Clarke v Commissioner of Taxation

[2009] HCATrans 41

[2009] HCATrans 041

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Adelaide  No A35 of 2008

B e t w e e n -

RALPH DESMOND CLARKE

Appellant

and

COMMISSIONER OF TAXATION

First Respondent

ATTORNEY‑GENERAL FOR SOUTH AUSTRALIA

Second Respondent

FRENCH CJ
GUMMOW J
HAYNE J
HEYDON J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 10 MARCH 2009, AT 2.17 PM

Copyright in the High Court of Australia

MR P.A. HEYWOOD‑SMITH, QC:   If the Court pleases, I appear with MR A.L. TOKLEY for the appellant.  (instructed by Johnston Withers)

MS M.A. PERRY, QC:   If the Court pleases, I appear with MS M.C. WALL for the first respondent.  (instructed by the Australian Government Solicitor)

MR M.G. HINTON, QC (Solicitor‑General for the State of South Australia):   If the Court pleases, I appear with my learned friend, MR M.J. WAIT, for the second respondent.  (instructed by the Crown Solicitor for the State of South Australia)

MR S.J. GAGELER, SC (Solicitor‑General of the Commonwealth of Australia):   If the Court pleases, I appear with MS M.A. PERRY, QC and MS M.C. WALL for the Attorney‑General of the Commonwealth intervening in the interests of the first respondent.  (instructed by Australian Government Solicitor)

MR R.J. MEADOWS, QC (Solicitor‑General for the State of Western Australia):   May it please the Court, I appear with my learned friend, MS J.C. PRITCHARD, on behalf of the Attorney‑General for the State of Western Australia intervening.  (instructed by State Solicitor for Western Australia)

MS P.M. TATE, SC (Solicitor-General for the State of Victoria):   May it please the Court, I appear with my learned friend, MR G.A. HILL, for the Attorney-General for Victoria intervening.  (instructed by Victorian Government Solicitor)

MR W. SOFRONOFF, QC (Solicitor‑General of the State of Queensland):   May it please the Court, I appear with my learned friend, MR G.J.D. DEL VILLAR, for the Attorney‑General for the State of Queensland intervening.  (instructed by Crown Law (Qld))

MR M.J. LEEMING, SC:   May it please the Court, I appear with my learned friend, MR S.J. FREE, for the Attorney‑General of New South Wales intervening.  (instructed by Crown Solicitor for New South Wales)

FRENCH CJ:   Yes, Mr Heywood-Smith.

MR HEYWOOD-SMITH:   If the Court pleases.  The submission is that the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Imposition Act 1997 (Cth) and the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (Cth) are invalid in respect of the appellant, in respect of his pension entitlements under the Parliamentary Superannuation Act 1974, (SA), the Superannuation (Benefit Scheme) Act 1992 ‑ ‑ ‑

GUMMOW J:   How did this matter get into the Administrative Appeals Tribunal?

MR HEYWOOD-SMITH:   By way of case stated ‑ ‑ ‑

GUMMOW J:   No, no, into the Administrative Appeals Tribunal.  They referred something to the Full Court.  What was before the Tribunal?

MR HEYWOOD-SMITH:   Three questions were before the Tribunal, if the Court pleases.  They are referred to in the appeal book ‑ ‑ ‑

FRENCH CJ:   You are talking about the question from the Tribunal to the Court.  The process by which the matter got into the Tribunal was following an objection to a disallowance of an objection to an assessment, was it not?

MR HEYWOOD-SMITH:   That is so, but the Court will be aware from the appeal book in item 1 the three questions that were stated to the Federal Court from the Administrative Appeals Tribunal.

GUMMOW J:   Yes, I realise that.  That is not what I am asking.  I am trying to start at the beginning.  What was before the Administrative Appeals Tribunal - some objection to an assessment?

MR HEYWOOD-SMITH:   What was before was an objection to an assessment by the Commissioner by the appellant, Mr Clarke, and in 2.5 of the appeal book, we have an application for review of that decision before the Administrative Appeals Tribunal, three questions of which were stated and referred to the Full Federal Court; two of which questions have not been made the subject of a special leave application and the third of which only arises for determination on this appeal.

GUMMOW J:   It seems to be at page 168.  That seems to be the starting point.  There was a disallowance of your client’s objection to the surcharge.

MR HEYWOOD‑SMITH:   That disallowance appears at 2.4.  As I understand it, the matter has proceeded from there by way of stating of a case of three questions to the Full Federal Court.  The determination of those questions, one of which questions ‑ ‑ ‑

HAYNE J:   Just before you rush on, Mr Heywood‑Smith, can I understand is it one tax year or several tax years that are in issue?

MR HEYWOOD‑SMITH:   I believe there are some four tax years in issue.

HAYNE J:   The document at 2.5 which you took us to at page 168 seems to deal with the year ended 30 June 2001.

MR HEYWOOD‑SMITH:   The liability to pay the tax only arose upon the retirement of the appellant from Parliament.  It was at that stage that the accrued surcharge debt was made the subject of a section 15(7) notice.

GUMMOW J:   Do we have the notice?

MR HEYWOOD‑SMITH:   I believe the notice ‑ ‑ ‑

GUMMOW J:   At some stage we are going to have to understand precisely the legislative footing which produced this income tax dispute.

MR HEYWOOD‑SMITH:   Perhaps I can defer the answer to the question precisely and allow my learned junior to ‑ ‑ ‑

FRENCH CJ:   Mr Heywood‑Smith, at page 188 the Full Court refers to objections following assessments which I think are referred to in the previous paragraph for each of the financial years ended 30 June 1997 to 30 June 2001.  Then it is said:

The applicant then applied to the Administrative Appeals Tribunal (the “AAT”) for review of the Commissioner’s decisions.

Those presumably are the disallowances of each of the objections to each of those assessments.  Is the document that we have at 2.5 simply a specimen?  Are there other documents in existence which relate to the other reviews, and was the Full Court dealing with all of the matters?  It seems to be so from their reasons.  It is just that there is only one originating document here.

MR HEYWOOD‑SMITH:   The Full Court was dealing with each of the three questions that ‑ ‑ ‑

FRENCH CJ:   Yes, but in respect of all matters?

MR HEYWOOD‑SMITH:   In respect of all matters.  The section 15(7) notice, I am instructed, does not actually appear in the appeal book but it is referred to in the statement of agreed facts and I think it may be addressed in the exhibit to that statement of agreed facts, namely, the affidavit of a Ms Antcliff who was the Commonwealth Actuary.  I believe that I will be taking the Court to that affidavit in due course.

For the purposes of the submission perhaps I can indicate to the Court that I would propose to refer to the two pieces of legislation that I have already indicated as the Protected Funds Assessment Act and the Protected Funds Imposition Act, when referring to both, simply the Protected Funds Acts.

The approach which I intend to adopt, subject to the Court’s alternative indication, is to briefly spend a moment on the background to the matter in the general surcharge Acts, then give some consideration to the Protected Funds Assessment Act, then to the State legislation, the three State Acts setting out the three schemes pursuant to which the appellant was a member, a brief reference to the Melbourne Corporation doctrine, then the cases of Re Australian Education Union; Ex parte Victoria (1995) 184 CLR 188 and then to the decision of Austin v Commonwealth and its apparent application to the case at Bar and ending with consideration of the Full Court’s decision and what we assert are the errors in that decision and the Commonwealth’s defence of same.

I am very mindful of the fact that two members of this Court sat in Austin v Commonwealth and have heard a description of this legislation before but I am mindful as well that the other members of the Court may be assisted by more extensive explanation of the legislation and so I commence with a brief reference to the background of the matter.

