CHAPTER 3
CONSTITUTIONAL ISSUES
Possible Invalidity
3.1 In a document supplied to the Committee, Mr Dennis Rose AM, QC, of
Blake Dawson Waldron, Solicitors, and making a submission on behalf of
the Business Council of Australia, submitted that the Superannuation Contributions
Surcharge (Assessment and Collection) Bill 1997, if enacted, would breach
the Constitution. As the proposed Act is a central part of the surcharge
scheme, if it was found to be invalid the current legislative scheme would
be inoperable.
3.2 Mr Rose's argument is based on the premise that the proposed legislation
relies either on the taxation power contained in paragraph 51(ii) of the
Constitution or on the power to legislate on matters incidental to the
exercise of a power vested in the Commonwealth to legislate for a matter
(paragraph 51(xxxix) of the Constitution). If the surcharge is based on
the taxation power, Mr Rose argued that clause 34 of the Superannuation
Contributions Surcharge (Assessment and Collection) Bill 1997 is probably
invalid and that this would result in the remainder of the Bill being
invalid as it:
...would clearly be inseverable from the provisions of the proposed
Act imposing liabilities on the [superannuation] providers to pay surcharge
and advanced instalments. [1]
3.3 Clause 34 provides:
If a superannuation provider makes a payment under this Act in discharge
of a liability of the provider for surcharge or advance payment on a
member's surchargeable contributions, then, dispite anything in any
trust instrument, contract or other document or in any legislation,
the provider may reduce any benefits accruing to or for the member after
20 August 1996 by the amount paid.
3.4 Mr Rose argues that this will breach certain decisions of the High
Court, the most recent being that in MacCormick v Federal Commissioner
of Taxation (1984) 158 CLR 622. An essential point to Mr Rose's argument
is the difference between a liability to pay taxation and an obligation
to collect taxation that is payable by another person. In a submission
to the Committee Mr Rose argues:
Clause 34 is probably not within the taxation or related "incidental"
powers. Given the imposition of a tax on person A, it is not within
those powers for the Commonwealth to require another person B to pay
the amount of the tax to the Commonwealth... [2]
3.5 In relation to the surcharge, this would mean that although the surcharge
is levied on members with assessable income and superannuation contributions
above the threshold (currently $70 000), clause 34 will provide that the
superannuation provider is liable to pay the surcharge on behalf of the
members, rather than only be responsible for collecting the surcharge
from the members.
3.6 In oral evidence given to the Committee, Mr Rose made the distinction
between the surcharge, where the superannuation provider can be liable
to pay the surcharge, and the PAYE taxation system where the employer
is obliged to collect taxation from their employees. [3]
3.7 Representatives of the Australian Taxation Office (ATO) agreed in
oral evidence given to the Committee that the proposed surcharge was based
on paragraph 51(ii) of the Constitution and that they were not aware of
a similar tax collection method. [4]
When asked to give a view on the submission by Mr Rose, the Australian
Tax Office representatives expressed the view that such a question should
be put to the Attorney-General's Department. [5]
3.8 The Chairman of the Committee wrote to the Attorney-General, the
Hon. Daryl Williams AM, QC, MP, offering him the opportunity to comment
on Mr Rose's opinion. The Committee understands that Mr Williams intends
to respond. However, this response was not received prior to this report
being sent for printing.
Taxation on the Property of a State
3.9 Section 114 of the Constitution provides, in part, that the Commonwealth
is not to:
3.10 Submissions made by both the State of New South Wales (N.S.W.) and
South Australia (S.A.) argued that the proposed surcharge could be in
breach of section 114 as it applied to certain State superannuation schemes.
3.11 The Superannuation Industry (Supervision) Act 1993 (SIS Act)
contains the concept that certain superannuation funds are 'Constitutionally
protected' funds. According to the explanatory memorandum to the Bill
which introduced the concept, a Constitutionally protected fund will be
one where the assets of the fund belong to a State government. The SIS
ACT contains provisions for the Income Tax Regulations to prescribe that
a fund is a Constitutionally protected fund, but to date no such regulations
have been made.
3.12 In oral evidence given to the Committee by a representative of the
N.S.W. Government, the representative stated:
Under section 114 of the Commonwealth Constitution the property of
a State may not be taxed. Some superannuation funds are actually styled
as superannuation funds but do not consist of a separate fund. Instead
they consist of an account within a consolidated fund of a state. It
is our understanding that these funds were constitutionally protected
and therefore not subject to tax. [6]
3.13 According to the N.S.W. Government written submission to the Committee:
There appears to be no constitutional or legal basis upon which the
levy of the surcharge can be made in the way proposed on the 'constitutionally
protected' funds. The Commonwealth attempt to sweep aside the protection
of State property in this way has very wide ramifications beyond superannuation,
and is viewed with great concern by the States. [7]
3.14 In response to questions that the surcharge may be imposed on the
individual rather than the fund, (where it can be argued that for defined
benefits schemes which apply to most State government employees that the
surcharge is payable by the individual at the time they retire and so
cease to be an employee of the State), the N.S.W. Government representatives
replied:
That is certainly a question that would have to be considered. Yes,
it is certainly a way of saying that this is not a tax on the State.
