South Australia v The Commonwealth

[1942] HCA 14

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THE STATE OF SOUTH AUSTRALIA AND

THE COMMONWEALTH AND ANOTHER

DEFENDANTS.

THE STATE OF VICTORIA AND ANOTHER

THE COMMONWEALTH AND ANOTHER

DEFENDANTS.

THE STATE OF QUEENSLAND AND

THE COMMONWEALTH AND ANOTHER

DEFENDANTS.

THE STATE OF WESTERN AUSTRALIA

AND ANOTHER

THE COMMONWEALTH AND ANOTHER

DEFENDANTS. Constitutional Law-Destroying functions of States-Income tax-Financial assist-

anceDiscrimination-Preference-Priority of Commonwealth tax over State tax -Military and naval defence-Taking over State officers-Acquisition of State property-Just terms--Admissibility of evidence-Speeches in Parliament Report of Committee-Object or consequences of Act Scheme" of legislation -The Constitution (63 &64 Vict. C. 12), secs. 51 (ii.), (vi.), (xxxi.), (xxxix.), 55, 96, 99, 109-States Grants (Income Tax Reimbursement) Act 1942 (No. 20 of 1942)-Income Tax (War-time Arrangements) Act 1942 (No. 21 of 1942)- Income Tax Assessment Act 1942 (No. 22 of 1942)-Income Tax Act 1942 (No. 23 of 1942).

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The Income Ta Act 1942 and the States Grants (Income Tax Reimbursement) Act 1942 are respectively within the powers of the Commonwealth Parliament to make laws with respect to taxation and to grant financial assistance to any State, notwithstanding the condition of abstinence from imposing income tax attached to such grants under the last-mentioned Act. The two Acts men- tioned, whether considered separately, together, or in conjunction with sec. 31 of the Income Tax Assessment Act 1942 and the Income Tax (War-time Arrange- ments) Act 1942, are not invalid as being legislation directed towards destroying or weakening the constitutional functions or capacities of the States or as involving discrimination contrary to sec. 51 (ii.) of the Constitution or prefer- ence contrary to sec. 99.

So held by Latham C.J., Rich, McTiernan and Williams JJ., Starke J. agreeing as to the validity of the Income Tax Act 1942 but dissenting as to the validity of the States Grants (Income Tax Reimbursement) Act 1942. Per McTiernan J.: The Acts are also justified by secs. 51 (vi.) and (xxxix.) of

The Commonwealth Parliament under its powers to make laws with respect to taxation has power to make Commonwealth taxation effective by giving priority to the liability to pay such taxation over the liability to pay State taxation. Sec. 31 of the Income Tax Assessment Act 1942 on its true construc- tion has the effect of giving such priority as regards Commonwealth taxation on the income of any year over State taxation on the income of the same year only, and SO construed is within power. So held by Latham C.J., Rich, Starke and Williams JJ. McTiernan J. deciding that the section (which is preceded by a recital that it is passed for the better securing of the revenue required for the efficient prosecution of the present war and is expressed to have opera- tion only until the last day of the first financial year after the end of the war) is within the power of the Commonwealth Parliament to make laws with respect to the naval and military defence of the Commonwealth and the several States and that as the section was a valid exercise of the power which Parliament purported to exercise in passing it, it was unnecessary to decide whether the section was valid under sec. 51 (ii.) and (xxxix.) of the Constitution.

The Income Tar (War-time Arrangements) Act 1942 enables the Common- wealth to take over from the States their officers, premises and equipment concerned with the assessment and collection of income tax and provides for the transfer from the States to the Commonwealth of records relating to Common- wealth income tax. The Act is to continue in operation until the last day of the first financial year after the present war.

Held, by Rich, McTiernan and Williams JJ. (Latham C.J. and Starke J. dissenting), that the Act is a valid exercise of the power of the Commonwealth Parliament to make laws with respect to the naval and military defence of the Commonwealth and the several States. So held, however, without deciding whether the provisions of the Act for the determination of compensation for the possession and use of premises and equipment by an arbitrator appointed by the Governor-General and for the States' right to access to those records

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which relate to State income tax constitute just terms within the meaning of sec. 51 (xxxi.) of the Constitution.

Evidence of speeches made in Parliament or of the report of a Committee on which legislation is based, adduced to show the purpose or intention of Parliament or the existence of a "scheme" of legislation, is irrelevant to the determination of the validity of legislation and inadmissible,

So, held by Latham C.J., Rich, Starke, McTiernan and Williams JJ. Relevance of the object and consequences of legislation to the determina- tion of its nature and validity discussed. Effect of the existence of a "scheme" of legislation in relation to the validity of component Acts, considered.

APPLICATIONS for interlocutory injunctions ordered to be argued before a Full Court and by consent treated as the trials of the actions.

The States of South Australia, Victoria, Queensland and Western Australia and the respective Attorney-Generals of those States in separate actions sued the Commonwealth and Joseph Benedict Chifley, the Treasurer of the Commonwealth for (a) a declaration that the whole, or some one or more, or some part or parts of (i) the States Grants (Income Tax Reimbursement) Act 1942, No. 20 of 1942 (ii) the Income Tax (War-time Arrangements) Act 1942, No. 21 of 1942; (iii) the Income Tax Assessment Act 1942, No. 22 of 1942 and (iv) the Income Tax Act 1942, No. 23 of 1942, were, or was, ultra vires the Commonwealth Parliament and were, or was, uncon- stitutional and invalid; and/or that the scheme of uniform taxation embodied in those Acts was unconstitutional and invalid; and (b) an order or injunction to restrain the defendant Treasurer and other Ministers and Commonwealth officers from taking over compul- sorily any of the officers of the plaintiff's taxation department and any of the office accommodation, furniture or equipment of that department or the returns or records held by the department relating to the assessment or collection of income tax and from putting the said Acts, or any of them, or the said scheme, into operation.

All the four Acts referred to were assented to on the same day. The States Grants (Income Tax Reimbursement) Act 1942, No. 20, provides by sec. 4 "In every financial year during which this Act is in operation in respect of which the Treasurer is satisfied that a State has not imposed a tax upon incomes, there shall be payable by way of financial assistance to that State the amount set forth in the Schedule to this Act against the name of that State, less an amount equal to any arrears of tax collected by or on behalf of that

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State during that financial year." Sec. 5 provides that any arrears

SO collected shall be paid as further financial assistance " to eligible States immediately prior to the expiration of the Act and in the meantime shall bear interest. Upon the Treasurer, after considering a report by the Commonwealth Grants Commission, being SO satisfied, such further financial assistance as the Treasurer thinks fit must be granted to the State or States concerned (sec. 6). Payments are to be made out of the Consolidated Revenue Fund, which is thereby appropriated accordingly (sec. 7). The Act is to continue in operation until the last day of the first financial year to commence after the date on which His Majesty ceases to be engaged in the present war, and no longer" (sec. 8). In the schedule appears the following New South Wales, £15,356,000 Victoria, £6,517,000 Queensland, £5,821,000; South Australia, £2,361,000; Western Australia, £2,546,000 Tasmania, £888,000; (Total) £33,489,000.

