The Commissioner of Taxation has forwarded the following memorandum to me for advice:

A draft Cabinet minute has been prepared proposing amendments to the Income Tax Assessment Act, one of which is to allow an income tax deduction to all taxpayers residing in certain defined areas of the Commonwealth. The relative part of the draft minute reads as follows:

The proposals contained in this submission are that some measures of relief from taxation should be granted–

1. …
2. to employees and other taxpayers residing in the more remote areas of Australia.

…

Allowances are often granted to employees located in remote districts to compensate them for uncongenial climatic conditions, isolation, loss of social amenities and higher cost of living. These payments are made as an inducement to undertake employment in these areas. These allowances are also subject to taxation in full without any deductions in respect of the higher cost of living which may prevail in these districts.

It is contended by recipients of these allowances that the conditions under which these employees are obliged to reside compel them to incur higher living expenses than employees residing in more congenial and settled areas. Because of the present high rate of taxation they are not permitted to enjoy the full benefit of the allowances granted to them.

Further, it is obvious that if no benefit or very little benefit is to accrue to recipients from these allowances, there will be a reluctance, if not an absolute refusal by employees, to accept employment in these areas–a serious detriment which may jeopardise post-war developmental plans.

Taking all these factors collectively, there is justification for some relief from taxation for these taxpayers as compared with others residing in cities and the more settled areas. As all taxpayers residing in these remote areas experience the same disabilities, any measure of relief contemplated cannot reasonably be confined to employees receiving special allowances, but will have to be extended to all taxpayers residing in the same areas.

It is impracticable, however, to measure the disability of one taxpayer as compared with another with any degree of exactitude in these remote areas. It is accordingly recommended that the relief from taxation should take the broad form of an income tax concessional deduction that would apply to all taxpayers residing in either of the following zones for at least 6 months of the year of income. The deduction proposed is:

Zone A. £40 (i.e. approximately 15/- per week) in a zone comprising the North Western areas and the extreme North Eastern area of Queensland; the Northern part of the Northern Territory; and the Northern portion of Western Australia.

Zone B. £80 (i.e. approximately 7/6 per week) in a zone comprising Central, North Eastern (with the exception of the Northern extremity) and South Western Queensland; Western New South Wales; the North and West of South Australia; the Goldfields area and South Eastern area of Western Australia.

Appended hereto is a map of Australia delineating broadly the areas in which the special deductions will apply.

It is considered that in drafting the legislation to give effect to the above proposal, it will be necessary to specify in the Income Tax Assessment Act or Regulations the areas defined. The view has been expressed that such action may amount to a taxation discrimination between taxpayers in States or parts of States, and thus infringe the Constitution.

The Treasurer has expressed a desire that Crown Law opinion be obtained before the proposed plan is submitted for the consideration of Cabinet.

In the circumstances, I should be glad if you would advise urgently whether, in your opinion, legislation on the above lines would infringe section 51(ii) of the Constitution.

The relevant provisions of the Constitution are as follows:

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:

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

For present purposes, the restriction on the taxation power contained in these two provisions may be treated as identical. ‘The expressions “discriminate between States” in the one, and “give preference to one State over another State” in the other, seem to me identical in purport and effect.’ (Per Isaacs J. in R v. Barger (1908) 6 C.L.R. 41, at p. 107). The question whether discrimination between parts of the same State is prohibited by section 51(ii) (which was discussed in the case just referred to) need not, I think, be considered as the present proposals, assuming they involve such a discrimination, also involve a discrimination between different States or parts of different States.

It may be well at the outset to consider what results would follow from a decision that an amending Income Tax Assessment Act to give effect to the proposals involved a prohibited discrimination or preference. It might be argued that the Income Tax Assessment Act, as amended, would become an Act discriminating in the prohibited manner, that to cut out the new concessional deduction would be to ‘increase the area of taxation intended by Parliament’ (c.f. 6 C.L.R. at p. 111, per Isaacs J), and that, as this can only be done by the legislature, the court might treat the whole of the Income Tax Assessment Act as invalidated. In my view this result would not follow. The amending Act would, if effective, itself give a preference within the meaning of section 99 and would therefore be invalid, and the principal Act, not being effectively amended, would not be affected. On this view it would appear not to be of advantage to any citizen to challenge the validity of the concessional deduction proposed.

I proceed to consider the question of the constitutional validity of the proposals.

In R v. Barger the question arose whether a provision in an Excise Act which provided for a remission of duties to any manufacturer whose wages and conditions:

1. were declared fair and reasonable by Parliament;
2. were in accordance with an industrial award;
3. were in accordance with an industrial agreement filed; or
4. were declared to be fair and reasonable by the President of the Arbitration Court,

was contrary to section 51(ii) or 99 of the Constitution. A majority of the Court (Griffith C.J., Barton and O’Connor J.J., Isaacs and Higgins J.J. dissenting) held that the Act authorised a prohibited discrimination, and was therefore invalid on that ground (as well as on other grounds).

The view of the majority was that the section authorised the prescribing of conditions reasonable according to the circumstances of locality and that this resulted in a prohibited discrimination.

