Opinion Number. 1756



Key Legislation

CONSTITUTION ss 51(ii), (iv), (vi), (xxxix), 61, 96: INCOME TAX ASSESSMENT ACT 1922 s 11: INCOME TAX ASSESSMENT ACT 1936 s 15, proposed new s 221: INCOME TAX ASSESSMENT BILL 1942: INCOME TAX (WAR-TIME) ARRANGEMENTS) BILL 1942 cll 12, 13, 17


Further Joint Opinion

Since we furnished to the Solicitor-General on 11th May, 1942, a joint opinion as to the validity of revised drafts of—

(a)  proposed new s. 221 of the Income Tax Assessment Act; and

(b)  the Income Tax (War-Time Arrangements) Bill 1942,1 we have had the advantage of considering the joint opinion, with regard to the same matters, of Mr. E.M. Mitchell and Mr. A.H. Taylor.2 We are asked to set out in more detail the views which at the Solicitor-General’s request we expressed in outline by telephone to him on 13th May.3

Though we have felt the force of the objections expressed by Sydney Counsel to the validity of clauses 12, 13 and 17(b) of the War-Time Arrangements Bill, we nevertheless adhere to our former view that these clauses are intra vires. Conference between us all, by affording an opportunity for full mutual exposition of reasons, might have produced some approximation of our respective views. Failing that, it is at least incumbent on us to explain with some particularity the considerations that have led us to the conclusion stated.

Clause 12 of the Income Tax (War-Time Arrangements) Bill authorises the Commonwealth to enter into an agreement with any State for two purposes: (a) the collection by the Commonwealth of arrears of State income tax; (b) the investment of the proceeds, in the name of the State, in Commonwealth loans. It will be convenient in the first instance to consider the validity of each purpose separately, though we think the clause may also be regarded as a whole.

Clause 12: the ‘collecting part’. In expressing the view that the Commonwealth taxation powers would support the entry by the Commonwealth into an agreement with a State to collect State Income tax, we should perhaps have stated that we were thinking of the taxation power as including also some incidental powers, both those implied at common law and those conferred by s.51(xxxix) of the Constitution. The proposition that the collection of State tax cannot be incidental to the execution of the power to collect Commonwealth tax is in our opinion too absolutely stated. By making the services of its own tax-collecting staff available to the State as well, the Commonwealth secures the tangible advantage of more economical administration, and the less tangible but not less real advantage of simplifying the obligations of the public (e.g. in making deductions at the source). Whether or not the advantages to the Commonwealth in the exercise of its power to collect its own taxes are sufficiently great to justify or require the legislation in question is a matter for the Parliament itself. There is we think a close parallel between the use of the Commonwealth’s taxing machinery authorised by cl. 12 of this Bill and the use of the Commonwealth Clothing Factory for the manufacture of uniforms in time of peace for various State services. This use of the Commonwealth Clothing Factory was upheld by the High Court, Starke J. dissenting, in A-G. (Victoria) v. Commonwealth, 52 C.L.R. 533.

Accordingly we are of opinion that, so far as concerns an agreement to collect State income tax, cl. 12 of this Bill, like earlier legislation to the same effect, such as s. 11 of the Income Tax Assessment Act 1922–1934 and s. 15 of the Income Tax Assessment Act 1936–1941, is properly referable to the taxation power, and powers incidental thereto.

Even if the ‘collecting part’ of cl. 12 could not be supported in time of peace, we are of opinion that it could validly be enacted in time of war, under the defence power. The Commonwealth Clothing Factory case is clearly in point in this regard. The extent to which man-power and materials would in practice be economised is a matter to be considered by the legislature in deciding whether or not to adopt the policy; not for a court in considering whether or not the measure is valid.

In part, the adverse opinion formed by Sydney Counsel on the ‘collecting part’ of cl. 12 appears to rest on the fact that they read it as purporting to confer on the executive governments of the States, irrespective of present State law, an authority to make the relevant agreement with the Commonwealth. We do not ourselves regard the clause as purporting to do this. In our opinion it confers no authority at all, save on the executive of the Commonwealth itself. The reason for thus giving specific legislative authority is no doubt an uncertainty whether the executive power per se would extend to the making of such an agreement; see the ‘Wool Tops’ case: Commonwealth v. Colonial Spinning & Co., 31 C.L.R. 421. The executive of a State may well, as Sydney Counsel observe, be legally unable to enter into any such agreement with the Commonwealth until the State law is altered by the Parliament of the State. But the office of cl. 12 is not to deal with this possibility.

As we have formerly stated, we are of opinion that the ‘collecting part’ of cl. 12 can be supported on other grounds as well as those noted above. But it will be convenient, before stating these, to examine the ‘funding part’ of the clause.

