THE SCHEME - IN SUMMARY

Tax Analysis By Fiona Alpins The Superannuation Guarantee Charge is not a tax, but is instead an acquisition of property without just terms and therefore contravenes the prohibition on legislative power under sec. 51 (xxxi) of the Constitution. Even if the Superannuation Guarantee Charge were construed to be a tax, the Acts governing the Scheme are also laws with respect to the acquisition of property without just terms and therefore ultra vires the Commonwealth s powers. The Superannuation Guarantee Scheme is governed by the Superannuation Guarantee Charge Act 1992 (Cth.) (the Charge Act ) and the Superannuation Guarantee (Administration) Act 1992 (Cth.) (the Act ). Under the Scheme, employers who provide less than the prescribed minimum superannuation contribution for the benefit of each of their employees (subject to limited exemptions) are liable to a Superannuation Guarantee Charge (the SGC ). These Acts may be supported by a number of section 51 powers in the Constitution - sec. 51(ii) (taxation), sec. 51(xx) (corporations), sec. 51(xxiii) (pensions), sec. 51(xxxiii) (the acquisition of property). However this paper deals with the following issues which arise for consideration: is the SGC a tax? is the SGC an acquisition of property? are the Acts laws with respect to taxation? are the Acts laws for the acquisition of property? It is contended in this article that: the SGC is not a tax, but instead an acquisition of property without just terms, and therefore the imposition of the SGC contravenes the constitutional prohibition on the Commonwealth s acquisition power SUPERANNUATION Why the Superannuation Guarantee Scheme is unconstitutional It is contended in this article that the Superannuation Guarantee Scheme is unconstitutional, and the consequences of constitutional invalidity are discussed. under sec. 51 (xxxi) of the Constitution; furthermore, even if the SGC were construed to be a tax, the Acts are also laws with respect to the acquisition of property without just terms and therefore ultra vires the Commonwealth s powers. THE SCHEME - IN SUMMARY The Scheme is administered by the Australian Taxation Office. All employers are subject to the Scheme (other than the Commonwealth). A Commonwealth authority otherwise exempted from Commonwealth taxes is liable to pay the SGC unless the legislation exempting the authority from Commonwealth taxes expressly exempts the authority from liability to pay the SGC (sec. 5A of the Act). The minimum contribution that an employer must provide for each (relevant) employee to avoid liability to pay the SGC is currently 7 per cent (the charge percentage ) based on each employee s notional earnings base subject to the maximum contribution base (secs 13, 14 of the Act). The charge percentage will rise to 9 per cent for the year 2002/3 and subsequent years (secs 20, 21). Under the Scheme, the prescribed employer contributions must be paid for the benefit of each employee to any complying superannuation fund, the Superannuation Holdings Account Reserve ( SHAR ) or the retirement savings account ( RSA ) of an employee. A complying superannuation fund means a complying superannuation fund for the purposes of Part IX of the Income Tax Assessment Act 1936 (Cth.) (secs 6(1) and 7 of the Act). A complying superannuation fund has the meaning given in sec. 45 of the Superannuation Industry (Supervision) Act 1993 ( SIS Act ), namely a resident, regulated superannuation fund which has received a notice from the APRA (or the former ISC) stating that it is a complying superannuation fund under the SIS Act 1993; alternatively the fund must be an exempt public sector superannuation scheme. Complying superannuation funds are required to ensure that the contributions are fully vested and preserved in accordance with the SIS Regulations, that is, all benefits arising from the contributions are maintained for the employees for whom the contributions are made and employees can only access the benefits in the circumstances prescribed by the Regulations. (For the purposes of the Scheme, contributions to the SHAR are treated as contributions to a complying superannuation fund, and are subject to any overriding award obligations to make the contributions to a superannuation fund.) An RSA has the same meaning as in the Retirement Savings Accounts Act 1997 (sec. 6(1) of the Act). 254 The Tax Specialist

Employers must measure the actual level of superannuation contributions provided for each employee in each quarterly contribution period (the actual percentage level of support) and compare it to the prescribed minimum contribution (the charge percentage), to ascertain whether there is an individual superannuation guarantee shortfall. If the actual percentage level of support provided is less than the charge percentage, there is an individual superannuation guarantee shortfall in respect of the particular employee (which is the difference in percentage levels times total salary or wages paid to the relevant employee (subject to the maximum contribution base)) in the contribution period. While contributions must be made to complying superannuation funds or an RSA (contributions to the SHAR being treated as the former), measurement of the superannuation contribution provided by the employer differs depending upon whether a defined benefit superannuation scheme (secs 6A, 22) or another type of fund (sec. 23) is used. If an employer makes superannuation contributions for the benefit of employees pursuant to an industrial award, occupational superannuation arrangement or in accordance with Commonwealth, State or Territory law, those contributions may count towards the prescribed minimum contributions to be made by employers. Accordingly, if an employer s superannuation contribution made to a complying superannuation fund in respect of an employee under award provisions is equal to or greater than the prescribed minimum contribution under the Scheme, the employer will not have an individual superannuation guarantee shortfall. An employer must always satisfy obligations under the Scheme, which are distinct and discrete from obligations arising under award provisions, although the latter may count towards the former. It is important to note that the Scheme ensures a prescribed level of superannuation support irrespective of award provisions. If an employer has one or more individual superannuation guarantee shortfalls for a year, the employer has a superannuation guarantee shortfall, comprising: (a) the total of the employer s