The Income Tax (War-time Arrangements) Act 1942, No. 21, contains a recital that it is " An Act to make provision relating to the collection of taxes during the present war," and is prefaced by a preamble which states that "with a view to the public safety and defence of the Commonwealth and of the several States and for the more effectual prosecution of the war in which His Majesty is engaged, it is necessary or convenient to provide for the matters hereinafter set out." Sec. 4 provides "The Treasurer may. at any time and from time to time,

by notice in writing addressed to the Treasurer of any State, notify him that, as from the date specified in the notice, it is, in his opinion, necessary for the efficient collection of revenue required for the prosecution of the war, for the effective use of manpower, or otherwise for the defence of the Commonwealth, that any officers of the State service specified in the notice who have been engaged on duties which, in the opinion of the Treasurer, are connected with the assessment or collection of taxes upon incomes should be temporarily transferred to the Public Service of the Commonwealth, and any officer SO specified shall, by force of the notice, be temporarily transferred to the Public Service of the Commonwealth accordingly as from that date." Other sections provide for the retransfer of officers after the Act ceases to operate, for the preservation of the rights of officers, for the control of them while serving the Commonwealth, retirement and superannuation rights. Sec. 11 enables the Commonwealth, upon the Treasurer giving to the State Treasurer a notice similar to that already mentioned, to acquire the possession and the use of "any office accommodation, furniture and equipment specified in the notice."

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Sub-sec. 2 of that section provides that the compensation for such H. C. possession and use shall be as agreed between the Commonwealth and the States or as determined by an arbitrator appointed by the Governor-General. Sec. 13 provides for the transfer to the Common- wealth, as from the commencement of the Act, of all returns and records relating wholly or in part to the assessment or collection of Commonwealth income tax which are in the possession of a State. Sec. 14 is a penalty section. The Act is to continue in operation during the same period as that prescribed for Act No. 20.

Sec. 31 of the Income Tax Assessment Act 1942, No. 22, inserts a new sec. 221 in the Income Tax Assessment Act 1936-1941. That section provides: "(1) For the better securing to the Common- wealth of the revenue required for the efficient prosecution of the present war-(a) a taxpayer shall not pay any tax imposed by or under any State Act on the income of any year of income in respect of which tax is imposed by or under any Act with which this Act is incorporated until he has paid that last-mentioned tax or has received from the Commissioner a certificate notifying him that the tax is no longer payable." Sub-sec. (1) (b) gives effect to the Com- monwealth priority in payment of income tax in bankruptcy and in the liquidation of a company, and provides a penalty for infringe- ment of the section. Sub-sec. 2 provides that this section is to have operation during the same period as that prescribed for Acts Nos. 20 and 21.

The Income Tax Act 1942, No. 23, imposes Commonwealth income tax at very high rates rising to 18s. in the £1 upon that part of any income from personal exertion which exceeds £4,000, and upon that part of any income from property which exceeds £2,100. By sec. 3 the Income Tax Assessment Act 1936-1942 is to be incorporated and read as one with the Income Tax Act 1942. By sec. 7 (1) the tax imposed by the Income Tax Act is to be levied and paid for the financial year beginning on 1st July 1942. Sec. 7 (2) provides that until the commencement of the Act for the levying and payment of income tax for the financial year beginning on 1st July 1943, the Act shall also apply for all financial years subsequent to that beginning on 1st July 1942.

Upon applications made pursuant to notice by the first three named States and their respective Attorney-Generals, Latham C.J. ordered that the plaintiffs deliver a statement of claim within a specified period and that the defendants plead thereto within a further specified period, and, upon this having been done and certain affidavits filed, his Honour, by consent, ordered that, subject to all proper objections which might be taken to the affidavits, the

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cases be argued before the Full Court of the High Court upon the said notice, pleadings and affidavits and the exhibits referred to therein. An order referring to the Full Court, for argument upon the pleadings, affidavit and exhibit referred to therein, the case brought by the State of Western Australia and its Attorney-General was also made upon a summons taken out by them.

The statements of claim filed on behalf of the plaintiffs were, except as to reference in the appropriate places to the particular State concerned, drawn in similar terms. The statement of claim filed on behalf of the State of South Australia and the Attorney- General for that State was substantially as follows :-

1. For many years prior to the establishment of the Common- wealth of Australia and until the present time the State of South Australia has raised annual revenues by means, inter alia, of taxes upon the incomes of its subjects.

2. The State of South Australia maintains a department for the collection of State income taxes, in which a large staff is employed consisting of officers, the senior members of whom have spent many years in the department and thereby acquired a specialized know- ledge of the administration of the State's income tax Acts. The department uses for the purposes of its work large numbers of type- writers, adding machines and other mechanical equipment. The department is housed in extensive offices in Adelaide, and in the present conditions it would be impossible or impracticable to replace the personnel or equipment of the said department or to find other suitable premises for its accommodation.

3. The several States of the Commonwealth have at all material times depended upon annual revenues raised by taxation for carrying out their governmental functions, and without the revenues from the said taxes the said States would have been incapable of perform- ing their constitutional functions as constituent States of the Commonwealth.

4. The particulars of the revenues and expenditure of the said States are set out in public records, namely the financial statements of the Treasurers of the said States presented to their respective Parliaments for the financial year ended 30th June 1941. In the State of South Australia the principal sources of taxation revenue are and have been for many years past succession duties, land tax, income tax, stamp duties, motor vehicles tax and licences.

5. The following schedule compiled from the said financial state- ments shows the total amount of revenue raised by each State from taxation for the year ended on 30th June 1941, the total amount of revenue raised by each State from income tax, and the proportion

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which the revenue from income tax bears to the total revenue from all taxes in each State.

New South Wales Victoria Queensland South Australia West Australia Tasmania 6. Since the year 1915 the Commonwealth Parliament has levied annual taxes upon income for Commonwealth purposes, and in the year ended 30th June 1941 the Commonwealth raised by means of such taxes the sum of £43,305,000.

7. For some years past the respective taxation departments of all the States except Western Australia have collected on behalf of the Commonwealth the income tax assessed by the Commonwealth on taxpayers in the respective States pursuant to the Commonwealth Income Tax Collection Act 1923-1940. In the case of Western Aus- tralia the Commonwealth collects income tax on behalf of that State pursuant to arrangements made under that Act. In each State there is only one staff for the assessment and collection of both State and Commonwealth income taxes. The taxpayers make only one return, in which there are two columns, one for particulars for State income-tax purposes and the other for particulars for Commonwealth income-tax purposes. Besides the said returns the said depart- ments have in their possession complete records relating to taxpayers made over a long period of years which records are essential to the proper assessment and calculation of the taxpayers' future income tax. Such records relate to both State and Commonwealth tax.