In 1996, the Federal Government announced a 15 per cent surcharge on superannuation contributions made by or for high income earners.  High income earners essentially are persons earning in excess of $70,000.  The taxation of high income earners’ superannuation contributions announced in that Budget were brought into operation by the Superannuation Contributions Tax (Assessment and Collection) Act 1997 and the Superannuation Contributions Tax Imposition Act 1997, which I shall refer to as the general surcharge acts. These are the Acts that the Protected Funds Acts seek to replicate, or sought to replicate, insofar as members of constitutionally protected funds are concerned. The surcharge – that is the general surcharge – was sought to be applied in respect of unfunded and funded defined benefits schemes as well as accumulation schemes.

Typically, a defined benefits scheme was one which provided fixed entitlements such as a percentage of final salary by way of pension.  An accumulation fund was what it suggests, a fund that has accumulated as a result of deposits into it and income earned on it.  In the 2003/2004 tax year the surcharge rates were reduced, with effect from 1 July 2002.  This was said to be to make superannuation contributions more attractive in comparison with other forms of saving.  In 2005, the surcharge was eliminated altogether, pursuant to the Superannuation Laws Amendment (Abolition of Surcharge) Act 2005.

The general Surcharge Acts imposed surcharge on surchargeable contributions of members of defined benefits schemes calculated by reference to the actuarial value of benefits accrued. The liability was imposed on the relevant superannuation provider, rather than the member – section 10 of the general Assessment Act. Section 9 of the Imposition Act provided that the Act did not impose a tax on property of any kind belonging to a state within the meaning of section 114 of the Constitution.

Turning then to the Protected Funds Acts, I commence by saying that there is no apparent challenge by any party or intervener to the way that the legislation operates as expressed in Austin’s Case. What was sought to be done by enacting the Protected Funds Acts in relation to constitutionally protected funds was to apply the surcharge to those funds, notwithstanding that to impose the tax upon their superannuation provider would – or it was perceived might – contravene section 114 of the Constitution. This was done by making the member, rather than the provider, liable.

A “constitutionally protected superannuation fund” is defined in section 38 of the Protected Funds Assessment Act, which appears at tag 1.1of the appellant’s submissions.  It is defined as having the same meaning as “constitutionally protected fund” in Part IX of the Income Tax Assessment Act by tag 1.2.  That is defined as meaning a fund declared as such by regulations. 

If I can take the Court to tag 1.3, which is the regulations, or so much of it as required, and we will be seeing from regulation 177 that there is a reference then to Schedule 14, which appears on the following page in six parts – one part for each State indicates specific State legislation setting up arrangements for superannuation entitlements of particular State and State instrumentality employees. 

In particular I ask the Court to note New South Wales 101, the Judges’ Pensions Act 1953 which was, of course, the subject of consideration in Austin’s Case and so far as South Australia is concerned, at 505, 507 and 509 we have the reference to the three Acts that I have already referred to Court to, being the Parliamentary Superannuation Act 1974, the Southern State Superannuation Act 1994 and the Superannuation (Benefit Scheme) Act 1992.

It is significant to note, we say, that the Protected Funds Acts, whose validity in application to the appellant is being considered, are not Acts of general application.  They seek to target, in the instance of the three South Australian Acts that I have directed the Court to, members of funds established by those Acts.  In the case of the first one, the members are solely members of the South Australian Parliament.  In respect of the other two Acts, those Acts set up schemes for members who are essentially members of the South Australian public sector but, of course, that class includes persons such as the appellant as a member of the South Australian Parliament.

As I indicated earlier, the Protected Funds Act sought to target these members of funds because the general Acts did not impose a tax upon the beneficiary of superannuation benefits, but rather the superannuation provider and, as I have indicated, it was considered that section 14 may present a problem when that superannuation provider was a State.

Section 4 of the Protected Funds Imposition Act imposes the superannuation contributions surcharge that is payable for each financial year on the surchargeable contributions of a member as computed by the Assessment Act and it is appropriate now to take the Court to the Protected Funds Assessment Act which is tag 1.1 in the appellant’s submissions and to section 9 of that Act.

The Court will note that the Act which appears at tag 1.1 is expressed to be a compilation prepared as at 5 November 2001 which is of course some four years after the commencement of this Act.  I think the parties are, however, agreed that whilst there was an amendment to the original Act in 1999, that amendment related back to the commencement of the Act and nothing material flows from the use by the Court of this particular version of the Act.

Going then to section 9 of the Act, it will be seen that surchargeable contributions are addressed and section 9(2) addresses members “other than a member of a defined benefits superannuation scheme” – in other words, members of accumulated benefit schemes – and, as we will shall shortly see, the schemes created by what I shall call the SBS and SSS Acts, the second and third of the State Acts, created such schemes. Section 9(4), however, addressed members of defined benefits superannuation schemes, and again we shall shortly see that the scheme established by the Parliamentary Superannuation Act – that is, the first of the three South Australian schemes – is such a scheme.

The Court has in the appeal book the statement of agreed facts and at appeal book page 12, by statement of agreed fact 57, by way of interest it can be seen that insofar as this appellant is concerned, by far the most significant fund or scheme insofar as the application of a surcharge is concerned is the first – that is, the Parliamentary Superannuation Scheme – and it will be seen that, to the contrary, the surcharge payable in respect of the SBS scheme in 1997 and 1998 was quite modest and it continued to be modest insofar as the SSS scheme – and I can tell the Court that the SSS scheme, as from 1999, subsumed the SBS so that it took over – in effect, there was a merger of the schemes.

At statement of agreed fact, paragraph 59 on page 12, the amounts are further assessed and it will be seen that as at the end of 2001 an amount of $29,259.60 was the amount owing and I can tell the Court – although it can be done by simply adding those that refer to PSS – that of that 29,259, some 27,210 was attributable to the Parliamentary Superannuation Scheme. 

The Court might note that at statement of agreed fact 23a on page 8 of the appeal book it was an agreed fact that at the time of the service of the notice issued under section 15(7) the applicant was liable to pay an amount of 30,065, which is slightly greater than the sum shown in statement of agreed fact 59.  The reason for that is of course the accruing of interest in the period following retirement and prior to the service of the section 15(7) notice some 18 months later.

The calculation of the surchargeable contributions pursuant to section 9(4) is addressed by statement of agreed facts 30 on page 9 of the appeal book. The Court will see that there is a reference to a report of a consulting actuary, a Mr Watson, whose report appears at tag 2.2 of the book. Mr Watson explains the calculation of surchargeable contributions in his affidavit at page 86 of the appeal book and he asserts that – in fact he prepared actuarial certificates for all members of the South Australian Parliament for the period expiring 30 June 2000. They appear at page 117 as an annexure.

At page 117 is the letter with the accompanying actuarial certificate on the following page and the Court will note that all members of Parliament, save the appellant’s, names have been removed and it will be seen that in that year $29,982 is the amount of the surcharge and that figure, the Court will note, appears at page 12 in statement of agreed fact 57 where in the first box under “PSS” for the year 2000 the figure $29,982 appears.

Coming back to page 86 in Mr Watson’s affidavit or expert’s report, by paragraph 9 we learn that the actuary has calculated the surchargeable contribution by use of the “Superannuation Contribution Rule 97/1 (SCR 97/1)”.  I believe my instructing solicitor has provided to your Honours’ associates a copy of that document and I will be taking your Honours to that for a particular purpose in due course but that ruling sets out the assumptions which the actuary is required to make in respect of life expectancy and incidence of marriage and matters of that nature which enable an amount to be arrived at to ‑ ‑ ‑

FRENCH CJ:   That ruling itself is actually referred to in the Act, is it not?