individual superannuation guarantee shortfalls for the year (secs 18, 19 of the Act); and (b) the employer s nominal interest component for the year (sec. 31); and (c) the employer s administration component for the year (sec. 32). (sec. 17 of the Act) The nominal interest component represents an estimation of fund earnings foregone by the failure to provide the prescribed minimum superannuation contribution. The administration component serves to recover expenses associated with administering the SGC (and is therefore retained by the ATO). The Charge Act incorporates and is to be read as one with the Act (sec. 3 of the Act). The Charge Act imposes the SGC, and provides that the amount of the SGC payable is equal to the amount of the employer s superannuation guarantee shortfall (secs 5 and 6 of the Charge Act). Section 16 of the Act provides that the employer is liable to pay the SGC imposed by the Charge Act. (Assumedly the Acts have been enacted in this manner to avoid offending sec. 55 of the Constitution.) The Scheme is administered on the basis of self-assessment - an employer who has a superannuation guarantee shortfall for a year must lodge a superannuation guarantee statement for the year (sec. 33 of the Act), and must pay the relevant amount of the SGC (secs 5 and 6 of the Charge Act). The superannuation guarantee statement constitutes a deemed assessment (sec. 35 of the Act), and the Commissioner may render a default assessment if the employer fails to lodge a superannuation guarantee statement and the Commissioner believes the employer is liable to pay a SGC for the year (sec. 36). The Commissioner is able to amend assessments (sec. 37). The SGC payable by an employer constitutes a debt due to the Commonwealth (sec. 50). Part 8 of the Act governs the manner in which the Commissioner must deal Fiona J. Alpins Barrister, B.Comm. LLB. (Hons.)(Melb.) A.S.A. Fiona Alpins is a member of the Victorian Bar. She practises in taxation law, superannuation law and commercial law. She also lectures in taxation law and commercial law. with the shortfall component of the payment of a SGC in relation to a particular employee (sec. 63 of the Act). Amounts that the Commissioner is required to pay under Part 8 are payable out of the Consolidated Revenue Fund, which is appropriated accordingly (sec. 71). The shortfall component of the SGC comprises the amount of the SGC (in relation to the relevant employee(s)) less the administration component and any penalty charge payable, except a late payment penalty (sec. 64). The Commissioner must redistribute the shortfall component for the benefit of the relevant employee(s) in accordance with secs 65-67 of the Act. The shortfall component must be redistributed to a complying superannuation fund or complying approved deposit fund (ADF) nominated by the employee or otherwise in accordance with the regulations - sec. 65(1)(a)(b). The shortfall component amount may also be paid to an employee s RSA. If an employee does not make a nomination, the Commissioner must credit the shortfall component to an account in the employee s name in the SHAR (sec. 65(1)(c)). If an employee has retired because of permanent incapacity or invalidity, the Commissioner must pay the amount of the shortfall component to the former employee (sec. 66). If the employee has died, the Commissioner must pay the amount of the shortfall component to the deceased s legal personal representative (sec. 67). Volume 3 No. 5 April 2000 255

Some important points to note about the Scheme: The Scheme requires an employer to provide superannuation support for the benefit of individual employees to avoid liability to pay the SGC; The SGC is equivalent to the shortfall in prescribed minimum superannuation contributions (plus an estimation of fund earnings foregone by failure to provide the prescribed minimum superannuation contributions plus an administration component); The shortfall component of the SGC is redistributed by the ATO for the benefit of, or directly to, employees in respect of whom the SGC was paid; While superannuation contributions made pursuant to award provisions can count towards fulfilling employers obligations under the Scheme, the Scheme imposes distinct and discrete obligations on employers. There is no quid pro quo, in that a Scheme contribution is not made, nor is the SGC payable, in consideration of the performance of obligations under an employee s employment contract; The constitutional basis of the legislation is not stated and is not readily apparent. 1. THE SGC IS NOT A TAX The archetypal definition of taxation was given by Latham C.J. in the case of Matthews v Chicory Marketing Board (Vic.): 1 [A] tax...is a compulsory exaction of money by a public authority for public purposes, enforceable by law, and is not a payment for services rendered.... In Air Caledonie International v Commonwealth, 2 while acknowledging and applying Latham C.J. s definition of taxation, the High Court in its unanimous judgment considerably widened the scope of the definition of taxation, by not treating Latham C.J. s definition as exhaustive: [T]here is no reason in principle why a tax should not take a form other than the exaction of money or why the compulsory exaction of money under statutory powers could not be properly seen as taxation notwithstanding that it was by a non-public authority or for purposes which could not properly be described as public. The Court did not provide an example of what would be encompassed by this non-exhaustive application of Latham C.J. s test. Although the Court s comments were only dicta, they were considered and applied in a recent case concerned with the meaning of taxation - the Australian Tape Manufacturers case ( ATM ). 3 In ATM, the Court was required to consider the nature of a royalty imposed on vendors of blank tapes which was payable under statutory authority (Part VC of the Copyright Act 1968 (Cth.)) to a collecting society on behalf of copyright owners. By a majority of 4:3 (Mason C.J., Brennan, Deane and Gaudron JJ.), the Court held that the royalty imposed a tax. The Court had held unanimously that the royalty provisions of Part VC were a law with respect to copyrights under sec. 51 (xviii) of the Constitution; consequentially the amending Act that had introduced the provisions contravened sec. 55 of the Constitution and was invalid. Although the levy did not form part of the Consolidated Revenue Fund, the majority held that this did not prevent the levy being a tax - the majority rejected the proposition that an exaction raised and received by an independent statutory authority pursuant to a power conferred by statute...could not constitute a tax...