Cl. 12: the ‘funding part’. In our first opinion we stated our view of the validity of this part of the clause so summarily as perhaps to be misleading. We think the clause must be considered both on the assumption that its substance corresponds with its form and on the contrary assumption that its substance differs from its form.

In point of form, the office of the ‘funding part’ of cl. 12 is simply to authorise the executive of the Commonwealth to make an agreement with the executive of a State to invest in Commonwealth loans certain funds collected by the Commonwealth on behalf of a State. In our opinion, the Parliament plainly has power under s. 51(iv) to authorise such a procedure. When the relation of cl. 12 to other clauses of the Bill is taken into account, however, it is said that the agreement is only colourable, since the State is in effect compelled to enter into it. There is ample authority for the proposition that what is alleged to be a mere inducement to an agreement may in substance amount to a regulation of the matter in question, under penalty: see the Agricultural Adjustment Act case, United States v. Butler, 297 U.S.I. But in the present matter, even if the substance be not a taking by consent but a taking by compulsion, it seems to us probable that the taking would still be held to be by way of loan, and valid accordingly under s. 51(iv).

As we stated in our first opinion, it seems to us that the ‘collecting part’ of cl. 12 could quite properly be regarded as merely incidental to this ‘funding part’. If it is competent for the Commonwealth to receive (or take) certain State moneys by way of loan, it seems competent also for it to arrange to collect the funds through its own officers. In this view the whole clause would depend on the borrowing power.

To cl. 13 of the Bill we have given no further consideration, since during our discussion of these matters it was intimated to us that the Government proposed to omit the clause from the Bill to be introduced into Parliament.

Cl. 12 and s. 96 of the Constitution. In view of the fact that by virtue of cl. 17(b) the making of an agreement under cl. 12 is one of the express conditions of the grant of financial assistance to a State, it may be, as we stated in our second opinion, that the proper approach to the question of the validity of cl. 12 is not by way of the taxation power and the borrowing power or either of them, but by way of s. 96 itself. In this view, cl. 17 provides for the grant of financial assistance to a State on condition that it makes a certain agreement with the Commonwealth regarding arrears of State income tax, and the office of cl. 12 is simply to confer on the Commonwealth the necessary power to make the agreement. So regarded, clause 12 is in our view plainly incidental to the effectuation of the main purpose. It will be valid, so long as the principal provision—i.e. the imposition of the condition upon the grant of financial assistance to a State—is itself valid. To an examination of this question we must now turn.

Cl. 17(b) and s. 96 of the Constitution. The power conferred on the Commonwealth by s. 96 is to grant assistance to any State ‘on such terms and conditions as the Parliament thinks fit’. In the present Bill, cl. 17 authorises the grant of financial assistance to the States, and sub-clauses (a) and (b) define the conditions upon which the grants may be made. These conditions are onerous, for they amount to an abandonment by a State for the time being of its constitutional right to impose income tax, and even of its right to collect and use the arrears of tax owing from previous years. They must nevertheless, it would seem, be held valid unless either (a) some limitation in favour of the continued exercise of State powers can be read into the phrase ‘such terms and conditions as the Parliament thinks fit’, or (b) it can be shown that the alleged ‘grant of financial assistance’ is merely colourable, and that the clause is not in substance an exercise of the power granted by s. 96 at all. In our opinion, neither of these conditions can be satisfied.

Since the Federal Aid Roads case (Victoria v. Commonwealth 38 C.L.R. 399) and the Flour Tax case (Moran Pty. Ltd. v. Deputy Federal Commissioner of Taxation 63 C.L.R. 338) it is not possible to regard a ‘condition’ as invalid merely because the Commonwealth is regulating by means of a grant under s. 96 matters not ordinarily within its power, or is ensuring that a State power will be exercised in a particular way. In our opinion no valid distinction can be drawn between a condition requiring positively a specific exercise of a State power and a condition requiring negatively abstention from the exercise of a specific State power. The fact that such conditions were not contemplated by the draftsman of the Constitution is clearly not decisive.

The question whether the uniform tax scheme, regarded as a whole, is sufficient to show that the purported grants to the States are merely colourable is certainly more difficult. But we think that the case against the measures cannot be put higher than a contention that in order to make available to itself the maximum possible revenue from income tax during the war, the Commonwealth is seeking, by the use in combination of its taxing and its defence powers, to impede any attempt by the States to collect income tax during the subsequent years of the war and at the same time is offering to grant financial assistance to any State which is willing to vacate that field entirely during the war, forego all claim during the war to arrears of tax due from previous years, and lend to the Commonwealth the amounts collected in arrears.