[8]
3.15 The South Australian Government oral submission noted that the Commonwealth
Treasurer had written to the States requesting that they cooperate with
the implementation of the surcharge in relation to Constitutionally protected
funds. [9] The issue of State involvement
has raised the question of whether the State Parliaments will be able
to pass complementary legislation, particularly where the State government
does not have a majority in both Houses of the Parliament in the majority
of States where there are two Houses of Parliament.
Discrimination between the States
3.16 Paragraph 51(ii) of the Constitution (the taxation power) provides
that the Commonwealth may legislate in regard of 'taxation, but so as
to not discriminate between the States or parts of States'. The N.S.W.
Government submission notes:
The experience of public sector superannuation funds, Australia wide,
is that States: (a) fully fund or fully unfund their superannuation funds; or (b) fully fund some funds but not others; or
(c) partially fund. [10]
3.17 The N.S.W. Government submission then argues that the different
treatment of accumulation and unfunded schemes will result in the surcharge
being levied unevenly amongst the various State schemes. Within a State,
superannuation providers will also be treated differently resulting in
discrimination between parts of a State. This raises the question of whether
section 114 of the Constitution has been breached. [11]
3.18 The issue of whether the proposed surcharge will offend section
114 of the Constitution was also raised in a submission made by the Judicial
Remuneration Coordinating Committee. That Committee stated in its submission
in relation to the payment of judicial pensions, which are paid from the
State revenue:
In South Australia (and, so far as I am aware, some other States as
well), judicial pensions are payable by the Treasurer, direct from the
consolidated revenue which, by virtue of the relevant statute, is appropriated
for that purpose. There is no separate pension fund. The effect of the
proposed legislation is to attempt to attach the proposed surcharge
to the consolidated revenue of the State in a manner which appears to
offend section 114 of the Constitution. [12]
Remuneration of Federal Justices
3.19 Paragraph 72(iii) of the Constitution provides that for Justices
of the High Court and other courts created by the Commonwealth Parliament
they:
...shall receive such remuneration as the Parliament may fix; but the
remuneration shall not be diminished during their continuance in office.
3.20 The Parliament has established a number of courts, including the
Federal Court and the Family Court. Following the argument being put that
the surcharge would have the effect of reducing the remuneration of current
Federal justices, the Government introduced the Superannuation Contribution
Surcharge (Application to the Commonwealth) Bill 1997 and the Superannuation
Contribution Surcharge (Application to the Commonwealth - Reduction of
Benefits) Bill 1997.
3.21 The effect of the two Bills is that the surcharge will not be payable
in respect of currently serving Federal justices but will apply to new
appointments. The President of the Association of Australian Magistrates,
Mr Somes, made the point in oral evidence given to the Committee that
the application of the surcharge to only newly appointed justices and
to currently serving and newly appointed classes of other judicial officers,
would result in the situation of people doing the same work, ie. presiding
over a court and making judicial decisions, but receiving less final remuneration.
In his evidence Mr Somes stated:
If it is true that Federal judges currently serving are to be exempted
- and one would have to assume that it is because of the Constitutional
concerns - then it is difficult to see how people who do precisely the
same work, but perhaps at a slightly different level, can be treated
in any different way. [13]
3.22 The Association further argued that to be equitable, if the exemption
is to apply to Federal justices, magistrates should also be exempted from
the surcharge. [14]
Other Issues Relating to the Judiciary
3.23 It has been submitted to the Committee that the same principle that
applies to the protection of the remuneration of Federal justices equally
applies to members of the State judiciary. The Judicial Remuneration Coordinating
Committee stated in its submission:
However, precisely the same constitutional principle applies to judges
of the States. This is a principle that has been respected by Parliaments
in the common law world for many years. It may be, as a result of the
decision of the High Court in Kable v DPP that the same principle
applies to the State judiciary by virtue of the Australian Constitution.