8. On 7th June 1942 the following Acts having been passed by the Commonwealth Parliament received the assent of His Excellency the Governor-General and purported to become part of the statute law of the Commonwealth, viz., (a) The Income Tax Act 1942, No. 23; (b) The Income Tax (War-time Arrangements) Act 1942, No. 21; (c) The Income Tax Assessment Act 1942, No. 22 and (d) The States Grants (Income Tax Reimbursement) Act 1942, No. 20.

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9. The amounts set forth in the schedule to the States Grants (Income Tax Reimbursement) Act 1942 against the names of the respective States are in fact substantially the average of the amounts raised by each State by means of income tax in the financial years of each respective State ended 30th June 1940, and 30th June 1941.

10. The income taxes imposed by the Income Tax Act 1942 will raise and are intended to raise annually revenue of an amount approximately equal to the total of the amounts which would have been raised by the Commonwealth and the several States from income taxes under the existing rates of tax.

11. The said Acts form a single legislative scheme the object, substance, and effect of which is to prevent the State of South Australia and the other States of the Commonwealth from exercising their respective constitutional rights and powers to levy and collect income tax and to make it impossible for such States to levy and collect income tax.

12. The effect of the said Acts regarded as a single legislative scheme is to spread the burden of existing Commonwealth and State income taxes over the taxpayers of the Commonwealth as such and thereby to effect a discrimination between the States and the taxpayers of each State as such by reference to the varying rates of income tax at present in force therein.

13. The plaintiffs say that the said Acts are and each of them is unconstitutional and invalid because-(a) They constitute a single legislative scheme the object of which is to raise revenue for State purposes as well as for Commonwealth purposes (b) The said Acts constitute a single legislative scheme the pith and substance of which and the purpose and intention and the practical effect of which, is to make, contrary to the Constitution, the power of the Commonwealth to raise income tax exclusive and to deprive the States of their concurrent constitutional rights and power to raise revenue by way of income tax and to destroy the constitutional rights and powers of the State Parliaments and Governments as integral members of the Federal system established by the Con- stitution (c) The said Acts constitute a single legislative scheme of taxation which, contrary to the Constitution, effects a discrimination between States and particularly-(i) between those States (if any) which vacate the income-tax field and those which do not; and (ii) between the taxpayers of each State as such by reference to the varying rates of income tax at present in force therein; (d) The said Acts and the scheme embodied therein are a law of revenue and give preference to those States which vacate the income-tax field over those which do not and to taxpayers in some States over

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OF AUSTRALIA, taxpayers in other States by reference to the varying rates of income tax at present in force therein; (e) The Income Tax (War-time Arrangements) Act 1942 is an unconstitutional attempt to compul- sorily effect the transfer of a department of the Executive Govern- ment of South Australia or alternatively certain indispensable officers thereof to the Executive Government of the Commonwealth and to compulsorily acquire property belonging to the State of South Australia and essential to or used for the purposes of its Executive Government; (f) The Income Tax Assessment Act 1942 or sec. 31 thereof, is an unconstitutional attempt to interfere with the duties of the taxpayers of the States to pay taxes for the main- tenance of the Executive Governments of the States; (g) The States Grants (Income Tax Reimbursement) Act 1942 is an invalid exercise of the power of the Commonwealth Parliament to make grants to the States and the condition attached to the said grants is an uncon- stitutional interference with the legislative powers of the States; (h) The said Acts and each of them are and is beyond the legislative powers conferred on the Commonwealth Parliament by the Con- stitution.

The plaintiffs claimed a declaration and an order as set forth above. The defendants demurred to pars. 8 and 13 of each statement of claim on the grounds that the Acts therein mentioned were and each of them was within the constitutional powers of the Parliament of the Commonwealth. They admitted pars. 1, 4, 5, 8 and 9 of the statements of claim, and pleaded to the other paragraphs as follows :-

2. They did not admit that in the present conditions it would be impossible or impracticable for the department referred to to replace the personnel or equipment of that department or to find other suitable premises for its accommodation Save as aforesaid they admitted par. 2; 3. They did not admit any of the allegations in par. 3; 6. They said that the Commonwealth purposes for which annual taxes upon income had been levied by the Commonwealth had included the making of grants of large sums by way of financial assistance to each of the States. Save as aforesaid they admitted par. 6 7. They said that many taxpayers were required to make two or more returns and they did not admit that the records referred to were essential to the proper assessment and calculation of the taxpayers' future income tax. Save as aforesaid they admitted par. 7; 10. They admitted that the income taxes imposed by the Income Tax Act 1942 would raise for the financial year 1942-1943 an amount approximately equal to the amounts which would have been raised by the Commonwealth and the several States from income

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taxes under the existing rates of tax. Save as aforesaid they did not admit any of the allegations in par. 10 11 and 12. They denied each and every allegation in pars. 11 and 12; and 13. They submitted the questions of law raised to the judgment of the Court.

Except as to the admissions contained in the respective defences the plaintiffs joined issue.

Affidavits by the Crown Solicitors respectively of the States of South Australia, Victoria and Western Australia, and by the Com- missioner of Taxes of each of the two first-mentioned States, were filed in support of the various allegations contained in the state- ments of claim. The Public Service Commissioner for South Australia deposed in an affidavit that after the transfer to the Commonwealth of officers, office accommodation, furniture and equipment as referred to above, it would, in his opinion, be imprac- ticable to obtain the necessary staff and to provide the office accom- modation, furniture or equipment necessary to enable the State taxes on incomes of the financial year 1941-1942 to be assessed and collected. In an affidavit by an officer of the Treasury Department of the State of Victoria, he deposed that he had made careful calculations and estimates of the results of the so-called uniform taxation legislation of the Commonwealth comprised in the four Acts under consideration. He estimated that if that scheme were put into operation the total amount of income tax raised thereby would be about £145,000,000 of which about £60,000,000 would be raised in New South Wales and about £40,000,000 in Victoria. He continued that of the said total sum of £145,000,000 it was proposed that £33,489,000 would be paid to the States as income-tax reim- bursement. If that latter amount were allotted to the States proportionately to the aggregate contributions made by the tax- payers of such States, the allocation to the State of New South Wales would be approximately £14,000,000 and to the State of Victoria approximately £9,000,000, whereas the appropriation pro- vided in the States Grants (Income Tax Reimbursement) Act 1942 is £15,356,000 to the State of New South Wales and £6,517,000 to the State of Victoria.