In his dissenting judgment, Isaacs J., after considering certain American authorities concerning the provision of the United States Constitution that ‘all duties, imposts and excises, shall be uniform throughout the United States’, suggested that the difference in the wording of the Commonwealth Constitution was intended not to require geographical uniformity in taxation, but to prohibit Parliament from differentiating between States and parts of States, because they were particular States or parts of States. After discussing the language of section 51(ii) and section 99 relating to parts of States, His Honour went on to say that, in the case of both provisions, ‘the treatment that is forbidden, discrimination or preference, is in relation to the localities considered as parts of States, and not as mere Australian localities, or parts of the Commonwealth considered as a single country’ (at p. 107). In a subsequent passage (at p. 108) His Honour said:

… the pervading idea is the preference of locality merely because it is locality, and because it is a particular part of a particular State. It does not include a differentiation based on other considerations, which are dependent on natural or business circumstances, and may operate with more or less force in different localities; and there is nothing, in my opinion, to prevent the Australian Parliament, charged with the welfare of the people as a whole, from doing what every State in the Commonwealth has power to do for its own citizens, that is to say, from basing its taxation measures on considerations of fairness and justice, always observing the constitutional injunction not to prefer States or parts of States.

At p. 110 of the report, His Honour said:

Discrimination between localities in the widest sense means that, because one man or his property is in one locality, he or it is to be treated differently from the man or similar property in another locality.

Before considering the application of Barger’s case to the present proposals, it is necessary to examine the effect of a more recent decision which has a very direct bearing on the question under consideration, and in which the effect of Barger’s case was discussed.

In Cameron v. Deputy Federal Commissioner of Taxation for Tasmania (1923) 32 C.L.R. 68, the High Court held invalid certain Income Tax Regulations which prescribed different values at which live stock in different states and parts of States were to be taken into account for the purpose of determining the profit deemed to have been made from the natural increase of live stock and for certain similar purposes. It was contended for the Deputy Commissioner that, as the values prescribed for each State were a fair average value for that State, the discrimination was not based solely on the situation of the stock ‘regardless of any other circumstance’, and consequently was, according to the principles enunciated by Isaacs J. in Barger’s case, permissible. The Court unanimously rejected this contention.

Knox C.J. relied on the fact that the only discrimen pointed out in the Regulations for applying the varying values was the State in which the stock were found. He thought that the definition of ‘discrimination’ given by Isaacs J. in Barger’s case was applicable.

The following passage appears in the judgment of Isaacs J.:

The discrimen for different values is the State in each case. That is irretrievably in conflict with the constitutional provision prohibiting discrimination between States.

My opinion as to the true meaning of the constitutional provision in sec. 5l(ii) was fully expressed in R. v. Barger, and to that opinion I refer. I would, however, repeat one sentence, which was relied on in this case by both sides, in order that I may apply it to the present circumstances. At p. 110 I said: ‘Discrimination between localities in the widest sense means that, because one man or his property is in one locality, then, regardless of any other circumstance, he or it is to be treated differently from the man or similar property in another locality.’ It was said by Sir Edward Mitchell that as a ‘fair average value’ was applied in each State, that was not ‘regardless of any other circumstance’ than State situation. But that is an error. Stock in Queensland and stock in New South Wales are, by reason solely of their State situation, ‘treated differently’, by the mere fact that different standards are applied to them respectively. It does not matter whether those legal standards are arbitrary or measured, whether dictated by a desire to benefit or to injure, the simple fact is they are ‘different’, and those different legal standards being applied simply because the subject of taxation finds itself in one State or the other there arises the discrimination by law between States which is forbidden by the Constitution.

Higgins, Rich and Starke J.J. expressed views similar to those of the Chief Justice. Starke J. said, at p. 79:

… a law with respect to taxation which takes as its line of demarcation the boundaries of States or parts of States necessarily discriminates between them, and gives preference to one State or part thereof over another State or part thereof.

Another case which should be mentioned is James v. Commonwealth (1928) 41 C.L.R. 442, in which certain Regulations were held to infringe section 99 of the Constitution. It is not necessary to state the facts of that case, but it is worthy of note that Knox C.J. and Powers J. quoted with approval the definition of ‘discrimination’ given by Isaacs J. in Barger’s case. Starke J. adhered to his views as expressed in Cameron’s case.

I proceed now to apply the principles emerging from these cases to the present proposed legislation.

I think it is clear that the proposals involve discrimination between certain areas of the Commonwealth in the sense of the definition given by Isaacs J. in Barger’s case and adopted by the Court in Cameron’s case and James’ case. Because one man is resident in one area, he is to be treated differently from a man who is resident in another area. Residence in the area is the sole discrimen for the difference in treatment.

There is one passage, however, in the judgment of Isaacs J. in Barger’s case which, if it correctly states the law, indicates that the prohibition on discrimination between parts of States is not to be taken in its fullest literal sense. I refer to the passage in which he says that the discrimination or preference which is forbidden as regards parts of States, is in relation to localities considered as parts of States, and not as mere Australian localities, or parts of the Commonwealth considered as a single country. It would be apparent, I think, on the face of the proposed legislation that the areas in which the deduction is allowed are areas of Australia considered as a single country and have no relation to States or parts of States as such. This could be made even clearer by an appropriately worded preamble or other explanatory words.