[a]s Parliament has power to authorize a statutory authority to levy and receive a tax. 4 The majority said that Australian authority had regarded the fact that a levy is directed to be paid into the Consolidated Revenue Fund as a conclusive indication that the levy is exacted for public purposes. 5 However, the authorities to which the Court was referring must be read in their context, that is, where the imposition is made for the benefit of the Consolidated Revenue 6 and the moneys can then be spent for any purpose for which the Commonwealth may lawfully appropriate money. 7 The fact that an exaction enters the Consolidated Revenue Fund may serve as an indication that it constitutes a tax, but it is not determinative. For instance, a compulsory service fee enters the Consolidated Revenue Fund, but it is not a tax. 8 Section 81 of the Constitution provides that all revenues or moneys raised or received by the Executive Government... shall form one Consolidated Revenue Fund, to be appropriated for the purposes of the Commonwealth. In the Consolidated Revenue Fund, the taxation moneys[ ] identity is lost...there can be no earmarking...of any Commonwealth revenue. 9 The majority in ATM said that [t]he requirement imposed by s.81...cannot constitute...a criterion for what is a tax. 10 The majority did not equate public purposes with governmental purposes. The Court in the ATM case was aware that the Part VC of the Copyright Act was:...a legislative scheme designed to deal with the problem presented by the widespread practice here and overseas of private and domestic taping of sound recordings, and that...this practice ha[d] constituted an infringement of the copyright in the sound recordings but that...for all practical purposes...the owners of those copyrights were left without any effective remedy... 11 The Court stated that it may be said that:...an expropriation from one group for the benefit of another as an incident of legislative regulation of interests...with a view to bringing about what is conceived to be an equitable outcome... is private in that it concerns the interests of the two groups only. But...the legislative solution to the problem proceeds on the footing that it is imposed in the public interest. Indeed, the purpose of directing the payment of the levy to the collecting society for ultimate distribution of the net proceeds to the relevant copyright owners as a solution to a complex problem of public importance is of necessity a public purpose. 12 The majority referred to the case of Attorney-General (N.S.W.) v Homebush Flour Mills Ltd. 13 (albeit a sec. 90 case and arguably a poor analogy as the Court in that case was interpreting a prohibition 256 The Tax Specialist

on power), and commented: Just as, in that case, the relief of necessitous farmers was a public purpose so, in this case, the compensation of relevant copyright owners arising out of what has been a complex problem of public importance is a public purpose. 14 A trenchant criticism of the majority s reasoning in this regard can be found in the dissenting judgments of Dawson and Toohey JJ., and the lone judgment of McHugh J. In their joint judgment, Dawson and Toohey JJ. refer to the passage from Air Caledonie cited above and stated: Read in its widest sense that passage does suggest that any exaction enforceable by law may be a tax in the constitutional sense and that is... to regard as dispensable that feature of a tax which is, in truth, indispensable, namely that the moneys raised be government revenue. Indeed, if all that is required for a tax is that there be an exaction enforceable by law, sec. 51(ii) assumes unforeseen proportions. Any compulsory exaction of money under statutory power would need no other constitutional warrant. 15 The dissenting judges stated that the purpose of the exaction was private, not public, in that it was designed to compensate copyright owners, rather than to raise government revenue. 16 As stated in the dissenting judgments, taken too far, the dicta in Air Caledonie would appear to make any compulsory exaction a taxation. (Arguably it would also render the constitutional guarantee of just terms, which circumscribes the Commonwealth s acquisition power under sec. 51(xxxi) of the Constitution, meaningless - this issue is addressed in Part 4 of this paper.) It is noteworthy that the majority in ATM, while acknowledging the passage... from... Air Caledonie to the effect that an exaction for non-public purposes may be a tax, 17 actually based its decision on the Matthews definition, and sought to demonstrate a public purpose. However, with respect, the manner in which it did so ultimately renders the requirement to show a public purpose meaningless. The majority justified the existence of a public purpose by reference to the legislative solution being imposed in the public interest. The problem is that the majority s finding of a public purpose appears to rely on the fact that the legislature chooses to enact legislation to deal with what it perceives to be in the public interest. According constitutional validity to laws passed by the legislature by virtue of the fact that the legislature decides to pass them renders laws unchallengeable. The majority s reasoning would result in a law being valid in this regard because the legislature elects to pass it. Equating public purpose with public importance is an equally nebulous and unsatisfactory approach. Equating public purposes with governmental purposes i.e., the raising of revenue for government expenditure, as is evident in the dissenting judgments in ATM would appear to be a more satisfactory approach. It guards against an overly wide application of sec. 51(ii) which would encroach upon the constitutional guarantee in sec. 51(xxxi). However, the High Court has previously, albeit in the context of the arbitration power under sec. 51(xxxv) of the Constitution, rejected the discredited distinction between functions of government which are essential or truly governmental and those which are not, 18 noting that the U.S. Supreme Court, after embracing... the distinction between functions that are traditionally governmental and those that are not..., has now rejected the distinction as unworkable. 