounts to be paid to the States were to be paid out in turn by them to the wheatgrowers, except in Tasmania where they were to be used to refund to the millers the tax they had paid. Yet this scheme was upheld by the courts. In the present legislation the grant will be made to the State, to be used by the State for any purpose that it may think fit.

11. We have been asked also to consider whether, if in our opinion the scheme adopted by these two Bills is in any respect ultra vires, any alternative methods of attaining like results seem constitutionally open. In view of our opinion on the main points, it is perhaps unnecessary to deal in detail with this subsidiary matter. It may however be useful to add that in our opinion, having regard to the decision of the Privy Council in Colonial Sugar Refining Co. v. Irving (1906 A.C. 360), the Commonwealth could validly attain some at least of the results now aimed at by imposing income tax at a high uniform rate and allowing as a deduction from the tax payable to the Commonwealth any tax paid or payable to a State.

[Vol. 34, p. 415]

K.H. Bailey⁽⁶⁾

W.K. Fullagar

Supplementary Observations

26 April 1942

Since we formed the above conclusions we have had the advantage of reading a provisional opinion on the same matters written by Mr. E.M. Mitchell K.C. and Mr. A.R. Taylor. All the views therein expressed are based on a fundamental assumption with the validity of which we are, as we have said, unable to agree. This assumption is that none of its constitutional powers would enable the Commonwealth directly to exclude the States during the war period from the field of income tax. This view seems to us to do less than justice to the possibilities of the defence power, as expounded in a whole series of decisions in the High Court. The limitless and unforeseeable contingencies of total war may require the Commonwealth, in the interests of defence, to interfere with the exercise of State powers at countless points. At such times, the whole national structure may break down and fall into chaos if the Commonwealth is denied this power. No doubt there are some express constitutional limitations which affect even the defence power; for instance the power would presumably be subject to section 99 and section 114. But short of some express limitations such as these; we feel that the defence power must be held to confer upon the Commonwealth power to take all the steps which may reasonably be considered essential to the preservation of the nation. The far-reaching economic and financial effect upon the States of a measure affords no ground, in face of the defence power, for challenging its validity.

Though we appreciate the fact that with legislation such as the present it may be both proper and necessary to read the several measures together in order to ascertain their true nature and substance, we feel that too little significance has been attached to the fact that in Moran’s case⁽⁷⁾ the majority of the High Court and the Privy Council actually held the enactments there in question to be valid. While conceding that a legislative scheme might be merely a colourable pretence of exercising powers to achieve an end in itself unauthorised, the Privy Council refused to find a scheme merely colourable which was open, as it seems to us, to even stronger attack than can be made in the present case.

[Vol. 34, p. 424]

(1) The date is incomplete in the Opinion Book.

(2) (1920) 29 CLR 1.

(3) (1941) 65 CLR 255.

(4) (1916) 21 CLR 433.

(5) (1917) 24 CLR 120.

(6) Sir Kenneth Hamilton Bailey. Born 3 November 1898, Canterbury, Victoria; died 3 May 1972, Canberra, ACT. Australian Imperial Force 1918–1919. Awarded Rhodes Scholarship 1919. Admitted London Bar 1924. University of Melbourne, appointed Vice-Master of Queen’s College and Lecturer in History 1924; Professor of Jurisprudence 1927; Dean of Law School 1928; Chair of Public Law 1930. Adviser to Australian delegation at Imperial Conference 1937. Appointed consultant on constitutional matters and foreign affairs, Commonwealth Attorney-General’s Department 1943. Adviser to Australian delegation at United Nations Conference on International Organization 1945. Secretary, Attorney-General’s Department and Commonwealth Solicitor-General 1946–1964. Appointed CBE 1953; KBE 1958. Appointed first Commonwealth QC 1964. High Commissioner to Canada 1964–1969. Awarded LLD, Dalhousie University 1966; Australian National University 1970; University of Melbourne 1972.