In an affidavit filed on behalf of the defendants the Deputy Crown Solicitor for the State of Victoria deposed that the efficient prosecu- tion of the war had necessitated an unprecedented increase in the expenditure of the Commonwealth, and consequently in the revenue to be raised by taxation. For this purpose taxation on incomes of individuals and of companies had been resorted to in an increasing degree. The taxable capacity of the community had been rising since the outbreak of the present war, largely through the defence

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expenditure of the Commonwealth. This, he deposed, could be seen from the increase in income-tax collections of the States, despite decreases in taxation rates. The financial position of the States had been materially eased during the war, owing chiefly to the virtual elimination of unemployment through the expansion of war industries, to the provision by the Commonwealth of certain social services, and to a great expansion of railway revenue arising chiefly from causes connected with the war. The amounts raised by the States from income taxation varied widely from State to State in respect of the amount of income tax per head of population and in respect of the manner in which the burden of the tax was spread over different income levels. By reason of those circum- stances the Commonwealth had not been able to use for its own purposes the full taxable capacity of a taxpayer in a less highly taxed State without imposing an insupportable burden on a taxpayer at the same income level in a more highly taxed State by reason of the aggregate of Commonwealth and State income tax. In some cases, he deposed, the rate of these taxes combined in the financial year 1941-1942 already exceeded 20s. in the £1. Although the taxes imposed in the Income Tax Act 1942 are calculated to raise during the financial year 1942-1943 an amount approximately equal to the total of the amounts which would have been raised during that year by the Commonwealth and the several States from income tax at the rates which have operated during the financial year 1941- 1942, it was estimated that, largely as a result of the rising income level, they would raise a substantial amount more than has been raised during the said financial year 1941-1942. The amount of the increase would be available to the Commonwealth for the purposes of defence. If and SO far as the States refrained from imposing income tax during the remainder of the war period, there would be avail- able to the Commonwealth the whole of the increase in the yield of income tax due to the rising income level, derived mainly from war expenditure by the Commonwealth. Previously, this increase had been shared between the Commonwealth and the States. There were at present in the Commonwealth and in the several States some twenty-three distinct taxes on income, most of them differing not only in rate but also in basis of assessment. It was anticipated that to substitute for these diverse taxes the single set of taxes imposed by the Income Tax Act 1942 would, by simplifying the machinery for the assessment and collection of income tax, effect a substantial economy in trained personnel, whose services would thus be released for other duties in connection with the prosecution of the war. With a view to simplifying the machinery for the

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assessment and collection of income tax and with a view to making available to the Commonwealth for the prosecution of the war the full taxable capacity of the Australian community, the then Govern- ment of the Commonwealth in June 1941 and the present Govern- ment of the Commonwealth in May 1942 requested the States to vacate the field of income tax for the remainder of the war, and to accept compensation by way of financial assistance from the Common- wealth. This request was on each occasion unanimously refused.

All the parties consented that the applications for interlocutory injunctions should be treated as the trials of the actions.

Certain exhibits annexed to affidavits filed on behalf of the plain- tiffs and being the speeches by the Treasurer of the Commonwealth when introducing into the Commonwealth Parliament the Bills which subsequently became the Acts now challenged, and a report of the Committee on Uniform Taxation, were tendered in evidence and objected to.

The objection to evidence was argued :- Ham K.C. (with him Fullagar K.C., A. R. Taylor and K. H. Bailey), for the defendants. Neither the speeches nor the report are admissible in evidence (Administrator-General of Bengal v. Prem Lal Mullick 1; Sydney Municipal Council v. The Commonwealth 2 Assam Railways and Trading Co. Ltd. v. Commissioners of Inland Revenue 3; Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. 4; Richards v. McBride 5 ). The speech of an individual member of a legislature cannot be accepted as an aid to the construction of a statute enacted by it.

Ligertwood K.C. (with him Hannan K.C. and K. L. Ward), for the State of South Australia and the Attorney-General for that State. The speeches and the report are admissible. They are relevant because they demonstrate the existence of a legislative scheme to make the Commonwealth tax exclusive. They show to the Court the object and purpose of the challenged legislation (Attorney-General for Alberta v. Attorney-General for Canada 6 ). They serve to show that the power which the Parliament sought for the ostensible purpose of obtaining revenue for the Commonwealth was here used for some other purpose which was not an authorized purpose, and also to show that the Parliament has attempted to do

1(1895) L.R. 22 Ind. App. 407. 2(1904) 1 C.L.R. 208, at p. 213. A.C. 838, at p. 849 63 C.L.R. 3(1935) A.C. 445, at p. 457. 338, at p. 341. 4(1939) 61 C.L.R. 735 (1940) 5(1881) 8 Q.B.D. 119, at p. 123. 6(1939) A.C. 117. 65 CLR 385

in an indirect manner that which it was not entitled to do in a direct H. C. OF

Counsel for the other plaintiffs did not desire to add to the fore- going argument.

LATHAM C.J. The Court is of opinion that this evidence, consist- ing of the report of the Committee and the speeches of the Treasurer, is not admissible for any of the purposes mentioned, and the Court accordingly rejects the exhibits and the affidavits in each action. The reasons for rejecting them will be published when the judgment is given.

Counsel proceeded to argue in the actions Ligertwood K.C. (with him Hannan K.C. and K. L. Ward), for the State of South Australia. An examination of the four statutes under consideration shows that they are in fact a single legislative scheme, and that the substance, purpose and effect of it is to make the Commonwealth Parliament the exclusive taxing authority in the Commonwealth in respect of income tax, and to prevent the States from exercising their constitutional powers in relation to income tax. Sec. 7 (2) of the Income Tax Act 1942 diverges from the practice of making the rate of tax the subject of an annual Act. It is not necessary to wait for a new Act to be enacted to fix the rates. The tax continues at the old rates until a new rates Act is passed. This is important having regard to the provisions of sec. 31 of the Income Tax Assessment Act 1942. In the circumstances, it is a matter of economic impossibility for the States to remain in the income-tax field. The money payable under this Act is not for Commonwealth purposes but is for combined Commonwealth and State purposes. It is obvious that the four Acts together form a scheme of legislation, one is dependent on the other. One of those Acts is a Tax Reimbursement Act. It is a reimbursing of the States in respect of moneys which the Commonwealth has collected for their needs. The moneys SO proposed to be "reimbursed" were not intended to be grants for the assistance of the States. The States have not sought assistance, the " need " has been created by the Commonwealth. It is not a grant of the kind contemplated by sec. 96 of the Constitution, and does not come within the power conferred by that section. The provisions of the Income Tax (War-time Arrangements) Act 1942 not only constitute an inter- ference with or hindrance to the executive functions of the States but also, the necessary staff, accommodation, furniture and equip- ment having been taken from them, it is impossible for the States

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to collect any tax which might be lawfully and properly imposed by them. The defence power conferred by sec. 51 (vi.) of the Constitution cannot be used for the purpose of destroying the constitutional powers, legislative and executive, of the States. The Acts have only one objective, and that is to prevent the States from exercising their income taxing powers. Sec. 11 of the War-time Arrangements Act is discriminatory legislation. By it the Common- wealth, if it exercises the power, proposes to take over property which is only used for income-tax purposes and not other property. The returns and records taken over pursuant to sec. 13 are necessary to the States for the efficient assessment of their future income tax. The Commonwealth has no power to direct its legislation towards a State department specially. The power in the Constitution for the Commonwealth to take over State property is subject to the Constitution. The operation of the Income Tax Act 1942 and the Income Tax Assessment Act 1942, having regard to the word " "imposed" in sec. 31 of the latter Act, makes it absolutely illegal for a person ever to pay his State income tax. Sec. 7 of the Income Tax Act provides indefinitely for future years. Income tax is imposed in advance of assessment. It is imposed as soon as the income commences to be earned and is paid by way of weekly or other periodical deductions. There is never a time when all the Commonwealth income tax imposed has been paid, because it is a continuing liability.