The decision of the majority in Barger’s case on the question of discrimination must, I think, be recognised as being contrary to the dictum of Isaacs J. Any discrimination between localities which could have arisen out of the legislation dealt with in that case would not have been discrimination between localities considered as parts of States. The discrimination would have resulted from differences in wage conditions in different localities and those conditions would arise out of economic considerations unrelated to State boundaries.

It is unlikely, however, in my opinion, that the Court would now follow the majority decision in Barger’s case on this question.

The decision of the majority has not been relied on by the Court in any subsequent case, and passages from the dissenting judgments have been cited and relied on both by the High Court and the Privy Council. In his dissenting judgment in Deputy Federal Commissioner of Taxation v. Moran (1939) 61 C.L.R. 735, at p. 781, Evatt J., discussing Barger’s case, said:

It was possible that, as a result of the so-called ‘exemption’, goods of the same class would be excisable in some parts of the Commonwealth but not in others. But it is very difficult to appreciate the court’s finding that because of such possibility the Act discriminated between States or parts of States because there was differentiation in the taxing scheme by reference to the criterion of locality. The majority so held, but, with great respect, I think erroneously. This particular ruling in R. v. Barger has never been formally overruled, but the reasoning of the judges in cases like Cameron v. Deputy Federal Commissioner of Taxation tells against it.

I conclude, therefore, that the majority judgment in Barger’s case should not be regarded as an authority fatal to the present proposals. I should add that rejection of that judgment does not necessarily imply acceptance as correct of the dictum of Isaacs J., which is under discussion. The legislation in Barger’s case did not impose any direct test of locality, but could only indirectly result in different treatment of different localities. It is quite possible to regard such legislation as valid while rejecting the validity of legislation in which locality is directly made the discrimen.

There appears to be no direct authority on the correctness of the dictum of Isaacs J. The particular passage has not been relied on in any subsequent judgment, but that passage can be considered, I think, as colouring the meaning of other passages from the judgment which have been cited with approval, e.g. the passage (already quoted) cited by the Privy Council on the appeal in Moran’s case (1940) 63 C.L.R. 338, at p. 348, beginning ‘the pervading idea is the preference of locality merely because it is locality, and because it is a particular part of a particular State’.

Cameron’s case is not, I think, inconsistent with the dictum of Isaacs J. in Barger’s case. In Cameron’s case, not only was the discrimen the situation of stock in particular areas, but those areas were, in nearly all instances, States. It could not be contended that the State areas were considered, not as States, but as part of the Commonwealth as a whole selected for reasons based on natural or business circumstances or other similar reasons. Although it was argued that the prescribed values in each State were fair average values for that State, there was no reason shown why the boundaries of the States should be taken as the lines of demarcation or, in other words, why an average State value should have been taken rather than an average value over some other area. ‘But though the regulation aims at a “fair average value”, it is with reference purely to the State in which the stock is found’. (Per Isaacs J. at p. 76.)

In my view, therefore, there is no effective authority contrary to the dictum of Isaacs J. In my opinion, that dictum contains a correct interpretation of the relevant constitutional provisions, and would be adopted by the High Court if ever the question squarely arose before it. There is no reason to suppose that the framers of the Constitution intended so to limit the taxation power of the Parliament that it could not differentiate on a locality basis where State boundaries in no way influenced the framing of the measure. In the present proposals the areas to be adopted will, I understand, be determined by reference to the fact that the living expenses incurred by residents in the areas are higher than those incurred by residents in other areas. The areas thus adopted will include parts of States but, having regard to the basis of determination of the areas, especially if a suitable preamble or explanatory words were included, there should be no difficulty in satisfying a court that the law had no regard to parts of States as such, but merely to parts of Australia selected by reason of differing economic conditions.

I do not consider that the facts that the boundaries are to some extent arbitrary and that, in the case of residents close to each side of the boundaries, there might be a discrimination not corresponding to any actual difference in economic conditions, affect the application of the principle enunciated by Isaacs J.

It must be admitted, however, that the view I have taken is not without difficulties, and that the contrary view is arguable both on principle and on the authorities. It is difficult to reconcile, for example, with the dictum of Starke J. in Cameron’s case quoted in this Opinion. Again the enquiry whether a particular area which is preferred or discriminated against is ‘considered as a part of a State or States’ comes close to a consideration of the purpose or motive of Parliament, which, as Latham C.J. pointed out in Moran’s case (at p. 760), is irrelevant. My own view is, however, that if it can be shown or inferred that a particular boundary line has been selected because it represents, in the opinion of the legislature or its delegate, either exactly or approximately the line between different economic conditions which are the substantial reason for the differentiation, there is no infringement of the constitutional limitations.

In my opinion, therefore, the taxation proposals outlined by the Commissioner may validly be enacted, whether the definition of the areas is contained in the Act or left to Regulations. If Regulations are to be used, I suggest that the Act should indicate the principle which the Regulations are to implement.

[Vol. 36, p. 365]