19 One must look elsewhere in the majority s judgment to find an indication as to whether there is any legally enforceable exaction of money (other than a fee for services or penalty) which the majority could see as not being a taxation. At p.509, while discussing the relationship between the legislative powers under sec. 51 (ii) and sec. 51 (xxxi), the majority stated that the proviso that money...was not revenue raised by taxation... might be satisfied whenever the relevant purpose was to confer a private and direct benefit on a person or group [emphasis added]. The significance of these words is discussed in Part 3. Leaving criticism of this aspect of the majority judgment aside, and assuming that it represents the current law as to what constitutes a tax for the purposes of sec. 51 (ii), in my opinion the SGC falls outside even the majority s view in the ATM case. Section 71 of the Act provides that amounts that the Commissioner is required to pay under Part 8 of the Act are payable out of the Consolidated Revenue Fund, which is appropriated accordingly. However, the Fund serves only as an administrative conduit for transferring the shortfall component in order to confer a private benefit upon the relevant employees. Accordingly, the fact that the shortfall component passes through the CRF does not determine whether the SGC has a public purpose, as the method of collecting the SGC merely complies with sec. 81 of the Constitution, without being for the benefit of the CRF. The germane issue in the ATM case is the majority s interpretation of what constitutes a public purpose. The majority was quite explicit that the royalty imposed served the purpose of compensating copyright owners, and was mindful of a pre-existing problem which the legislation was designed to remedy. The public purpose for which the money was exacted was defined by the purpose for which it was expended. It was not a private purpose because there was no connection between any individual payment and any individual receipt. Nor was there any connection between any payment or receipt and any particular breach of copyright. The facts of ATM are clearly distinguishable from the Superannuation Guarantee Scheme. The SGC does not, nor is it designed to, compensate employees for any prior transgression of their rights. It simply serves to confer a benefit on employees where employers have failed to confer the benefit referred to in other provisions of the Act. It is not payable as a quid pro quo in consideration of an employee s services, as an employer s obligations under award provisions are discrete from the Volume 3 No. 5 April 2000 257

obligations imposed under the Scheme (although the former can serve to reduce the latter). The Scheme lacks the generality which gave the quality of public to the ATM scheme. Money is exacted because of a failure to provide a benefit to an individual employee. It is expended in the same amount for the benefit of that employee. The Act and the Charge Act may be intended to deal with a pre-existing problem of public importance but the purposes they serve are private purposes. Accordingly, the SGC has no public purpose under the majority test. The SGC fits squarely with the majority s view as to what would not constitute a tax, as it serves the purpose of conferring a private and direct benefit on individual employees. In this respect, the SGC can be contrasted with the now defunct Training Guarantee Scheme, governed by legislation which was upheld by the High Court as laws validly enacted pursuant to the taxation power under sec. 51 (ii) in Northern Suburbs General Cemetery Reserve Trust v The Commonwealth. 20 The Training Guarantee Scheme bore structural similarity to the Superannuation Guarantee Scheme. The Training Guarantee Act 1990 (Cth.) imposed on employers a training guarantee charge ( TGC ) equal to an employer s training guarantee shortfall in a year. This charging Act was read together with the Training Guarantee (Administration) Act 1990 (Cth.) ( TGAA ). The primary relevance of the case is what the Court held to constitute a law with respect to taxation (see Part 2). However, two important points arise at this stage, in considering what constitutes a tax. In that case, the TGC was characterised as a tax, as opposed to being a penalty. In their joint judgment, Mason C.J., Deane, Toohey and Gaudron JJ. stated: The characterisation of the charge is complicated by the circumstance that the legislature has not stated whether the charge is a tax or a penalty... but... the considerations pointing to a tax rather than a penalty are decisive. Neither the Act nor the Administration Act mandates or proscribes conduct of any kind. The legislative provisions do not make it an offence to fail to spend the minimum training requirement; nor do they provide for the recovery of civil penalties for such a failure. Consequently, the charge is not a penalty because the liability to pay does not arise from any failure to discharge antecedent obligations on the part of the person on whom the exaction falls. 21 In view of this decision, and the facts that the Acts governing the Superannuation Guarantee Scheme do not make it an offence for employers to fail to contribute the prescribed minimum superannuation contribution and do not provide for the recovery of civil remedies for failure to do so, the SGC is unlikely to be interpreted by the Court as a penalty. (Although arguably the Court might take a more liberal approach to the distinction between a tax and penalty in the context of interpreting a prohibition on power, i.e., in the context of construing the scheme as a law with respect to the acquisition of property under sec. 51 (xxxi) (see Part 4)). However, despite their structural similarity, there are fundamental differences between the erstwhile Training Guarantee Scheme and the Superannuation Guarantee Scheme: 1. Under the Training Guarantee Scheme, the minimum training expenditure required to avoid liability to the TGC did not have to be incurred in relation to specific or individual employees ; rather it could be incurred for employees in general or even for non-employees (TGAA secs 25, 27). Conversely, the Superannuation Guarantee Scheme requires the prescribed minimum contributions to be vested in individual employees (the importance of this distinction is discussed in Part 2). 