The four statutes under consideration must be construed together their essential subject matter is State taxation in various aspects. The entire subject matter of the States Grants (Income Tax Reimbursement) Act 1942 is State taxation. It is proved by evidence that the amounts set forth in the schedule to that Act were fixed by reference to State income-tax requirements. The condition of the payment of the amounts SO set forth is that the respective States shall vacate the income-tax field. There is a distinction between the exercise to the fullest extent by the Common- wealth of its copyright and bankruptcy powers and the method adopted in connection with taxation in the subject four statutes inasmuch as the power to tax is essential to the Constitution of the States. Neither the Commonwealth nor the States can direct their legislative powers towards destroying or weakening the Constitution, capacity or functions of the other See the Constitution, secs. 106, 107. In defining the content of a Commonwealth power regard must be had to the Federal nature of the Constitution (D'Emden V. Pedder 1; Baxter v. Commissioners of Taxation (N.S.W.) 2;

1(1904) 1 C.L.R. 91. 2(1907) 4 C.L.R. 1087. 65 CLR 387

The King v. Barger 1; James v. The Commonwealth 2; Andrews V. Howell 3 ).

The Commonwealth of Australia is a dual system. The Common- wealth has a sphere unto itself, and the States have a sphere unto themselves. So far as possible all the powers must be construed

SO as to preserve that idea, that is, that subject to sec. 109 of the Constitution the States are much on the same level as the Com- monwealth (Moore, Commonwealth of Australia, 2nd ed. (1910), pp. 506-511). A Parliament with limited powers cannot do indirectly what it is forbidden to do directly (Attorney-General for Ontario V. Reciprocal Insurers 4; Toronto Electric Commissioners v. Snider 5 ). That principle should be applied to the States Grants (Income Tax Reimbursement) Act, the purported object of which is to make grants to States under sec. 96 of the Constitution whereas its real object is to command and control the income-tax legislation of the States (W. R. Moran Pty. Ltd. v. Deputy Federal Commissioner of Taxation (N.S.W.) 6 ). The principle stated in The King v. Barger 7 should be applied here. The Court should have regard to the pith and substance of the Acts under consideration (Attorney-General for Queensland v. Attorney-General for the Commonwealth 8; W. R. Moran Pty. Ltd. v. Deputy Federal Commissioner of Taxation (N.S.W.) 9 ).

In ascertaining the subject matter, or the scope or purpose of the legislation, the Court is entitled to have regard to its economic effect (The King v. Barger 10; Attorney-General for Alberta v. Attorney- General for Canada 11 ). The effect of the four statutes is to render impossible, from a practical or economic point of view, the taxing of incomes by the States.

The power conferred by sec. 51 (ii.) of the Constitution of taxation for the peace, order and good government of the Commonwealth refers to taxation by the Commonwealth for Commonwealth purposes. The use of the taxation power deliberately to destroy the Constitution of the States is not an exercise of the taxation power subject to the Commonwealth Con- stitution. Under sec. 96 the question of purpose must be considered. The only authority conferred by that section is to provide financial assistance to States which need it, and not first of all to create that need. Here, not only did the Commonwealth create the need, but

1(1908) 6 C.L.R. 41, at pp. 65, 78. 2(1936) A.C. 578, at p. 611 55 C.L.R. 338, at pp. 349, 350. C.L.R. 1, at pp. 40, 41. 3(1941) 65 C.L.R. 255. 4(1924) A.C. 328, at pp. 337-339. 5(1925) A.C. 396. C.L.R., at pp. 341, 345, 346. 6(1940) A.C. 838, at p. 858; 63 7(1908) 6 C.L.R., at p. 74. 8(1915) 20 C.L.R. 148, at p. 160. 9(1940) A.C., at pp. 849, 854 63 10(1908) 6 C.L.R. 41. 11(1939) A.C., at pp. 130-132. 65 CLR 388

A. it also created the conditions with which the States were required

to comply in order to obtain grant. A grant is not a reimburse- ment. The power to tax is a 1 udamen l function of every sovereign and quasi-sovereign body politic, and it S an essential ingredient in every Constitution (The King v. Barger 1; The Federalist, Essays Nos. 30, 31, 32, by Alexander Hamilton). By attempting to destroy the power of the States to tax incomes, the Commonwealth Parlia- ment is attempting to destroy a sovereign power of the States and that is contrary, inter alia, to sec. 106 of the Constitution. The question is not one of national defence or national necessities. The Commonwealth Parliament has all the powers it needs in respect of money; it has the fullest powers to acquire money, property and manpower. The extent to which powers are exercisable applies equally to times of peace and to times of war.

The Parliaments of the States have the same regard for national exigencies as has the Commonwealth Parliament.

If the legislation is to be regarded as taxation legislation then it is not properly framed legislation. If it is to be regarded as grants legislation then it is intermeddling with something which is exclu- sively reserved to the States, namely, the taxation power of the States (In re Insurance Act of Canada 2 ).

The purpose of the legislation, as shown by the States Grants Act, is to intermeddle with the power of the States to collect taxes for their own purposes; and that is made part of the taxation scheme, a scheme which is brought into effect in these four statutes, therefore the whole of the legislation, regarded as taxation legislation, is bad, because the Tax Act itself is linked up with the States Grants Act and was intended to be linked up with that Act. The States Grants Act is bad, therefore the Tax Acts cannot be regarded as properly framed legislation for Commonwealth taxation purposes. The rule in D'Emden v. Pedder 3, that any interference with a State instru- mentality is bad, was probably laid down too widely. Although the rule was again affirmed in Deakin v. Webb 4, and in Baxter V. Commissioner of Taxation (N.S.W.) 5, notwithstanding the decision in Webb v. Outtrim 6, the true principle is that a deliberate and purposeful interference with the functions or capacities of either the Commonwealth or the States, is ultra vires and invalid. This principle was first indicated in Baxter v. Commissioners of Taxation (N.S.W.) 7. In The Federated Amalgamated Government Railway and Tramway Service Association v. New South Wales Traffic Employés Association (Railway Servants' Case) 8 it was held that the