The use of s. 96 by the Commonwealth, in combination with one or more other powers, to reach results that would or might have been impossible by means of the other powers alone, was recognised as a valid procedure both by the Privy Council and by the majority of the High Court in the Flour Tax case (61 C.L.R. 735 (H.C.), 63 C.L.R. 338 (F.C.)). The relevance and reasonableness of the condition as to arrears can, as we apprehend the position, be seen readily from a consideration of the amount of the grants authorised under cl. 17 for the States. Reference to the report of the Uniform Taxation Committee—which we think would be admissible—shows that the proposed grant has been arrived at by striking an average of the amounts actually collected by the several States during the financial years 1939–1940 and 1940–1941. In substance therefore the Commonwealth is saying to the States: ‘We will provide you with the same revenue from income tax as you have had in the previous two years, on condition that you get in no more, even by collecting arrears’. In our opinion, no connection with considerations of defence is needed under s. 96. But if some such connection were needed we should not think that one would be difficult to establish. The fact that the war finances of the Commonwealth will temporarily benefit from the condition imposed would in our view itself be sufficient.

For these reasons we are unable, either in principle or on authority, to regard cl. 17(b) as showing that the purported grants to the States are colourable, and not a valid exercise of s. 96 of the Constitution. In our opinion the whole of cl. 17 is valid, as drawn.

We doubt whether we have fully appreciated the difficulty felt by Sydney Counsel with regard to the workability of cl. 17(a). We agree with their view that—at any rate in a State where the laws for imposing assessing and collecting income tax have a permanent prospective operation—the Treasurer of the Commonwealth could not be satisfied that a State had not imposed an income tax unless the relevant State law had been either repealed or suspended in respect of the year in question. But once this had been done we should have supposed that the Treasurer could be ‘satisfied’, within the meaning of cl. 17(a).

During our consideration of these matters, we were asked to consider also a suggestion that had been put forward in order to meet the objections felt by Sydney Counsel to the provisions concerning the collection of arrears. We did not see an actual draft of the proposed modifications of the Bill. But we were informed that the proposal was that either in the Arrangements Bill or in a separate measure the Commonwealth should

1.  provide firstly for the paying of £34,000,000 per annum less, in any year, such amount as is collected by or on behalf of the States as arrears for the year 1941–1942 or any prior year;

2.  Grant to the States and invest in Commonwealth loans repayable on the expiration of the Act a sum equivalent to any amount collected by or on behalf of the States during the currency of this Act by way of arrears for the year 1941–1942 or any prior year.

If we have understood the new proposal correctly, the financial position of a State, and the financial responsibility of the Commonwealth, will be the same as it would be under the Bill as now drawn. The State will get, partly by grant from the Commonwealth and partly from the collection of arrears, the average of its actual collections during the previous two financial years, and no more. The Commonwealth will pay less in immediate grants, but will invest in loans, in the State’s name, an amount equivalent to the arrears collected. But under the new agreement the arrears will go to the States, and the loan will be provided directly by the Commonwealth from consolidated revenue.

While we do not think this rearrangement necessary, we do think it is not only unobjectionable but desirable. It secures the same substantial object as the proposals now embodied in the Bill—viz. that the States will have presently available to them from income taxation the average amounts they collected during 1939–1940 and 1940–1941. But it does this without imposing a condition that looks onerous because it makes the entire grant contingent upon the arrangement to allow the Commonwealth to fund arrears.

It is perhaps unsatisfactory for us to express any opinion on the question whether this proposal fully meets an objection felt by Sydney Counsel, which we do not ourselves share and the grounds of which we may have imperfectly grasped. Under the new proposal, as under the present Bill, the Commonwealth does in effect keep, as a loan from the States, the amount of the arrears to be collected by or on behalf of the States. But we would not ourselves think that in its proposed new form cl. 17 would, or for that matter could, be regarded as imposing conditions of such a character as to show that the purported grants were in any sense colourable, or as to deprive the clause of its validity as an exercise of the power conferred by s. 96 of the Constitution.

We have further considered the question, raised by some of the objections to the scheme as a whole which have been publicly expressed in Victoria, whether the actual taxing Bill can be held invalid, as discriminating between States contrary to s. 51(ii) of the Constitution. It is admitted, for the purpose of this objection, that any grant from Commonwealth revenue to a State under s. 96 may have the indirect financial effect of making taxpayers in the other States contribute towards the maintenance of State services in the State assisted, and thereby retaining for Commonwealth purposes in different States a different proportion of the total Commonwealth tax collected. But this it is said, is a different thing from the operation of the present scheme. For, it is said, by fixing the amount of the grant to each State by reference to the amount it had previously collected in income tax, the Commonwealth is making clear that what it is really doing is to add to the State income tax a Commonwealth tax that will vary in rate from State to State—which is just what the Constitution forbids.

