CHAPTER 3

Twenty-third Report of the Senate Select Committee on Superannuation
SUPERANNUATION SURCHARGE LEGISLATION
TABLE OF CONTENTS

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:

3.3 Clause 34 provides:

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:

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:

3.13 According to the N.S.W. Government written submission to the Committee:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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:

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