1(1908) 6 C.L.R., at p. 81. 2(1932) A.C. 41, at p. 50. 3(1904) 1 C.L.R. 91. 4(1904) 1 C.L.R. 585. 5(1907) 4 C.L.R. 1087. 6(1907) A.C. 81 ; 4 C.L.R. 456. 7(1907) 4 C.L.R., at p. 1164. 8(1906) 4 C.L.R. 488. 65 CLR 389

principle was reciprocal SO that the Commonwealth could not inter- fere with the States any more than the States could interfere with the Commonwealth. That principle was applied until the decision in Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd. (Engineers' Case) 1. In that case the Court denied the principle as laid down in the wide terms of D'Emden v. Pedder 2, but did not deny the principle that neither the Commonwealth nor the States can purposely direct its or their legislation towards destroying or weakening the functions or capacities of the other see the report 3. This principle was not dealt with by the majority of the Court in the Engineers' Case (1). It was not necessary to and is quite outside the decision in that case (West v. Commissioner of Taxation (N.S.W.) 4 ). The scheme shows an interference with and a discrimination against the States. The discrimination in the grants indicates the purpose of the Commonwealth. The real object of the legislation is to force the States out of the taxing field. The States Grants Act is not conditioned by the needs of the States. It is not a proper use of the grant power. Whatever construction is given to the powers of the Commonwealth those powers are subject to the principle that the State Constitutions must be left intact in their essential ingredients: See Pirrie v. McFarlane 5; Australian Railways Union v. Victorian Railways Commissioners 6; West V. Commissioner of Taxation (N.S.W.) 7; Federal Commissioner of Taxation v. Official Liquidator of O. Farley Ltd. 8. The imposing of taxation is an essential function or activity of the States. In order to effectuate its scheme the Commonwealth needs a special power to be conferred upon it, as was the position which resulted in adding sec. 105A to the Constitution See New South Wales V. Commonwealth [Nos. 1 and 3] 9. The Commonwealth is endeavour- ing to introduce a unitary system without amending the Constitution. If this scheme be good the State Governments can be completely subordinated to the Commonwealth Parliament (Attorney-General for Alberta v. Attorney-General for Canada 10 ). Although the Com- monwealth has the power to impose the tax, the selection or dis- crimination shown in imposing the tax makes it manifest that the object is an ulterior one (Attorney-General for Alberta v. Attorney- General for Canada 11 ). This legislation is intended to put the

1(1920) 28 C.L.R. 129. 2(1904) 1 C.L.R. 91. 3(1920) 28 C.L.R., at pp. 143, 173, 4(1937) 56 C.L.R. 657, at p. 682. 5(1925) 36 C.L.R. 170, at pp. 191, 216, 221, 228. 6(1930) 44 C.L.R. 319, at pp. 389, 7(1937) 56 C.L.R., at pp. 681-683, 687, 688, 694, 698, 701, 707. 8(1940) 63 C.L.R. 278, at pp. 312, 9(1932) 46 C.L.R. 155, 246, 10(1939) A.C. 117. 11(1939) A.C., at p. 128. 65 CLR 390

States in a dilemma (Attorney-General for New South Wales v. Home- bush Flour Mills Ltd. 1) It is not admitted that each of the four statutes is in itself valid. Each statute was enacted as part of a scheme, therefore when considering the validity or otherwise of each statute regard must be had to that scheme (W. R. Moran Pty. Ltd. v. Deputy Commissioner of Taxation (N.S.W.) 2 ). An invalidity in any one of the four statutes infects each of the other three statutes (Attorney-General for the Commonwealth v. Colonial Sugar Refining Co. Ltd. 3 ).

All the powers of the Commonwealth Parliament conferred by sec. 51 of the Constitution are subject to the principle that neither the Commonwealth nor the States must deliberately interfere with essential functions of the other. This follows from the fact that all the powers in sec. 51, including the defence power, are conferred 'subject to this Constitution." That principle is not an implied principle, it is a necessary consequence of secs. 106 and 107. It follows, therefore, that the Commonwealth cannot, under the defence power, direct itself to destroying or weakening the essential capacities of the States. The only question considered in Farey v. Burvett 4 was whether there was any limitation on the defence power by reference to the reserved powers of the States the question as to whether the Constitution itself limited the defence power was not directly discussed in that case but apparently was indirectly referred to 5. A conflict of laws, which under sec. 109 is resolved in favour of the Commonwealth, is a different thing from interfering with the power of the States to pass a law, power being regarded as a governmental function. The operation of the defence power is limited. For example, the Commonwealth could not under the defence power purport to effect a purpose contrary to the provisions of secs. 51 (ii.), (iii.), 116, or 117. The defence power is not bounded only by the requirements of self-preservation as stated in Farey v. Burvett 6, that power is for the defence of the Commonwealth and the States. The question which arises is Was the power which the Parliament exercised related to its defence power (Andrews v. Howell 7 ) ?

A state of war does not suspend the Constitution (United States V. L. Cohen Grocery Co. 8; Ex parte Milligan 9; Mitchell V. Harmony 10; Knowlton v. Moore 11 ). This legislation

1(1937) 56 C.L.R. 390, at pp. 404, 2(1940) A.C. 838 63 C.L.R. 338. 3(1914) A.C. 237 17 C.L.R. 644. 4(1916) 21 C.L.R. 433. 5(1916) 21 C.L.R., at p. 440. 6(1916) 21 C.L.R., at p. 453. 7(1941) 65 C.L.R., at p. 271. 8(1921) 255 U.S. 81 [65 Law. Ed. 9(1866) 4 Wallace 2 [18 Law. Ed. 10(1851) 54 U.S. 115 [14 Law. Ed. 11(1900) 178 U.S. 41 [44 Law. Ed. 65 CLR 391

cannot be justified by the doctrine of necessity. The Common- wealth has been given the widest powers in relation to finance, which can be exercised for the purpose of the defence of the realm. There is no limit (a) to the taxing power in sec. 51 (ii.) except that of discrimination; (b) to the borrowing power under sec. 51 (vi.), or (c) to the power to acquire property under sec. 51 (xxxi.), other than that the acquisition must be on just terms. There is, therefore, no need for the Commonwealth to make laws as to finance by excluding the taxing powers of the States. The Income Tax Act read in the light of the States Grants Act and of the facts admitted in the pleadings raises taxes for both Commonwealth and State purposes. The power to raise money by means of taxes is for the peace, order and good government of the Commonwealth, and not for that of the States (Moore, Commonwealth of Australia, 2nd ed. (1910), p. 510; Sydney Municipal Council v. Commonwealth 1 West v. Commissioner of Taxation (N.S.W.) 2 ). Notwith- standing that a taxing Act must deal with only one subject, it is permissible to have regard to the taxing Act and the appropriation Act together. The War-time Arrangements Act is challenged because it authorizes the taking over of executive departments of the States which are essential to the carrying on of the essential governing functions of the States. It is not an exercise of the defence power, although it purports to be SO. All the work necessary for the collec- tion of all the taxation imposed by the Commonwealth and the States is being performed under existing arrangements, and this Act will not effect any saving in manpower or expense. The priority provision in sec. 31 of the Income Tax Assessment Act 1942 is bad (Federal Commissioner of Taxation v. Official Liquidator of E. O. Farley Ltd. 3 ). Notwithstanding his capacity and willingness to pay both a taxpayer who pays his State income tax prior to paying all Commonwealth income tax imposed upon him renders himself liable to a penalty. The Commonwealth has other and proper means for the protection of its interests (The Commonwealth V. Queensland 4 Pirrie v. McFarlane 5; West v. Commissioner of Taxation (N.S.W.) 6 ). The statutes discriminate amongst the taxpayers of the different States, and thus offend the provisions of sec. 51 (ii.) of the Constitution. Taxation is always in relation to persons and the burden is borne by persons, and, if there is a dis- crimination between persons by reference to their residence or connection with a particular State in some way, then that is a discrimination between States. The burden, and also the benefit,