MR HEYWOOD‑SMITH:   Yes, it is and it was subsequently, in about 1999 replaced by a reference to the regulation.  SCR 97/1, however, was not confined in its use only to the Protected Funds Acts.  It was also used to calculate the surchargeable contributions pursuant to the general legislation, as we will see shortly.

Can I direct the Court’s attention to page 87 of the appeal book and to Mr Watson’s paragraph 11.1 which, in a sense, describes the assumptions or what assumptions are taken into account.  I do not think the Court needs to go precisely to the manner in which the assumptions were reflected by SCR97/1 but also we note, as I have just indicated in 11.2 that, whilst the actuaries commenced by using that ruling from a date in the following year ending 1999, that ruling was replaced by the Superannuation Contributions Tax (Assessment and Collection) Regulations.  I do not think there is a need for this Court to be concerned with any changes of detail to the way the assumptions were applied.

Can I return to the Protected Funds Assessment Act at tag 1.1 in the appellant’s submissions.  Critical to the determination of this case we say is section 11(1) to the effect that the member is liable to pay the surcharge.  Subsection (1) reads:

The superannuation contributions surcharge on a member’s surchargeable contributions for a financial year is payable by the member.

This is to be compared with section 10 of the general Assessment and Collection Act.  I will not take the Court to that Act now.  It is actually in the book provided I think by the Commonwealth Solicitor.  But there is no issue that under section 10 of the general Assessment and Collection Act in the ordinary case the superannuation provider was liable for the surcharge.

Under the Protected Funds Assessment Act section 15 addressed when the respondent surcharge became payable.  Payment is deferred until the lump sum or pension becomes payable.  That is apparent from section 15(6).  Note that interest is charged on the deferred amounts and compounded.  That is the effect of section 15(4).  As I have indicated earlier, section 15(7) provides for the giving of a notice after payment becomes due.  By section 15(8) the debt must be paid within three months of the date of issue of the notice.  Section 15(9) provides that a member may make payments for the purpose of reducing the surcharge debt.

In parentheses I simply draw attention of the Court to the fact that in Austin’s Case at paragraph 89 there was a dispute as to whether those payments were refundable if the benefits were never received, and I do not believe that that dispute has been - it certainly was not considered by the lower court and is not a matter that was the subject of any agreed fact, not that we say it is of particular significance.

Under the general Assessment and Collection Act, section 15 of that Act renders the surcharge payable as it accrues, save and except for one instance, namely in the case of an unfunded defined benefits scheme.  In the case of an unfunded defined benefits scheme under the general legislation, the superannuation provider was again relieved of the obligation of paying the surcharge until benefits became payable.  That is pursuant to section 16(6).  That, for our purposes, is I think sufficient so far as the Commonwealth legislation is concerned.  Can I turn then to the State legislation and firstly to the Parliamentary Superannuation Act 1974. That appears at tab 3.1 behind the appellant’s submissions.

FRENCH CJ:   That is as it stood in April 1997, I think.

MR HEYWOOD-SMITH:   Yes, as it stood in April 1997 and, for our purposes, there is only one subsequent amendment that might have any impact or might be worth noting and that is that in 1999, pursuant to the amendment legislation which appears behind 3.4, the South Australian Parliament established a fund to assist in the mechanism for providing the benefits.  Prior to that time any benefits pursuant to the Act came from consolidated revenue and there was no fund so that it was properly an unfunded scheme prior to that time.  After that time the Treasurer was obliged to pay into a particular fund an amount that would ensure the payment of benefits pursuant to the legislation on the retirement of a member, but when that retirement occurred, payment still came from the consolidated revenue.  The consolidated revenue was reimbursed from this particular fund, but ‑ ‑ ‑

HAYNE J:   Sorry, would you state again what you say the effect of the 1999 Act is?

MR HEYWOOD-SMITH:   It would appear to have been an administrative procedure to, I suspect, more efficiently enable the Treasurer to stay on top of the State’s finances and obligations pursuant to this legislation.  We say that it does not have any impact so far as the determination of these proceedings are concerned.

The Parliamentary Superannuation Act 1974 provides for the retirement benefits of members of Parliament. Contrary to the Commonwealth’s submission in its written submissions at paragraph 26, the Surcharge Acts do, in this instance, apply simply to persons who held office at the higher levels of Government. This Act, as it clearly states, is only for the benefit of members of the South Australian Parliament. The features of the Act that the Court should note are these. By section 14 a member of the State Parliament was obliged to pay 11.5 per cent of his or her salary to the Treasurer.

FRENCH CJ:   I am sorry, just before you pass on to that last comment, 26 has to do with the application of the Surcharge Acts, does it not?  It is not talking about the Parliamentary Superannuation Act of South Australia.

GUMMOW J:   No, it is picking up or referential to the Income Tax Regulations Statutory Rule 191 of 1997, Schedule 14 of which includes the Coal Mines Act, Ombudsman Act, Public Prosecutions Act of Victoria, and when you get to South Australia, Electricity Trust, Electricity Corporation and so on.  I think that is the point that is being made there.

MR HEYWOOD-SMITH:   Yes.  I may have misread that.  We understood that the Commonwealth was putting a submission that the Acts in Schedule 14, the three South Australian Acts, were Acts which had application to a class of member beyond persons who held office at the higher levels of Government.  We simply note that at least in respect of this Act that that cannot be said, that all members of this scheme were members of the South Australian Parliament.

I had taken the Court to section 14 of the Act pursuant to which members were required to pay 11.5 per cent of their salary to the Treasurer up to 20 years of service.  After 20 years of service the Court will see, by subsection (3), that that percentage was halved to 5.75 per cent.  Pursuant to the statement of agreed facts, at fact 5 on page 5 of the appeal book it is an agreed fact – and I will read the second sentence of statement of agreed facts 5: 

The applicant was liable to pay income tax on the gross amount of that remuneration (without any deduction referable to contributions made by the applicant in relation to any superannuation scheme).

So, in other words, that 11.5 per cent was from after‑tax income.  Section 16 provides for a pension.  It is a pension which changes.  Up until six years of office, if a member retires, even if that is involuntary, the member does not become entitled to a pension.  In those circumstances he receives, pursuant to section 22, what he has paid in – his 11.5 per cent, plus any income that is earned on those payments in.  After six years and up to 15 years, if he retires as a member involuntarily or, I think, on reaching the age of 60 he becomes entitled to a pension, after 15 years of service whether he retires involuntarily or voluntarily he or she becomes entitled to the pension. 

FRENCH CJ:   The notion of involuntary retirement varies – a fact which is picked up in 6, is it not?  That requires where somebody retires by reason of losing an election, which is what happened to the appellant in this case, there has to be a judge satisfied that he stood genuinely for election and was defeated.  There is some sort of certification process for that.  

MR HEYWOOD-SMITH:   Yes, that would appear to be so; your Honour is right.  I am not certain of the situation when somebody loses preselection.  But in any event, the Act makes specific provision for what is deemed to be voluntary and what is deemed to be involuntary. 

HEYDON J:   That would be section 6(1)(a)(ii)(A): “failure to secure the support of a political party”.

MR HEYWOOD-SMITH:   Yes.  Section 17 of the Act addresses the amount of pension, which for an ordinary member rose from 41.2 per cent of final salary, commencing I think from year 6, to up to 75 per cent of that salary, increasing at 0.2 per cent per completed month so that, necessarily, if one does the arithmetic, the maximum entitlement was reached after 20 years of service.  There is complicated formula, which this Court need not be concerned with, which I think appears in section 17(2), to work out what the final salary is in circumstances where the member has held higher office within the Parliament and may have held ministerial office or committee membership and earned greater income than the basic parliamentarian’s salary over the period of time but may have dropped back immediately prior to retirement to that of a Member of Parliament alone. I do not think we need to be concerned about that. 