2. The TGC was retained by the Commissioner in a Training Guarantee Fund (sec. 32 TGAA), for eventual distribution via sec. 96 and sec. 122 grants to the States and Territories respectively to fund additional training under training guarantee agreements (secs 34, 35 TGAA). In other words, there was no connection between the destination of the TGC and the class of persons in relation to whom an employer had incurred the charge. Conversely, the SGC must be redistributed by the Commissioner to confer a benefit on the individual employees in respect of whom an employer has failed to provide the minimum prescribed superannuation contribution. This second distinction is critical in distinguishing the finding in Northern Suburbs that the TGC was a tax from the circumstances of the SGC: the SGC serves only to confer a direct and private benefit on a person or group. 22 Therefore, despite the significantly (and probably excessively) widened definition of taxation in current constitutional law, in my opinion the SGC falls outside the scope of that definition - it is not a tax. 2. AUSTRALIAN TAPE MANUFACTURERS AND SECTION 51(II) Is it still open to be argued that an Act which imposes a tax is not in substance a law with respect to taxation? For a Commonwealth law to be a valid exercise of the taxation power, the law must be characterised as a law with respect to taxation. There is a line of cases dealing with challenges to laws which impose a tax but do so for the purpose of regulating conduct in an area ultra vires the powers of the Commonwealth i.e., the law can be supported only under the taxation power. In Fairfax, 23 the High Court held as valid provisions in an amendment to the Income and Social Services Contribution Assessment Act 1936-1960 (Cth.) which made (previously exempt) superannuation funds subject to income tax unless they invested in a prescribed minimum level of public securities. Kitto J. stated that the question of constitutional validity of leglislation under sec. 51 of the Constitution: is... to be determined... by reference to the nature of the rights, duties, powers and privileges which it changes, regulates or abolishes. 24 His Honour acknowledged that: [t]he legislative policy is obvious... : it is to provide trustees of superannuation funds with strong inducement to invest sufficiently in... public securities. The 258 The Tax Specialist

raising of revenue may be of secondary concern. But the enactment does not prescribe or forbid conduct... the substance of the enactment is the obligation which it imposes, and the only obligation imposed is to pay income tax. 25 The Court in Northern Suburbs applied and followed the approach of Fairfax, which had allowed the Commonwealth expansive scope via sec. 51 (ii) to regulate areas of conduct where the Commonwealth otherwise lacked legislative power. The principal objects of the TGAA were stated in sec. 3 to be to increase, and improve the quality of, the employment related skills of the Australian workforce.... None of the stated objects referred to revenue-raising. The Court acknowledged that the revenue-raising burden [was] merely secondary to the attainment of some other object, 26 but, citing Kitto J. in Fairfax, 27 stated that this was no reason to treat the TGC otherwise than as a tax: The fact that the legislature has singled out those who do not spend the minimum training requirement as the class to bear the burden of the charge and to quantify the amount of the liability by reference to the shortfall does not deprive the charge of the character of a tax. 28 The Court then made a logical leap by assuming that any law dealing with a tax was a law with respect to taxation. This was presumably on the basis of the Fairfax notion that the TGC was the only obligation imposed under the Scheme. The Court s legalistic approach was apparent when it stated: If a law, on its face, is one with respect to taxation, the law does not cease to have that character simply because Parliament seeks to achieve, by its enactment, a purpose not within Commonwealth... power. 29 Having concluded that the Acts were valid under sec. 51 (ii), the Court stated th[at] conclusion... is unaffected by the omission of the purpose of raising revenue from the statement of legislative objects. 30 The following points must be made: 1. In Fairfax, Kitto J. stated the test of legislative validity as follows: The argument for invalidity not unnaturally began with the proposition that the question to be decided is a question of substance and not of mere form; but the danger quickly became evident that the proposition may be misunderstood as inviting a speculative inquiry as to which of the topics touched by the legislation seems most likely to have been the main preoccupation of those who enacted it. Such inquiry has nothing to do with the question of constitutional validity under sec. 51 of the Constitution. Under that section the question is always one of subject matter, to be determined by reference solely to the operation the enactment has if it be valid that is to say by reference to the nature of the rights, duties, powers and privileges which it changes, regulates or abolishes... 31 This sounds dangerously similar to the criterion of operation formula which was so convincingly rejected by the High Court in Cole v Whitfield. 32 The expression with respect to is probably not susceptible to exegesis and the attempt to supply a formula for the purpose of testing the constitutional validity of legislation has often been productive of error. The other judges in Fairfax did not approach the question in quite the same way as Kitto J., but all the judges did with more or less emphasis accept that the question was not solely a matter of the form of the legislation: [I]t is a question as to the true nature and character of the legislation: is it in its real substance a law... with respect to...? 33 In so far as the judgment [in Barger s case] insisted upon testing the validity of the law by reference to its substantial operation, it has been approved by the Privy Council in W.R. Moran Pty. Ltd. v Deputy Commissioner of Taxation 34 and neither the dissenting members of the Court in Barger s Case nor any Judge since has wished to disagree. 35 [I]f it be, in substance, a law with respect to a particular subject matter the motives which influenced the legislature or the indirect consequence of the measure cannot operate to change its character. 36 There may be laws ostensibly imposing tax which, nevertheless, are not laws with respect to taxation. 37 I do not mean to say that a case could not be imagined in which an Act in the guise of a law with respect to taxation might be seen to be in its true character something else. 38 2. The effect of the judgment in ATM is that any purpose thought by Parliament to require legislation is a public purpose and that legislation requiring payment of money by one person to another person for a public purpose is a law imposing taxation within the meaning of sec. 55 of the Constitution. The Court was construing sec. 55, not sec. 51(ii). 