1(1904) 1 C.L.R., at p. 232. 2(1937) 56 C.L.R., at p. 686. 3(1940) 63 C.L.R., at pp. 304, 305. 4(1920) 29 C.L.R. 1. 5(1925) 36 C.L.R. 170. 6(1937) 56 C.L.R., at pp. 684-710. 65 CLR 392

varies in accordance with whether the rate of income tax imposed by a particular State is higher or lower when compared with the rate of income tax imposed by the other States. There is a dis- crimination in the States Grants Act (a) as between States which agree to vacate the income-tax field and those which do not, (b) because of the varying amounts given to the six States, and (c) because of the varying burdens of income tax in each State. That Act and the Tax Act should be regarded as really one Act with respect to taxation. So regarded the two Acts together are subject to sec. 51 (ii.).

The Court has power on the hearing of a suit to declare an Act ultra vires per se. The States and the Commonwealth have a justiciable interest in ensuring that none of the others exceeds its powers (The Commonwealth v. New South Wales 1; Attorney- General for New South Wales v. Brewery Employés Union of New South Wales 2; The Commonwealth v. Queensland 3; Victoria V. The Commonwealth 4; Tasmania v. Victoria 5; Attorney- General for Victoria v. The Commonwealth 6 ).

Weston K.C. (with him Dr. Ellis), for the State of Victoria and the Attorney-General for that State. The argument addressed to the Court by Mr. Ligertwood on all matters except sec. 31 of the Assessment Act and the question of distribution is adopted on behalf of these plaintiffs with slight supplement. If the Court can gather from admissible evidence and relevant considerations that the four Acts are linked with one another, the Court should, in the circum- stances, give consideration to the operation, the character or purpose of the legislation. A later Act may, in itself, contain material which shows that a prior Act, ex facie a perfect exercise of the taxing power, is not in fact directed to taxing but to destroying the functions of the States or to driving them from a particular field of activity. In such a case if the Court looked at the later Act and thus saw that per se it disclosed the character of the earlier Act at that time the earlier Act is invalid ab initio. The later Act might amount to, in effect, an admission by the legislature that the earlier Act, which was ex facie an income-tax Act, had in fact been directed not to raising income tax, but to destroying a function of the State. If one Act is interconnected with another the Court may look back when consider- ing the validity of each of them (W. R. Moran Pty. Ltd. v. Deputy Federal Commissioner of Taxation (N.S.W.) 7 ) The validity of an Act depends upon its substance. In a series of Acts such as are now under consideration the substance is all of them. The important

1(1923) 32 C.L.R. 200. 2(1908) 6 C.L.R. 469. 171, 174, 186, 188. 3(1920) 29 C.L.R., at pp. 7, 11-13. 4(1926) 38 C.L.R. 399. 5(1935) 52 C.L.R. 157, at pp. 168, 6(1935) 52 C.L.R. 533, at p. 556. 7(1940) A.C. 838; 63 C.L.R. 338. 65 CLR 393

safeguard in sec. 51 (ii.) cannot in every instance be displaced and neutralized, rendered nugatory or nullified, by the use of a power which ex facie gives permission to discriminate (Moran's Case 1 ). An examination of the four Acts discloses their character, operation and purpose. The purpose is to drive the States from the income- tax field of taxation. Therefore those Acts do not constitute an exercise of the Commonwealth power with reference to taxation. The powers under sec. 96 of the Constitution cannot be used to effect a discrimination in a matter of taxation. In the circumstances the true character of the States Grants Act is that it is a law in regard to taxation. If the States Grants Act is an Act of taxation and discriminates, then sec. 51 (ii.) would be the same as the passage in sec. 99, but in the opposite way. Whether there is discrimination under sec. 51 (ii.) or preference under sec. 99 is ultimately a question of fact. There can be discrimination in respect of a State or States by taking money, which, it is admitted, may be the proceeds of income tax, from one State, and giving it by means of any inter- mediate machinery, such as an appropriation Act, to another State. This discrimination is a result of (a) the pronounced difference between the income-tax rates of the various States, (b) the difference in population, and (c) the difference in the income of the citizens of each State. There was no uniformity in respect of State taxation. Therefore, although the rate of the Commonwealth tax is uniform, the results vary by reason of the factors mentioned above and hence discrimination takes place. If the Constitution has forbidden a discrimination or preference, the fact that the money is paid into the consolidated revenue is quite immaterial. Shortly, the Tax Act and the States Grants Act should be read together. So read they each become, or the two Acts combined become, a law with respect to taxation and fall within sec. 51 (ii.) of the Constitution. Further, the States Grants Act, a law appropriating revenue, is a law of taxa- tion, and sec. 99 of the Constitution applies.

Maughan K.C. (with him H. J. Henchman and Dr. Ellis), for the State of Queensland and the Attorney-General for that State. The arguments already addressed to the Court are adopted on behalf of these plaintiffs. The substance or the purpose or effect of the War-time Arrangements Act is to make it impossible for the Govern- ment of Queensland to administer its income tax department. That result was intended by the Commonwealth. The taking over under sec. 4 of that Act of all the State taxation officers would render it impossible to perform the vast amount of work required to be done with respect to State income taxation for past years. The various provisions of the Act tend to deprive the State of one of its

1(1940) A.C. 838; 63 C.L.R. 338. 65 CLR 394

essential activities and are quite beyond the powers of the Common- wealth under any power conferred upon it by the Constitution.

Those provisions constitute not SO much an unlawful exercise of power but rather the purported exercise of a power which does not exist. Taxation, and the personnel and equipment for its collection, is an essential service or function which the State must have and be entitled to retain against the will of the Commonwealth. Although the Commonwealth may be entitled under the defence power to call up all and any citizen as such, it is not entitled under that power to call up persons because they are officers of the Public Service of a State. The principle stated in Federated Municipal and Shire Council Employees' Union of Australia v. Melbourne Corporation 1 is unaffected by the decision in the Engineers' Case 2, because an essential service was not dealt with in the latter case. The Common- wealth cannot take the servants of a State in an essential service as such. The extent of the Commonwealth powers is no greater in times of war than in times of peace. An examination of sec. 51 with its thirty-nine placita shows that the powers conferred upon the Commonwealth Parliament under the different placita are vis-a-vis the rest of the Constitution of the same quality, because all the placita in sec. 51 are subject to this Constitution." The Constitution recognizes the continued existence of the States. The States are entitled to exist notwithstanding anything the Common- wealth Parliament can and may do under the defence power or the taxation power. The States Grants (Income Tax Reimbursement) Act, as its title connotes, is an Act for the reimbursement by the Common- wealth of the States in respect of income tax. The so-called grant is not a grant of financial assistance within the meaning of sec. 96 of the Constitution. It does not satisfy the States' needs, because the need was created by the Commonwealth itself. Although the Commonwealth has large powers of making grants under sec. 96, it is not at liberty to use sec. 96 as a means, in effect, of compelling submission by a State to the surrender of its constitutional powers. Looking at the scheme as a whole, the Commonwealth has taken such a course of action that the State is not able to pursue its ordinary course, its inherent right of imposing income tax, and then, the Commonwealth, having put it in that position, deliberately proposes to reimburse it. Sec. 5 of the States Grants Act cannot be construed as granting financial assistance to a State. The payment of taxation "arrears" at the end of the war, is not financial assistance as con- templated by sec. 96 of the Constitution. The assistance contem- plated by that section is in respect of a presently existing need. The payment SO made would not be in respect of the needs of the