In this case, for example, the appellant had been for a time, as is apparent from the statement of agreed fact 3, the Deputy Leader of the Opposition and that had an impact in the income that he earned in those years.  Significantly, the pension that is received is unrelated, or the amount of the pension is unrelated to the contribution payable pursuant to section 14 and, as I have indicated, where there is no entitlement to a pension either because ‑ ‑ ‑

GUMMOW J:   Where do we see that, that ‑ ‑ ‑

MR HEYWOOD‑SMITH:   It necessarily follows from the fact that the pension entitlement is a percentage of final salary unrelated to any payments made and the scheme of the Act is that in a sense the quid pro quo for the receipt of the pension it received is that the member has paid this 14.5 per cent and after 20 years, 5.75 per cent during the course of his or her time as a member.

FRENCH CJ:   You take that simply out of the fact that in section 17 there is no reference to contributions as a factor relevant to calculation?

MR HEYWOOD‑SMITH:   That is so, if the Court pleases, but the Court will also see in section 22 that:

Where an old scheme member –

and the appellant was an old scheme member, that is, he was someone who came into the Parliament prior to a particular date, where he or she –

ceases to be a member and no pension or other benefit under this Act is payable to, or in relation to, the former member, there is payable to the former member a lump sum equivalent to the balance standing to the credit of the former member’s notional contribution account.

That is the sum that he has paid to the Treasurer in his 11.5 per cent annual after tax salary.  Of course, that situation may develop in the case of somebody who has retired voluntarily between six and 15 years in circumstances that do not otherwise entitle him to a pension.  It is significant, we say, that if a member retires from Parliament and were to die within a month with no spouse or child, he will receive a sum but it is a substantially reduced sum, as is calculated from sections 24, 25, 31A and so on.  The Court will see that the effect of death of the member has the substantial impact upon (a) the benefits received by a spouse or children, or if there are no spouse or children, the amount that his or her estate receives pursuant to this Act.

FRENCH CJ:   I do not think those provisions are reproduced, are they?

MR HEYWOOD-SMITH:   I do apologise.  South Australia has provided to the Court a separate book of legislative materials and in paragraph – I am told the Commonwealth ‑ ‑ ‑

FRENCH CJ:   I should mention at this point that there are currently a number of compilations of materials which are overlapping and we risk some duplication.  It will be necessary for the parties to ensure that, so far as possible, there are references to the minimum number of volumes, otherwise we will have marks in different parts of the papers that are provided to us and it will be difficult to refer back to them later.

MR HEYWOOD-SMITH:   Yes, thank you.

GUMMOW J:   I should tell you I have been working off the Commonwealth volumes.

MR HEYWOOD-SMITH:   If your Honour pleases.

GUMMOW J:   Which seem to be complete.

HEYDON J:   You said that it was very significant that if someone died without spouse or child and there was an impact on the pension, why is it significant?

MR HEYWOOD-SMITH:   I will come to that in due course, if your Honour pleases.  The significance we say is that it is suggested by the Full Federal Court and, we understand, the Commonwealth, that unlike the position in Austin, in the case there is no actuarial evidence which would indicate the impact of the surcharge on benefits received by a member.  We say that that is not the case and in due course I will be taking the Court to that scenario, but these ‑ ‑ ‑

HEYDON J:   Do not distract yourself now.

MR HEYWOOD-SMITH:   Thank you, if your Honour pleases.  Section 21 is a significant section.  Section 21 provided for commutation of pension and ‑ ‑ ‑

GUMMOW J:   Just before we go to 21, 20 is significant too, is it not, because if the former Member of Parliament regains the favour of the electorate and comes back in, he or she starts again but with the advantage of the earlier period of service.

MR HEYWOOD-SMITH:   Yes, I accept your Honour’s observation.  For our purposes, I do not believe that it impacts on the respective arguments of the parties.  Section 21, however, addresses computation and the position – if the Court goes to tag 3.1 of the appellant’s submissions, the last page of that tag contains Schedule 2 and what Schedule 2 indicates is that if a member retires with the benefit of a pension, having established an entitlement to pension, if that member is, for example, as was the case with the appellant in his 51st year, he was entitled to commute 60 per cent of his pension and the Court will see that the younger ‑ ‑ ‑

FRENCH CJ:   He was actually 50 at the time of his retirement, but the birthday next following the day on which he became entitled would have been his 51st birthday.

MR HEYWOOD‑SMITH:   I think so, yes, your Honour.  The Court will see that the younger the member, or the younger the retirement age, the more he or she was entitled to commute and obviously the older the less.  By section 21(1c) it was necessary in order for a member to so commute to elect to do so and to elect or to nominate the particular percentage up to his or her entitlement within three months of becoming entitled, that is, within three months of retirement and by subsection (2), significantly, if a member elected to commute pursuant to section 21 there was a fixed commutation rate of “10 for each $1 of annual pension so commuted”.

If I can refer the Court then to the statement of agreed facts at page 9 of the appeal book and to statement of agreed fact 31c., Mr Watson, the actuary whose report was agreed by the parties, asserts that:

Where a member pensioner elects to commute a percentage of his pension pursuant to s21(2) of the PSS Act, the commutation factor of $10 prescribed by s21(2) is likely to result in the lump sum being less than the present value of the amount of pension foregone for members who are less than age 75 at the date of commutation.

That observation is perhaps more clearly explained by Mr Watson in his actual report at page 89 of the appeal book in paragraph 14 of his affidavit in which he asserts from about line 6:

In my view, the commutation factor of $10 under s21 is likely to result in the lump sum being less than the present value of the amount of pension foregone for members who are less than age 75 at the date of commutation.  I can illustrate that in the following way.  If a member of Parliament who wished to commute $10,000.00 of his or her pension giving him or her an amount of $100,000.00 pursuant to s.21(2) of the Act, he or she can do so.  The amount of that annual pension will thus be reduced by $10,000.00.  If the $100,000.00 were to be invested, it would be unlikely that the investment earnings combined with the drawdown of the capital amount will be sufficient to give a return to a member of $10,000.00 per annum (indexed in line with inflation) until that member and/or that member’s spouse ceases to receive a pension.

We would make the obvious observation that in an age such as the present of low interest rates that would be all the more so.  In our submission, the South Australian Parliament in enacting section 21(2) is really discouraging members from commuting and encouraging the retention of a pension.

Section 21AA – the Court will be taken to that in due course – appears behind tab 3.5.  That was an amending provision to specifically address the issue of commutation by a member in order to meet the Superannuation Surcharge Act imposed by the Protected Funds Assessment Act that is under consideration.  I will come back to section 21AA at a more convenient point.

FRENCH CJ:   That is what later became section 23AA?

MR HEYWOOD‑SMITH:   It lately became section 23AA, but for our purposes I think we can concentrate on 21AA.  Can I turn then to the other two South Australian Acts; firstly the Superannuation (Benefit Scheme) Act 1992, that appears at tag 4.1, and the Southern State Superannuation Act 1994, which appears at tag 5.2. As I have indicated earlier, the former was merged with the latter in 1998 in the amending legislation which appears at tag 5.1.

Coming back to the Superannuation (Benefit Scheme) Act 1992 at tag 4.1, pursuant to section 4 of that Act, anyone for whom the Crown in the right of South Australia is liable to pay the superannuation guarantee charge under the Superannuation Guarantee (Administration) Act 1992 – that is what we know as “industry super” – is a member of the scheme created by this Act. It necessarily includes all State public servants. The plaintiff became a member of that scheme by virtue of section 4(6). Although when the Court goes to section 4(6) it may not indicate much, that is a statement of agreed facts on page 9 of the appeal book. Statement of agreed fact 34 is to this effect:

The applicant became a member of the SBS from 11 December 1993, when he commenced as a member of the South Australian Parliament by virtue of s 4(6) of the SBS Act and Regulation 5 of the Superannuation (Benefit Scheme) Regulations 1993.