39 Section 55 is a constitutional fetter upon the legislative powers of the Commonwealth Parliament. In considering the width of constitutional prohibitions the High Court has always felt free to go behind the form of the law and to consider its substantial effect and operation (see Part 4). The statements in ATM are so wide that they could not have been intended as an exhaustive definition of what constitutes a tax for all purposes of the Constitution e.g., if applied literally they would include matters such as licence fees or fees for services. It follows that the Court would not necessarily consider the approach adopted by the Court to sec. 55 in ATM as authority for what is meant by the expression with respect to taxation in sec. 51(ii). Fairfax and Northern Suburbs may still be authority for the proposition that a law is not a law with respect to taxation under sec. 51(ii) unless there is at least a secondary object of raising revenue: In so far as it operates to impose the charge, the clear intent of the legislation is to raise revenue and to do so for the purpose of expenditure under training guarantee agreements. The fact that the wider object of the legislation is to encourage employers to pay for training programs themselves and so avoid the charge does not alter the true nature or character of the impost. 40 3. In summary to this point, in my opinion: the SGC is not a tax under the ATM test; the Scheme does not satisfy the legalistic Fairfax/Northern Suburbs test of Volume 3 No. 5 April 2000 259

what constitutes a law with respect to taxation. It has no (secondary) object of raising revenue and indeed is incapable of doing so; the case of ATM is distinguishable as it involves consideration of a prohibition upon constitutional powers. 3. SGC IS AN ACQUISITION OF PROPERTY (WITHOUT JUST TERMS) The imposition of the SGC is an unconstitutional acquisition of property other than on just terms. Section 51 (xxxi) of the Constitution provides that the Commonwealth Parliament has power to make laws... with repect to... [t]he acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws. Some general points concerning this Commonwealth power: 1. In the case of Bank of N.S.W. v Commonwealth, 41 Dixon J. expounded upon the dual nature of this power with prohibition: Section 51 (xxxi)... provides the Commonwealth Parliament with a legislative power of acquiring property: at the same time as a condition upon the exercise of the power it provides the individual or the State, affected with a protection against governmental interferences with his proprietary rights without just recompense... In requiring just terms sec. 51 (xxxi) fetters the legislative power by forbidding laws with respect to acquisition on any terms that are not just. 2. In Clunies-Ross v Commonwealth, 42 Gibbs C.J., Mason, Wilson, Brennan, Deane and Dawson JJ. in their joint judgment stated that sec. 51 (xxxi) had assumed the status of a constitutional guarantee of just terms [which was] was to be given the liberal construction appropriate to such a constitutional provision. Commentators have drawn analogies between sec. 51 (xxxi) and the Fifth Amendment of the U.S. Constitution. 43 (However, there are differences in the formulation of the two which make U.S. case law in this regard not directly applicable. One difference is that the 5th Amendment involves a prohibition against taking property, while sec. 51(xxxi) confers a power to acquire property but fetters that power. 44 ) 3. The Court will construe the constitutional guarantee under sec. 51 (xxxi) widely so as to prevent the Commonwealth Parliament circumventing it by means of a circuitous device 45 or by indirect means. 46 In the Bank of N.S.W. case, Dixon J. stated that the maxim what cannot be done directly cannot be done indirectly is particularly germane to a constitutional prohibition on power, 47 such as sec. 51 (xxxi). 4. As a general rule, the sole source of Commonwealth legislative power with respect to the acquisition of property is under sec. 51 (xxxi) (leaving aside the Commonwealth power in relation to territories under sec. 122). Despite the otherwise plenary nature of constitutional powers under sec. 51, they are constrained by sec. 51 (xxxi) - the Commonwealth cannot avoid the constitutional guarantee of just terms by relying on an incidental power under another head of sec. 51: [When] you have, as you do in par. (xxxi), an express power, subject to a safeguard, restriction or qualification, to legislate on a particular subject or to a particular effect, it is accordance with the soundest principles of interpretation to treat that as inconsistent with any construction of other powers conferred in the context which would mean that they included the same subject or produced the same effect and so authorized the same kind of legislation but without the safeguard, restriction or qualification. 48 Similarly: Section 51 (xxxi) is to be treated both as abstracting from other heads of power (including the incidental power) all content which would otherwise have enabled the compulsory acquisition of property, and as subjecting the power with respect to the acquisition to an obligation to provide just terms; the paragraph thus ensures that whenever property is compulsorily acquired pursuant to a law of the Commonwealth just terms must be provided, because the totality of power of compulsory acquisition is embodied in the paragraph.... 49 5. However, the ambit of sec. 51 (xxxi) has been constrained to some extent by recent decisions of the High Court to the effect that... operation of sec. 51 (xxxi) to confine the content of other grants of legislative power, being indirect through a rule of construction, is subject to a contrary intention either expressed or made manifest in those other grants. 