In principle, the short answer to this objection is in our opinion that it confuses the legal operation of the scheme with its economic or financial result. The fact is that the presence of s. 96 in the Constitution very largely nullifies, so far as concerns taxation, the maxim that what cannot be done directly cannot be done indirectly. Under the present scheme, the payer of income tax will be under one obligation only, and that uniform throughout Australia. The Commonwealth may provide from consolidated revenue a grant sufficient in each case to maintain State services at their existing level; but this result occurs only because the Commonwealth Parliament, in its unfettered discretion, thinks fit so to provide. In fine, the Constitution cannot reasonably be read as making s. 96 subject to s. 51(ii).

On authority, the answer to this objection is in our opinion that it is inconsistent with the decision in Moran Pty. Ltd. v. Deputy Federal Commissioner of Taxation (63 C.L.R. 338). It is true that in that case the Privy Council was at pains to say that the Commonwealth Parliament must not be regarded as being able to exercise its powers under s. 96 with a complete disregard of the prohibition contained in s. 51(ii) or so as altogether to nullify that constitutional safeguard; 63 C.L.R. p. 349. But it must also be remembered that in that case the wheat industry assistance scheme was upheld by the courts, though the special grant to Tasmania, upon which the attack on the scheme was founded, was expressly linked with the amount of tax that had been paid by the millers in that State, and was admittedly intended to be used by the State to refund to the taxpayers almost the whole amount they paid in tax. It is in our view much easier to support the validity of the grants proposed in this Bill than those made under the wheat industry assistance scheme.


Notes of a conversation by telephone between Mr. W.J. Fullagar, K.C., and the Solicitor-General: 13th May, 19424

Mr. Fullagar:  We disagree with the further Sydney opinion which was supplied to us this morning.

I say that we do not agree with any of the alterations which they make.

We think that your suggestion to Mr. Clausen this morning is probably preferable with respect to the matters at present covered by clause 17(b).

It might be preferable to put the proposals as to the grant in a separate measure as they are related to a separate section of the Constitution, namely 96.



(Phoned to Mr Withnell at 11.40 a.m., 13.5.42)


Concerning the joint opinion of Messrs. Mitchell and Taylor as to the validity of Clauses 12 and 13 of the Income Tax (Wartime Arrangements) Bill 1942 and more particularly clause 17(b),5 the Government is prepared to drop clause 13 and no further consideration to this clause need to be given.

Clauses 12 and 17(b) are, however, an essential feature of the scheme and may not be dropped without some alternate method being found of achieving the same end. The point is that the £34,000,000 has been carefully calculated as being the revenue requirements of the States for each year. Assuming, as we must, that this amount has been correctly calculated, the effect of allowing the States to collect and use in addition the arrears of tax would be to allow them £6,000,000 during the first year which they do not require and which the Commonwealth would have to forego from its requirements which are so solely needed for the war purposes.

It is suggested that one method of overcoming the objection of Sydney Counsel is that the Commonwealth might provide (if necessary by a separate clause or even a separate bill) for payment of grants set out in the Schedule, less in any year such amount as is collected by or on behalf of each State as arrears for 1941–1942 or any prior year. Secondly that the Commonwealth grant to the States, and invest in Commonwealth loans in name of States and repayable on expiration of Act, a sum equivalent to any amount collected by or on behalf of the States during the currency of this Act by way of arrears for the year 1941–1942 or any prior year.

The effect of this proposal would be that a State would receive the grant proposed under the present Bill, less arrears; but, as it may collect these arrears its revenue would be brought up to the amount of the grant which the present Bill proposes to give, and in addition the Commonwealth would invest in War Loans in the name of the State an amount equal to the arrears so collected so that, just as is provided by the present Bill, the State would receive a credit for those arrears over and above the amount of the grant.

Should the States desire the Commonwealth to collect the arrears for them and pay them to the States, an agreement to this effect could be made under Section 15 of the Income Tax Assessment Act and in this event no provision would be included in the present Bill specifically empowering any such agreement.

1 Opinion No. 1753.

2 This is apparently a reference to Opinion No. 1755. The following paragraph refers to ‘the objections expressed by Sydney Counsel to the validity of clauses 12, 13 and 17(b) of the Income Tax (War-Time Arrangements) Bill’; these are the subject of Opinion No. 1755.

3 Notes setting out these views are reproduced at the end of this opinion.

4 In the Opinion Book notes of further deliberations in relation to the proposed uniform federal income tax scheme were reproduced at the foot of the Schedule to Opinion No. 1697—now published separately as Opinion No. 1752. Those notes have been reproduced at the foot of this opinion given that counsel describe their object in their opinion as: ‘… [to] set out in more detail the views which at the Solicitor-General’s request we expressed in outline by telephone to him on 13th May’.