Section 6 of the SBS Act required the employer, which in this case was the House of Assembly of the South Australian Parliament – that is an agreed fact at 36, page 10 ‑ ‑ ‑

FRENCH CJ:   Can I just understand how the agreed fact meshes with section 6.

MR HEYWOOD‑SMITH:   I think that was by regulation.  I think it was agreed that it was by ‑ ‑ ‑

FRENCH CJ:   It says he became a member – I see; section 4, subsection (6).

MR HEYWOOD‑SMITH:   Yes.  I think it was by regulation that ‑ ‑ ‑

FRENCH CJ:   I see.  “The Governor may, by regulation, declare”.

MR HEYWOOD‑SMITH:   Yes.  That is the position. 

FRENCH CJ:   So that is how it happened.  Right.

MR HEYWOOD‑SMITH:   As I have indicated, by statement of agreed fact 36 the House of Assembly of the South Australian Parliament was the agreed employer of the appellant and, pursuant to section 6 of the Act, that employer was required to pay – although there is what appears to be a complicated formula there by section 6(1), “CP is”:

(b)      in the case of section 4(6) member – 3 –

That is 3 per cent.  So 3 per cent of salary was paid pursuant to this scheme.  The payment was to the Treasurer under section 6(1).  Sections (7) and (8) simply made provision for the crediting of income on the moneys paid into the member’s account.  Section 12(1) indicates what the member gets on retirement.  In other words, he or she gets the “amount standing to the credit of his or her superannuation account”, but significantly, the Court will note that he or she does not get it if retirement occurs prior to age 55, unless the amount is less than $500 – that is apparent from 13(1)(a) – or the member satisfies the board that he or she is about to leave Australia with the intention of not residing.  But the normal case is that a member who is entitled to the amount standing to his or her credit in the superannuation account is not entitled to it until he or she reaches the age of 55.  That is a matter, we say, of some significance a little bit down the track.

Section (17) required the payment of the benefit to be from the consolidated account; there was no actual fund.  In our submission, contrary to the Commonwealth’s reply to the interveners at paragraph 22, this was not a contributory scheme.  There is no provision in this Act for contribution by a member into the scheme.  The only money that went into this scheme was the industry super of 3 per cent.

We then turn to statement of agreed fact 39, appearing on page 10 of the appeal book.  The Court will note that it was agreed that on 1 July 1998, the SBS Act was repealed, the applicant became a member of the SSS scheme by virtue of sections 14(2) and (6) of the SSS Amendment Act and of regulation 11 of the Southern State Superannuation Regulations and amounts credited to the applicant’s account in the SBS were credited to an account in the applicant’s name under the SSS Act. 

So we turn to the SSS scheme which directs us to tag 5.2 behind the appellant’s submissions.  The SSS Act is addressed in the statement of agreed facts from paragraphs 14 to 52, but some of those facts are related to the referred questions 1 and 2 which this court is not concerned with.  For our purposes, the following features, I think, are sufficient to note.  The appellant’s membership from SBS was transferred to SSS, statement of agreed fact 41.  Section 14(1) created the same membership as pursuant to the SBS Act, in other words, all State public servants, all persons to whom the Crown in the right of South Australia as an employer was obliged to make payments pursuant to the industry super legislation.

The appellant could not contribute to this scheme.  That is agreed at statement of agreed fact 42 and is apparent from section 25(2) of the SSS Act.  So that insofar as the appellant is concerned, this is not a contributory scheme and again, in our submission, the Commonwealth in paragraph 22 of its reply is not correct in describing this as a contributory scheme.  Some members, not the appellant, were entitled to contribute sums pursuant to this scheme, but the appellant was precluded, my understanding is the reason being that provision for his retirement was already addressed by the Parliamentary Superannuation Act.

FRENCH CJ:   So under section 14(6) there was a regulation which covered members being transferred, as it were, from the previous non‑contributory scheme with which this was being merged and then the disentitlement to make contributions or the non‑entitlement to make contributions arises under 25(2) as a result of that.

MR HEYWOOD-SMITH:   I believe so, your Honour.

FRENCH CJ:   So the agreed fact is really a mixed agreement of law and facts.

MR HEYWOOD-SMITH:   Yes.

FRENCH CJ:   I am not making a point about it.

MR HEYWOOD-SMITH:   No.  By section 26, the appellant’s employer is again the House of Assembly.  That is also noted in statement of agreed fact 43.  Payments are made to the Treasurer.  Section 26 does not say 3 per cent.  It refers to a charged percentage, which is defined in section 3(1) and refers ultimately to a regulation, but for our purposes I think the Court can assume that it remained at 3 per cent.

Sections 31 and 32 (2) and (3) are of some significance.  Similar to the position with the SBS Act, on retirement a member was not immediately entitled to the receipt of the money standing to his or her credit in the scheme.  He or she had to reach the age of 55 years or, as per section 32(3)(a), it is apparent that if the amount standing was “less than $200” there was no issue, and again, if he or she was intending to leave Australia and satisfied the board that that was intended to be permanent - so there were some scenarios by which the member could receive his or her entitlement prior to age 55, but the normal position is that the member did not have access to these moneys prior to 55.

Of course we know that Mr Clarke retired at age 50, so we questioned the Commonwealth at paragraph 44 to point 2 of its submission in response to the appellant when it might be perceived to suggest that the appellant would have had access to these moneys in order to discharge a liability on his retirement.  It may be inappropriately expressed, it may be simply that what is being asserted there is that a commutation of entitlements under the Parliamentary Superannuation Act to the maximum that the appellant was entitled would in all circumstances have been sufficient to discharge his liability pursuant to the Protected Funds Acts ‑ ‑ ‑

FRENCH CJ:   It goes back to that agreed fact at 28, does it not?

MR HEYWOOD-SMITH:   Yes, I think it has to be read that way, but I simply make the point that it is not necessarily the case that a retiring member will have access to entitlements pursuant to these accumulation fund moneys under the SSS Act to discharge that liability.  That, I think, is a sufficient outline of the legislation.  Can I turn then briefly to a reference to the Melbourne Corporation doctrine.  I think it is appropriate to say at the outset that all parties and interveners are agreed upon the existence of a limitation on Commonwealth legislative power under this title.

There may be some variation in expression but the essential features appear to be not in dispute. The doctrine, as we know, is based upon the federal structure established by our Constitution. For our purposes it sufficient to go to your Honours Justices Gummow, Hayne and Gaudron in Austin’s Case 215 CLR 185 at page 249 and paragraph 124 where their Honours writing the joint judgment in Austin – the Court will recall that of a Bench of six in that case the majority of five included separate judgments by the then Chief Justice and Justice McHugh and this joint judgment.  At paragraph 124 their Honours state:

There is, in our view, but one limitation, though the apparent expression of it varies with the form of the legislation under consideration.  The question presented by the doctrine in any given case requires assessment of the impact of particular laws by such criteria as “special burden” and “curtailment” of “capacity” of the States “to function as governments”.  These criteria are to be applied by consideration not only of the form but also “the substance and actual operation” of the federal law.  Further, this inquiry inevitably turns upon matters of evaluation and degree and of “constitutional facts” which are not readily established by objective methods in curial proceedings.

Their Honours in the joint judgment describe the fundamental constitutional conception of the principle as having “proved insusceptible of precise formulation”.  That is at paragraph 145 on page 258 of the judgment.  In the case at Bar the appellant says that the Protected Funds Acts both discriminate against South Australia and, for that matter, Western Australia and place a particular burden or curtailment of the capacity of those States to fulfil their constitutional function contrary to Melbourne Corporation principle.