50 There appear to be two general categories of acquisitions of property which may be validly achieved without complying with the requirement to provide just terms under sec. 51 (xxxi): (a) acquisitions outside the contemplation of sec. 51 (xxxi) where the provision of just terms is an inconsistent or incongruous notion, 51 such acquisitions being expressly authorized under another legislative power - the relevant example for these purposes being the taxation power under sec. 51 (ii) (alternatively, some authorities have suggested that taxation does not involve an acquisition of property); (b) acquisitions which are characterised as not being effected for their own sake, but rather as an incidental means of achieving an object in a power other than sec. 51 (xxxi) which involves a consequential acquisition. Express acquisitions outside ambit of sec. 51 (xxxi) - Dichotomy between sec. 51 (ii) and sec. 51 (xxxi) While there is a line of authority standing for the proposition that laws with respect to taxation under sec. 51 (ii) fall outside sec. 51 (xxxi), 52 the prime authority on the dichotomy between sec. 51 (ii) and sec. 51 (xxxi) is the majority judgment in ATM. In that case, the majority held that, if the royalty imposed were not a tax, it would constitute an acquisition of property without just term. It is worth noting that this part of the majority judgment really serves as part of the ratio (rather than as dicta), because it serves as a supporting reason for the majority s decision based on the actual facts with which the Court was dealing. The majority stated: [T]he relationship between the legislative powers conferred by sec. 51 (ii) and sec. 51 (xxxi)... necessarily involves antinomy between what 260 The Tax Specialist

constitutes taxation (for the purposes of sec. 51 (ii)) and what constitutes an acquisition of property (for the purposes of sec. 51 (xxxi)): of its nature, taxation presupposes the absence of the kind of direct quid pro quo involved in the just terms prescribed by sec. 51 (xxxi). 53 It does not follow from ATM that a law with respect to taxation cannot also be a law with respect to the acquisition of property (see Part 4). Incidental acquisitions outside ambit of sec. 51 (xxxi) In the case of Mutual Pools, 54 Mason C.J. noted that certain acquisitions, although they might fall prima facie within sec. 51 (xxxi) and therefore the just terms requirement, should be regarded as authorised by the exercise of specific powers not requiring the provision of just terms: Of these instances, it may be said that they are all cases in which the transfer or vesting of title to property or the creation of a chose in action was subservient and incidental to or consequential upon the principal purpose and effect sought to be achieved by the law so that the provision respecting property had no recognisable independent character. Indeed, the taxation cases apart, they were all cases in which the relevant statute provided a means of resolving or adjusting competing claims, obligations or property rights of individuals as an incident of the regulation of their relationship... 55 His Honour concluded that such laws resolving competing claims were not laws within sec. 51 (xxxi). 56 Other judgments in the case produced similar but varying tests of characterisation. 57 However, Mutual Pools has little authoritative value, as there was no majority ratio. Furthermore, the case can easily be distinguished and confined to its facts as one involving the adjustment of competing claims and obligations of individuals (namely a pool manufacturer and customer) in relation to an unconstitutional tax previously levied. The Superannuation Guarantee Scheme legislation does not provide for the adjustment of competing claims and obligations as an incident of the employer / employee relationship (as the employer s obligations under the Scheme are discrete from the employer s award obligations) - it only provides for the conferral of a benefit. A clearer and more relevant statement of the scope of sec. 51 (xxxi) was given in the majority judgment in ATM: In a case where an obligation to make a payment is imposed as genuine taxation, as a penalty for proscribed conduct, as compensation for a wrong done or damages for an injury inflicted, or as a genuine adjustment of the competing rights, claims or obligations of persons in a particular relationship or area of activity, it is unlikely that there will be any question of an acquisition of property within sec. 51 (xxxi) of the Constitution. 58 In summary, if the SGC is not a tax, the next issue is whether it constitutes an acquisition of property. Is there an acquisition of property? As sec. 51 (xxxi) empowers the Commonwealth Parliament to make laws with respect to the acquisition of property, the term acquisition includes not only acquisition by the Commonwealth or its agency, but also acquisition by a third party. Accordingly, the provision of just terms is required irrespective of who acquires the property. 59 Citing a line of authority, the majority in ATM stated that:... the fact that the obligation imposed... is to pay the levy to an entity[,] other than the Commonwealth... [does not] preclude the imposition of the obligation... from being an acquisition of property for the purposes of sec. 51 (xxxi). 60 It is necessary to establish that the acquirer receives a proprietary interest. 61 However, it is not necessary that the property acquired by the transferee have the same character as the property divested by the transferor: [A]cquisition directs attention to whether something is or will be received. If there is a receipt, there is no reason why it should correspond precisely with what was taken. 62 While employers are divested of money in paying the SGC, employees who receive an interest in a complying superannuation fund (or ADF, RSA or an amount credited to a SHAR account in their name) when the ATO redistributes the shortfall component in their favour receive a chose in action. As property is the subject matter protected by means of the constitutional guarantee of just terms in sec. 51 (xxxi), the term has also been given by authority the liberal construction appropriate to such a constitutional provision. 63 Accordingly, the word property has been held to be the most comprehensive term that can be used, 64 and to extend to: every species of valuable right and interest including real and personal property, incorporeal hereditaments... and choses in action. 65 In Georgiadis, Mason C.J., Deane and Gaudron JJ. confirmed that choses in action come within the definition of property under sec. 51 (xxxi). 66 In relation to the SGC, the chose in action is the property which is acquired (by employees). Even if one looks at the money employers are divested of by means of the SGC it is property protected by the constitutional guarantee of just terms. In this regard, the majority judgment in ATM is critical: In the context of sec. 51 (xxxi), the word property must also be construed as extending to money and the right to receive a payment of money. If it were otherwise, money or the right to receive money could compulsorily be acquired for any purpose in respect of which the Parliament has power to make laws and without compensation, provided the money or the right to receive it was not revenue raised by taxation, a proviso which might be satisfied whenever the relevant purpose was to confer a private and direct benefit on a person or group. The guarantee which sec. 51 (xxxi) was intended to give in protection of property would then largely be illusory. 67 Furthermore:... the mere fact that what is imposed is an obligation to make a payment or Volume 3 No. 5 April 2000 261