[15]
3.24 The argument that the proposed surcharge should not apply to members
of the State judiciary was also raised in a submission by the Bar Association
of Queensland. In its submission the Association stated:
If serving Federal judges are constitutionally protected from the imposition
of the surcharge it would be highly discriminatory and inequitable if
the surcharge were to apply to equivalent State judges. .... but it
is a clear and indefensible discrimination. [16]
3.25 The Judicial Remuneration Coordinating Committee also raised the
possibility that the proposed surcharge could effect the willingness of
members of the legal profession to accept judicial appointments. They
argue that members of the judiciary are appointed from the best of the
practicing profession and that appointment results in a significant loss
of earnings. This, however, is compensated to a degree by the judicial
pension schemes. They further argue that if the value of the pension is
reduced, there may be difficulty in attracting the best members of the
profession to the judiciary. [17] The
same point is made in a submission by the Stipendiary Magistrates Association
of South Australia. [18]
3.26 Submissions from judicial representatives also raise the issue of
members of the judiciary being appointed on an expected remuneration package,
a substantial proportion of which relates to their pension entitlements.
The value of this package will be affected by the surcharge. Various submissions
on this matter have stated:
Presently judicial officers have accepted appointment on the express
basis of a remuneration package which included the present pension entitlements.
[19]
We, as no doubt most members of unfunded defined benefits schemes,
commenced our employment and membership of the relevant superannuation
scheme , with the expectation .... that our fixed compulsory contributions
to the scheme would be available to us on retirement, subject to the
imposition of the reasonable and universal rates of tax on the ultimate
lump sum. [20]
3.27 The possibility of the surcharge interfering with judicial independence
under the separation of powers doctrine was raised in the submission made
by the Magistrates Association of the ACT. The Association argued that
they exercise Federal jurisdiction at times and that:
It follows that the proposed diminution in our remuneration by the
Commonwealth Parliament during our continuance in office will, when
we are exercising federal jurisdiction, operate as an interference with
our independence by the executive and legislative arms of the Federal
Government. [21]
3.28 Following this argument, it may also be argued that any increase
in taxation or the Medicare levy will also serve to reduce the net remuneration
of judicial officers and so interfere with judicial independence.
Constitutional Authority
3.29 Members of the Committee sought information on the Constitutional
basis for the proposed surcharge from representatives of the ATO. The
representatives made the initial point that the Constitutional basis for
proposed legislation is a matter for the Attorney-General's Department
and the Office of Parliamentary Counsel.
3.30 The ATO representatives also noted that they had not received advice
regarding the Constitutional authority of the proposed surcharge prior
to the submission by Mr Rose (see above), other than advice relating to
the application of the surcharge to Federal judges and the States. The
representatives also noted that they would need to check files to determine
the exact position regarding advice they had received. [22]
3.31 However, when questioned as to which Constitutional power would
be relied upon to support the proposed surcharge, a representative put
forward the view that:
The bill as a whole, I understand, is based on section 51, part II.
[23]
3.32 Paragraph 51 (ii) [the power referred to above] of the Constitution
allows the Commonwealth to make laws with respect to taxation. The advice
sought by the ATO relating to the Constitutional authority of the proposed
surcharge was sought in relation to the imposition of the surcharge on
members of the Federal judiciary, rather than on the basis of the Constitutional
authority relating to the Bill implementing the surcharge. An ATO representative
informed the Committee that:
The question on which we sought advice concerned whether the imposition
of the surcharge was in breach of section 72 of the constitution, which
relates to the appointment and remuneration of judges. [24]
Acquisition of Property
3.33 The representative of Bramex Super Pty Ltd, Mr Ross Ramsay, raised
the issue of whether the proposed surcharge would amount to an acquisition
of property on other than just terms, which is prohibited by paragraph
51(xxxi) of the Constitution. Mr Ramsay appeared as a representative of
one of over 120 000 excluded superannuation funds (ie. funds with fewer
than 5 members and which make up the majority of superannuation funds
in Australia). Mr Ramsay argued that:
If it is not a tax, it is surely unconstitutional anyway because it
is an expropriation of assets without any other compensation. [25]
3.34 The result of Mr Ramsay's argument would be that the proposed surcharge
is either Constitutionally valid under paragraph 51(ii) (the taxation
power) or otherwise would be invalid.
[GO TO CHAPTER 4]
Footnotes
[1] Document presented to the Committee on 11
March 1997.
[2] Ibid.
[3] Evidence, p. S214.
[4] Evidence, p. S289.
[5] Evidence, p. S288.
[6] Evidence, p. S13.
[7] Submission No. 22, p. 5.
[8] Evidence, p. 8, 9.
[9] Evidence, p. 13.
[10] Submission No. 22, p. 4.
[11] Ibid.
[12] Submission No. 64, p. 2.
[13] Evidence, p. 166.
[14] Ibid.
[15] Submission No. 64, p. 2.
[16] Submission No. 71, p. 1.
[17] Ibid., p. 3
[18] Submission No. 5, p.2.
[19] Submission No. 64, p. 3.
[20] Submission No. 36.
[21] Ibid.
[22] Evidence, p. S285-288.
[23] Ibid., p. S304
[24] Ibid., p. S306
[25] Ibid., p. S242
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