The appellant says that the South Australian Parliament is an essential organ of the constitutional structure of the State and the Protected Funds Acts purport to legislate for members of the South Australian Parliament and impose upon them a different regime and, indeed, a more onerous regime, although it is the appellant’s submission that it is sufficient that it is a different regime, than the Commonwealth has imposed on other high income earners under the general surcharge legislation.

The reason that that is said is because the legislation purports to impose the liability for the surcharge on the member rather than the superannuation provider.  It provides for the accruing of interest and compounds the same, it defers payment of the surcharge in respect of them so that the member is burdened with a potentially substantial debt on retirement.  Significant in the development of that submission was the decision in this Court in Re Australian Education Union: Ex parte Victoria (1995) 184 CLR 188. It is significant to note that this case was described by their Honours who wrote the joint judgment in Austin at page 260, paragraph 152 as “of central importance for the present case”.

The Melbourne Corporation principle was applied in the Australian Education Union Case to hold invalid the proposed application of a Commonwealth law on the ground that it impaired the capacity of a State to function as an independent Government.  The case arose, as members of the Court will recall, out of the industrial reforms proposed by the Kennett Government, including the abolition in Victoria of compulsory industrial arbitration.  The Kennett Government proposed wholesale redundancies in the public sector.  A great many public sector unions that hitherto covered their members or whose members were hitherto covered by State awards sought federal coverage to address the redundancy issue.  The State of Victoria challenged the power of the Commonwealth to authorise the AIRC to bind the State in respect of a number of awards and proposed awards concerning the Public Service of Victoria.  The court accepted Victoria’s submission that awards could not restrict Victoria’s offer of voluntary severance packages to Crown employees on redundancy grounds.

While accepting that the arbitration power extended to the prescription by federal awards of minimal wages and working conditions for State employees, it nevertheless held that critical to a State’s capacity to function as a government was its right to determine the number and identity of the persons it wished to appoint or to dismiss, with or without notice, on redundancy grounds.  So in respect of public servants generally –teachers, health workers – it was a matter for the State to make a determination as to number and identity.

But the Court went further and considered, or asserted, that whilst the AIRC could prescribe minimum wages and working conditions for the vast majority of State employees, nevertheless it could not do so in the case of persons employed at higher levels of government by the State, and those persons were said to include Ministers, ministerial assistants and advisers, heads of departments, high‑level statutory officeholders, parliamentary officers and judges and possibly others as well.

It is appropriate for me to take the Court to the particular passage which appears at page 232 of the report.  There are two passages that I would wish to read.  Towards the bottom of page 232 the Court said this:

At this point it is convenient to consider South Australia’s argument based on impairment of a State’s “integrity” or “autonomy”.  Although these concepts as applied to a State are by no means precise, they direct attention to aspects of a State’s functions which are critical to its capacity to function as a government.  It seems to us that critical to that capacity of a State is the government’s right to determine the number and identity of the persons whom it wishes to employ, the term of appointment of such persons and, as well, the number and identity of the persons whom it wishes to dismiss with or without notice from its employment on redundancy grounds.  An impairment of a State’s rights in these respects would, in our view, constitute an infringement of the implied limitation.

And then over the page, at the commencement of the next paragraph:

In our view, also critical to a State’s capacity to function as a government is its ability, not only to determine the number and identity of those whom it wishes to engage at the higher levels of government, but also to determine the terms and conditions on which those persons shall be engaged.  Hence, Ministers, ministerial assistants and advisers, heads of departments and high level statutory office holders, parliamentary officers and judges would clearly fall within this group.  The implied limitation would protect the States from the exercise by the Commission of power to fix minimum wages and working conditions in respect of such persons and possibly others as well.

As I have indicated, that passage was specifically referred to by all of the majority Justices in Austin v the Commonwealth, and it is to that case that I now specifically invite the Court to turn its attention.  The Protected Funds Acts that are the Acts that are under consideration by this Court were of course also the subject of consideration by this Court in Austin’s Case, and Austin’s Case, as we know, involved the application of these Acts to a New South Wales Supreme Court justice.  The factual circumstances, in our submission, are only slightly different from the case at Bar.  The judge concerned was to become the beneficiary of an unfunded defined benefit scheme on his retirement.  He was entitled to a pension.  The Protected Funds Acts levied the surcharge on the judge at his retirement.  In his case, the amount of the tax would have been greater than the pension payments that he would have been entitled to for some time after retirement.

GUMMOW J:   Do you disagree with what is put in support by New South Wales on this point at paragraph 2 of New South Wales’ submissions, as to the distinction, as you say not a particularly significant distinction, of Austin?  It just seems very succinctly encapsulated there.

MR HEYWOOD-SMITH:   It is true that the surchargeable contributions are considerably smaller.  That, we say, is apparent from the fact that Members of Parliament in South Australia earned substantially less than New South Wales Supreme Court judges, and it is a matter of relevance.  We do not see it as being a point of distinction.  I am not certain about 2(i) or the significance of 2(ii); 2(iii) we do not have a dispute with but we do not consider that it is a matter of distinction or relevance.  Base salary in (iv) is certainly agreed, and the matters in (v) are agreed.  We do not dispute (vi) – if that assists, your Honour. 

GUMMOW J:   Do you disagree with 7, with what New South Wales says in paragraph 7 on page 4, as to the sharing of the “central vice”, as it is salaciously described?

MR HEYWOOD-SMITH:   We agree with the submission in paragraph 7.  We have no dispute with that submission. 

GUMMOW J:   Thank you.  You have a number of allies here.  You may not agree with all that they say.  Thought might be given to that overnight, perhaps.

MR HEYWOOD-SMITH:   The joint judgment ultimately finds – that is apparent from paragraph 174 on page 267 – that the legislation was invalid in relation to Justice Austin, and indeed in relation to State judges, the beneficiaries of pension schemes resembling that provided by the New South Wales Pensions Act.

The majority, we say, held that the legislation placed a particular disability or burden on the operation and activities of the State, a special burden on the judges as compared with other superannuation beneficiaries resulted in the impairment of the State’s freedom to determine the remuneration in terms of retirement of its judges.  The judges along with other high office holders were recognised as part of the essential organs of government.  If I could refer the Court to page 264 of Austin’s Case and to paragraph 166 where the joint judgement noted a passage from Justice Brennan’s reasons in the Second Fringe Benefits Tax Case, which was described by the joint judgement as being:

no less significant for its presence in a dissenting judgment, given the later statement in Australian Education Union –

The footnote (247) refers to the passage at 233 of the Australian Education Union Case that I earlier read to the Court.  But the passage which the joint judgment notes from Justice Brennan’s reasons was this:

“The essential organs of government – the Governor, the Parliament, the Ministry and the Supreme Court – are the organs on which the ‘existence and nature’ of the body politic depends.  (I mention only the Supreme Court, for that is the court of general jurisdiction in which, subject to the jurisdiction of this Court, the laws of the State are finally interpreted and the constitutional and administrative law of the State is applied.)  The existence and nature of the body politic depends on the attendance to their duties of the officers of the essential organs of government and their capacity to exercise their functions.  The emoluments which a State provides to the officers of the essential organs of government ensure or facilitate the performance by those organs of their respective functions.”

Of course, what we are concerned with here is the emoluments which the State of South Australia has put in place concerning its members of Parliament and, in particular, the remuneration was to be received by them upon their retirement.

FRENCH CJ:   The impact on members of Parliament – I am not sure anything turns on it – is the same as the impact on Ministers of State who hold their office by virtue of being Members of Parliament and they will get a higher benefit under the State legislation because of the higher salaries they are paid as Ministers, ultimately?