to hand over property will not suffice to avoid sec. 51 (xxxi) s guarantee of just terms if the direct expropriation of the money or other property itself would have been within the terms of the subsection. Were it otherwise, the guarantee of the section would be reduced to a hollow facade. 68 In my opinion, the imposition of the SGC is precisely the kind of legislative imposition of an obligation to pay money contemplated by the majority judgment in ATM as constituting an acquisition of property within the ambit of sec. 51 (xxxi). It satisfies the proviso of conferring a private and direct benefit 69 so that it is not revenue raised by taxation. 70 In both their dissenting joint judgments in ATM and in Mutual Pools, 71 Dawson and Toohey JJ. declined to treat money as property under sec. 51 (xxxi), although, with respect, their reasoning is peculiar and fails to acknowledge the reasoning of the majority judgment at p.509 adequately. However, it is interesting to note that their Honours concluded that the conferral of a private and direct monetary advantage on a person or group at the expense of some other person or group does not, in our view, involve either the acquisition of property or a tax. 72 While McHugh J. concurred with Dawson and Toohey JJ. on this point in ATM, in Mutual Pools His Honour reversed his reasoning in ATM (concluding that taxation does involve an acquisition of property, but falls outside the scope of sec. 51 (xxxi)): [T]he purpose behind sec. 51 (xxxi) would be but a pious aspiration if the terms of that paragraph could be avoided by the device of raising a debt and then requiring the citizen to pay it or have his or her property sequestrated. 73 It is clear from the majority judgment in ATM that if a compulsory transfer of money which results in the acquisition of a proprietary interest (namely a chose in action) is not a tax, it would constitute an acquisition of property by the transferee from the transferor. In my opinion, the SGC exactly fits the criteria as to the kind of compulsory transfer of money that would not be a tax but instead would constitute an acquisition of property. Only two issues remain: is the acquisition made for any purpose in respect of which the Commonwealth Parliament has power to make laws?; and are just terms provided for the acquisition of property constituted by the SGC? A law with respect to the acquisition of property must have a purpose which relates to carrying out or furthering a purpose comprised in some other legislative power. 74 In contrast to the Training Guarantee Scheme (considered in Northern Suburbs), the Superannuation Guarantee legislation is singularly vague as to its objects. The Act states its long title as An Act relating to the establishment and administration of Superannuation Guarantee Scheme, and for related purposes. Neither the Act nor the Charge Act contain an objects clause. It would appear from the terms of the legislation that it is intended, either through employer contributions or the SGC, to confer a benefit on employees in the form of superannuation entitlements. Employer superannuation contributions must be made to a complying superannuation fund for the purposes of the SIS Act to avoid liability to pay the SGC. The SIS Act is enacted under the pensions power (sec. 51 (xxiii)) and corporations power (sec. 51 (xx)).75 It could at least be said that the acquisition of property constituted by the SGC was for the purpose of the provision of pensions under sec. 51 (xxiii). However, employers receive nothing in return for conferring a private benefit on employees by paying the SGC. The provision of labour does not serve as consideration for payment of the SGC, as it is met by award provisions and any superannuation entitlements pertaining to them, which are discrete obligations of employers. If the Commonwealth pays no compensation when the property is acquired by the employee, it cannot possibly be said that the property is acquired on just terms. 76 Accordingly, the prohibition on the power to acquire property under sec. 51 (xxxi) is contravened, which renders the SGC, and thereby the Superannuation Guarantee Scheme, unconstitutional. To quote the majority judgment in ATM: That being so, the law imposing the obligation to make [the compulsory transfer of property] and conferring the entitlement to receive it would be unconstitutional by reason of the absence of the just terms which the Constitution guarantees. 77 The Charge Act is incapable of standing alone, and therefore the whole Superannuation Guarantee Scheme would be rendered invalid. 4. EVEN IF SGC IS A TAX, THE LEGISLATION IS ALSO LAW WITH RESPECT TO ACQUISITION OF PROPERTY UNDER SECTION 51(xxxi): This Part considers the effect of the Act and the Charge Act in bringing about an acquisition of property and also the coercive effect of the Charge Act upon employers to bring about an acquisition of property. It is important to note that the majority judgment in ATM did not rule out the possibility that a law imposing a tax could also be a law with respect to the acquisition of property: In a case where an obligation to make a payment is imposed as genuine taxation... it is unlikely that there will be any question of an acquisition of property within sec. 51 (xxxi) of the Constitution [emphasis added]. 78 Similarly, Mason C.J. in Mutual Pools: [B]ecause the purpose served by an exercise of the taxation power conferred by sec. 51 (ii) is compulsorily to acquire money for public purposes, a law that relates to the imposition of taxation will rarely, if ever, amount at the same time to a law with respect to the acquisition of property within the meaning of sec. 51 (xxxi). 79 [emphasis added] Even if the SGC were construed to be a tax under the wide ATM test, the purpose of the legislation is to acquire money for the purpose of conferring a private benefit - the tax is merely 262 The Tax Specialist