MR HEYWOOD‑SMITH:   Yes.

FRENCH CJ:   But there is no relevant distinction between the holders of executive office in that character.

MR HEYWOOD-SMITH:   No, we would say not, and we would say that neither in the Australian Education Union Case or in Austin was their any attempt by either Court to distinguish between one high office holder and another.  True it is that in Austin’s Case the Court was specifically considering the position of a judicial officer, but, in our submission, nothing was said which would be not as equally applicable to a Member of Parliament.  Certainly there are certain factors associated with the engagement of a judicial officer, that person’s independence and security of tenure as opposed to that of a Member of Parliament who might, of course, lose his seat at an election, but the very fact that a Member of Parliament does not have that security of tenure makes retirement pensions of great significance to those members.

In Austin’s Case the State’s capacity to recruit and retain judges was found to be inhibited.  This aspect of the decision is addressed, we say, particularly clearly in the Chief Justice’s judgment at page 219 and in paragraph 28.  If I could just read a passage from that paragraph, about a third of the way down:

For the same reason, the Parliament’s power to make laws with respect to taxation does not extend to enable it to legislate to single out State judges for the imposition of a special fiscal burden.  Judges, like other citizens, are subject to general, non‑discriminatory taxation, and the mere fact that the incidence of taxation has a bearing upon the amount and form of remuneration they receive does not mean that federal taxation of State judges is an interference with State governmental functions.  It is otherwise when, as here, a federal law with respect to taxation treats State judges differently from the general run of high income earners and federal judges, and to their practical disadvantage.  That differential treatment ‑ ‑ ‑

GUMMOW J:   Is there any comparative situation in this case with federal parliamentarians?

MR HEYWOOD‑SMITH:   No.  I think the term we would ‑ ‑ ‑

GUMMOW J:   So it is high income earners, is it?

MR HEYWOOD‑SMITH:   They are certainly high income earners, but we understand federal parliamentarians to be addressed in the same way as ‑ ‑ ‑

GUMMOW J:   No, relevant comparator?  Chief Justice Gleeson fixed in that passage upon high income earners and federal judges.  Now, in this case, what is the comparator?  Just other high income earners, is it?  I think so.  I think that is the use to which you have to put that passage if you are going to get anything out of it.

MR HEYWOOD‑SMITH:   Yes.

GUMMOW J:   It also has in it, in that passage of the Chief Justice, a notion of discrimination because like and not being treated alike, which is not necessarily reflective of the whole of the majority decision and reasoning in that case.

MR HEYWOOD‑SMITH:   With respect, we would say that the passage that immediately follows amplifies what his Honour is saying there.  His Honour goes on to say:

That differential treatment is constitutionally impermissible, not because of any financial burden it imposes upon the States, but because of its interference with arrangements made by States for the remuneration of their judges.  The practical manifestation of that interference is in its capacity to affect recruitment and retention of judges to perform an essential constitutional function of the State.  Evidence of that capacity is to be found in the legislative response which the State of New South Wales was, in effect, forced to make.

If I take the Court, your Honours, back to paragraph 11 on page 208 where his Honour addresses the notion of the tax being discriminatory and he says at about line 8 of paragraph 11:

That the Acts treat the first plaintiff, and other State judges, differently from the manner in which other “high‑income earners” generally are treated for the purpose of taxing the value of the annual increases in the liability of their superannuation providers, and differently again from the manner in which federal judges are treated, is not in dispute.  There is a question whether the differences involve relevant and impermissible discrimination.  Federal judges in respect of whom the surcharge applies have their pensions, when they ultimately become payable, reduced, at the time of each pension payment, by a certain amount.  No personal liability is incurred; no accumulated debt is payable by the judge; and there is no possibility that surcharge liability could exceed benefits.  As to other high income earners, in their case the tax is imposed on the superannuation provider, no doubt in the expectation that it will be passed on to the member in the form of reduced benefits.

Those are the matters of significance by way of comparison and, in our submission, the same points are made here where a State Member of Parliament is made personally liable for the same accumulated debt and is obliged to pay it within three months of receipt of the section 15(7) notice in circumstances, we say, where under the general legislation – and although I do not think there is a specific reference to federal parliamentarians - there may be, I will check that over the adjournment - but that federal parliamentarians are addressed in a similar way.

FRENCH CJ:   You are not running a discrimination criterion of invalidity, though, are you?  It is the impairment of the State’s constitutional functions that you are directed to.

MR HEYWOOD-SMITH:   That is so, but we do say or we do point to the fact that when in Schedule 14 it specifically picks up the Parliamentary Superannuation Schemes in South Australia, Western Australia and none others, that there is an element of discrimination.

FRENCH CJ:   What is the significance of it?

GUMMOW J:  Discrimination between whom?

MR HEYWOOD-SMITH:   I take the Court’s point.  It may not be a relevant discrimination.  Your Honour, the Chief Justice, is certainly correct in saying that our primary point is the interference with the State’s capacity to function as a government.  The position which we emphasise is that the Protective Funds Acts are not Acts of general application.  They purport to speak only to a limited range of high income earner of a particular category and they are the ones that we have identified in Schedule 14.  The critical feature, we say, is the fact that the Member of Parliament in this case, of the judge in Austin’s Case was made personally liable for the surcharge as opposed to the superannuation provider under the general legislation.

Now, the Commonwealth would have the Court believe that all that this legislation does is to seek to subject members of these constitutionally protected funds to the same disabilities that other high income earners are subjected to, pursuant to the general legislation.  On that topic, we ask the Court to note again in that passage in paragraph 11 of the Chief Justice’s decision in Austin, the last sentence that I read:

As to other high income earners, in their case the tax is imposed on the superannuation provider, no doubt in the expectation that it will be passed on to the member in the form of reduced benefits. 

We would also ask the Court to note what his Honour Justice McHugh said at page 283 in paragraph 229 when his Honour says – it is a significant paragraph so I will read the whole – there is only one part that relates to this submission.  His Honour says:

Here the federal law discriminates against State judicial officers in a way that interferes in a significant respect with the States’ relationship with their judges.  It interferes with the financial arrangements that govern the terms of their offices, not as an incidence of a general tax applicable to all but as a special measure designed to single them out and place a financial burden on them that no one else in the community incurs.  The Commonwealth does not dispute that the relevant federal legislation treats the ‑ ‑ ‑

GUMMOW J:   We could read these passages to ourselves from here until Friday afternoon.

MR HEYWOOD‑SMITH:   Paragraph 229.  If your Honour pleases.  The particular sentence that I wish to draw the Court’s attention to is at the top of page 284:

The federal legislation assumes – no doubt with good reason –‑ that the surcharge will be passed on to the high income earner in his or her capacity as a member of the superannuation scheme ‑

et cetera.  No evidence was adduced by the Commissioner in the case at Bar as to the practice in the general community.  However, we do draw the Court’s attention to the SCR ruling 97/1 which I referred to earlier.  I thought they had been handed up, but can I provide copies to the Court of that ruling.  I told the Court earlier this afternoon that this was the ruling which gave direction to the actuaries concerning the calculation of surchargeable contributions pursuant to the general legislation but adopted in – pursuant to the Protected Funds Acts legislation.  The Court will note firstly in rule 1 that it is said to apply to the general Acts.  Can I direct the Court’s attention to rule 5.8 on page 9 of 11 where it is there said:

If an employer agrees to absorb the cost of the surcharge, in whole or part, the actuary should specify that an additional amount equal to the value of the absorbed surcharge divided by 0.85 should be added to the contribution otherwise reported to the ATO in that year.

The significance, we suggest, is that it is contemplated, or it was contemplated by the Commissioner that in certain circumstances an employer of high income earners would absorb this surcharge such that the member of those general funds would not necessarily end up meeting this liability at the end of the chain.  In our submission, there is no justification for considering, other than their Honours in Austin’s Case is concerned, that there was an assumption that in some way it would be passed down.  But that we say does not enable the Commonwealth to assert, as it has in its reply to the interveners in paragraphs 15.1, the following.  I am sorry, paragraph 19.1 at the bottom of page 5 of that reply and the end of that paragraph is to this effect:

The burden of the surcharge is ultimately borne by the member whether the liability falls upon the superannuation provider or upon the member directly.

In our submission, that is an assumption that we do not believe the Commissioner is entitled to advance to this Court as being necessarily the fact.

GUMMOW J:   On this question of discrimination, do you differ from the treatment, for example, by Victoria on page 16 of their submissions, paragraphs 43 through to 51?  The section has, if I may say so, a more sophisticated view of the matter than high income earners and, in particular, it focuses upon the critical difference between public and private in paragraph 48.

MR HEYWOOD‑SMITH:   We certainly do not disagree with the asserted crucial difference in paragraph 48 concerning the personal liability.

GUMMOW J:   I think you have then to look at the Attorney’s reply at paragraph 19 on pages 5 and 6 in 19.2.

MR HEYWOOD‑SMITH:   I will just comment upon 19.1.  The position of the appellant, can I indicate, is essentially this, that when the legislator chose to write legislation which spoke to Members of the South Australian Parliament and did so by non‑general legislation and effected changes in the terms and conditions of engagement of such parliamentarians that the line was crossed so far as the Melbourne Corporation principle is concerned.  We appreciate and accept that the Full Court and the Commonwealth seeks to invite this Court to say, well, no, it is not sufficient just to have identified those features of this legislation, you must then look at the practical differences and ask whether because of them it could truly be said that there is some significant infringement upon or interference with the State’s sovereignty.

Our submission to this Court is that that sort of exercise is wholly inappropriate because it will ultimately end up in a situation where validity of the legislation in respect of particular high office holders, eg, judges in one State and another may be found to be valid in respect of one State and invalid in respect of another simply because of the particular arrangements that the particular State has made in respect of their judges.  Similarly, in respect of a particular State it runs the risk of a finding that one high office holder, eg, a Member of Parliament, is validly spoken to by these legislations whereas another, a judge or a Minister, is not solely because of the arrangements that the State has put in place for those office holders.  In our submission, the constitutional validity of this Commonwealth legislation cannot be informed by the State legislation.

As we say, or what follows from the Australian Education Union Case and the application of it in Austin, once the subject of the legislation is identified as the high office holders of a State and once it is accepted that they are being spoken to by non‑general legislation and that that legislation is interfering with the arrangements that the State has made for the remuneration of those office holders, then we say the line has been crossed, and that is why we say, effectively, that this comparator exercise which the Full Court engaged in or indulged in was simply an error.

GUMMOW J:   It may be implicit in what you are saying that the Full Court, perhaps unconsciously, is treating it as a section 109 case rather than an absence of power case; a conflict between laws as distinct from an absence of power.

MR HEYWOOD-SMITH:   Yes, I had not thought of it in that way, but I can see how it might be.  There is one matter that we wish to identify as being of significance in this case flying from the submissions made by the Commonwealth.  It is our submission, as we say is made apparent by the former Chief Justice in Austin at paragraph 29, that the Court must look at the legislation at the date of its commencement of operation.  The Commonwealth in its submissions, in paragraphs 10, 11, 36.3, and in its reply at 15.2, appears intent on seeking to raise for consideration later developments in State legislation; developments all associated with what is asserted to be an apparent movement away by States from defined benefit schemes to accumulation schemes.

In our submission, the Court cannot assess the validity of this legislation by reference to where the States may subsequently be moving.  In the case of the South Australian Member of Parliament, the surcharge debt is accruing in the member’s account and attracting interest.  The obligation to pay on the liability is deferred until the lump sum or pension becomes payable to him.  There is no requirement for the member paying prior to that time, although section 15(9), as I have indicated, would allow him to do so.  Indeed, it would be chancing fortune – the phrase used by the joint judgment in paragraph 169 – for him to do so, as he might die before the pension becomes payable, he might not serve six years, he might retire voluntarily before 15 years but not otherwise qualify and there is no apparent provision for the refunding of surcharge. 

Under the general legislation, the surcharge is payable by the superannuation provider annually as it accrues in the case of a funded defined benefits scheme member and an accumulation fund member, pursuant to section 15.  It is deferred in the case of the unfunded defined benefits scheme member, but in that case the liability falls on the superannuation provider.  These are all matters which make it clear, we say, that the non‑general Commonwealth legislation has interfered with or is purporting to interfere with, the arrangements that the State has put in place for the proper remuneration, as it sees it, of its Members of Parliament. 

GUMMOW J:   Just stopping there for a minute, is not the State of the statute book of the various States dealing with this question of remuneration of its parliamentarians, in a way nothing more than a particular evidentiary fact of a constitutional nature against which you measure the purported exercise of Commonwealth power?

MR HEYWOOD-SMITH:   Yes, and here ‑ ‑ ‑

GUMMOW J:   Otherwise you get into this game of treating it as an exercise of concurrent power and saying, well, that interferes with this and this is a 109 case and so on and so forth.  That is not quite right.  It does not matter that the States might have another scheme from time to time, does it?

MR HEYWOOD-SMITH:   Well, no, it does not.

GUMMOW J:   The question is whether this Act was valid on the day it was assented to and commenced. 

MR HEYWOOD-SMITH:   That is correct.  That is our submission.  The State will from time to time change its arrangements, place particular significance on particular age restrictions, place particular significance upon amounts by which retiring members can commute, which, as we shall see, have been necessarily interfered with.

FRENCH CJ:   The Commonwealth special Act does not apply to the State relevant Superannuation Acts at a particular time, does it?  It is as they are from time to time, those named in the schedule?

MR HEYWOOD‑SMITH:   That is so.

FRENCH CJ:   So it is ambulatory to that extent, in the sense that it picks up statutes which may change their form?

MR HEYWOOD‑SMITH:   Yes, we accept that. 

FRENCH CJ:   I am not sure that is right.  I am just asking if that is your contention.

MR HEYWOOD‑SMITH:   That is so.  I have indicated that the appellant’s primary position, stated at its highest, is once the identification of the subject, “high office holders”, once acceptance of the non‑general legislation which is interfering with the arrangements that the State has put in place, the line has been crossed but as I have indicated here the Full Court and the Commonwealth have undertaken this comparative exercise.  In our submission, even were such an exercise to be considered appropriate, nevertheless there is ample material here to indicate that the impact of the Protected Funds Assessment Act on the retirement benefits of Members of State Parliament was significant.

For example, much – or it was noted in Austin’s Case that upon qualification for the pension the continuing in office of the judge concerned had a detriment so far as his or her ultimate entitlements might be.  Similarly, we say, in the case at Bar for a parliamentarian who has been in Parliament for 20 years and has maximised the percentage of his retiring salary at 75 per cent from then on the inducement to remain in Parliament is affected by this legislation.  As the years go by the debt is accumulating, but the proportion of his final salary being taken as pension is not and so the situation, whilst not exactly the same is analogous.  In addition to that this is in the circumstance where the member is still as the quid pro quo for the pension having to pay in this instance 5.75 per cent of his after tax salary, which we say is another factor.

FRENCH CJ:   That might be a convenient point to stop, Mr Heywood‑Smith.  The Court will adjourn to 10.15 tomorrow morning.

AT 4.17 PM THE MATTER WAS ADJOURNED
UNTIL WEDNESDAY, 11 MARCH 2009