1(1919) 26 C.L.R. 508, at p. 533. 2(1920) 28 C.L.R. 129. 65 CLR 395

States but because of their rights. Sec. 96, which empowers the H. C. Parliament to make grants of financial assistance, does not contem- plate the making of such grants by a Minister, or other person, as provided in sec. 6 of the States Grants Act. The word priority' " does not appear in sec. 31 of the Income Tax Assessment Act 1942 and should not be used in connection with it. In re Silver Brothers Ltd. 1 and Federal Commissioner of Taxation v. Official Liquidator of E. O. Farley Ltd. 2 refer to priority of a proprietary character against a fund. It, however, was said in Farley's Case 3 that priorities cannot be given. Those cases refer to an entirely different subject matter and, therefore, are distinguishable on this point. The proper construction of sec. 31 is that it is an absolute prohibition directed to all citizens of Australia who are taxpayers in a particular year against paying their State income tax until they have paid their Federal income tax. The Commonwealth has no power to enact that a person who pays his State income tax before he pays his Commonwealth income tax is guilty of an offence. There is no relation between such a provision and either the defence power or the taxation power. The taxation power in sec. 51 (ii.) relates only to Commonwealth taxation. To purport to prohibit the payment of State taxation is a law with respect to State taxation and is not a law with respect to Commonwealth taxation See West v. Commis- sioner of Taxation (N.S.W.) 4. It is a question of power, and not of sec. 109 of the Constitution (Stock Motor Ploughs Ltd. v. Forsyth 5 ). A tax is imposed as soon as income is earned, although it is not assessed till later (Commissioner of Stamps (W.A.) v. West Australian Trustee, Executor and Agency Co. Ltd. 6 )-see also Commissioner of Stamps (W.A.) v. West Australian Trustee, Executor and Agency Co. Ltd. 7.

Dunphy, for the State of Western Australia, and the Attorney- General of that State. I adopt on behalf of these plaintiffs the arguments already addressed to the Court. The States Grants Act, a statute enacted by the Commonwealth Parliament, is not an appropriation Act. It does not appropriate money for Common- wealth purposes but provides for payment of moneys to States, that is, it appropriates for State purposes. This follows from the joint operation of the Income Tax Act and the States Grants Act. In both those Acts there are references to income tax and in sec. 6 of the latter Act the "revenue requirements of the State" is referred to. The two Acts read together are a taxation Act, and therefore,

1(1932) A.C. 514. 2(1940) 63 C.L.R. 278. 3(1940) 63 C.L.R., at pp. 315-317. 4(1937) 56 C.L.R., at pp. 686, 687. 5(1932) 48 C.L.R. 128, at p. 147. 6(1925) 36 C.L.R. 98. 7(1926) 38 C.L.R. 63. 65 CLR 396

as a consequence, there cannot be any discrimination under sec. 51 (ii.) of the Constitution. Sec. 96 cannot be used by the Common- wealth to circumvent the provision of sec. 51 (ii.) against discrimina- tion. The money made available to the States under the States Grants Act is not financial assistance but is reimbursement of income tax collected from the taxpayers of the States. The four statutes should be read as a whole. Regarded as a scheme it is unconstitu- tional because its substance and effect is to make the power to levy income tax the sole jurisdiction of the Commonwealth as opposed to the States. A not inconsiderable proportion of the money raised is to be reimbursed to the States, therefore the taxation is not for defence purposes. If this legislation be valid the same course could be pursued by the Commonwealth in respect to every other form of taxation, and therefore the States can be reduced to financial dependence on the Commonwealth. Such a result is inconsistent with the position of the States under the Constitution.

Ham K.C. and Fullagar K.C. (with them A. R. Taylor and K. H. Bailey), for the defendants.

Ham K.C. In times of national emergency, as at present existing, the defence power is limited only by the necessity of self-preserva- tion (Farey v. Burvett 1 ).

There is no justification for the suggestion or implication that the Commonwealth has perpetrated a sinister scheme aimed at destroy- ing the States or their powers and functions. The duty of the Commonwealth is to protect the States. Under sec. 119 of the Constitution its duty is to protect every State against invasion. The challenged legislation is one way in which it is endeavouring to perform that duty. By this series of Acts, whether together they be described as a scheme or a plan is immaterial, it has endeavoured to marshal the financial resources of the Commonwealth to meet the imminent defence position. For that purpose the Commonwealth Parliament is entitled to impose a very high rate of tax, which is essential for the successful waging of the war, and is also necessarily entitled to obtain what is necessary for the collection of that tax. The collecting of the moneys is not levelled against the States. The personnel taken over are not SO taken over because they are State personnel and of a particular State department, but because they are the people who are skilled in the work involved in the collecting of the moneys. This vital and urgent work can be done by them quickly and effectively.

The purpose of the States Grants Act is that should the high rate of tax imposed by the Commonwealth Parliament render it impolitic

1(1916) 21 C.L.R., at p. 453. 65 CLR 397

for the States to attempt to impose a tax, grants would be made to the States SO that the States' finances would not be disrupted and they would be enabled to carry on their administration and their services. There is no justification for the suggestion that the Commonwealth will or may take unreasonable advantage of the provisions of the four statutes to the greater disadvantage of the States. It is essential that the Commonwealth Parliament, which is charged with the conduct of the war in all its aspects, should have control of the most essential services, namely, the financial services, and particularly in the matter of the collection of the finances.

The taxation provisions now challenged are within the taxation power conferred by sec. 51 (ii.) of the Constitution. They also come within the defence power conferred by sec. 51 (vi.).

The real purpose of the legislation is shown upon its face. It is not a colourable scheme whereby under the guise of doing something it was empowered to do the Parliament sought to do something it was not empowered to do, as in The King v. Barger 1; Attorney- General for Alberta v. Attorney-General for Canada 2, and In re Insurance Act of Canada 3-see also Sonzinsky v. United States 4. These Acts, individually or collectively, are, on their face, Acts for taxation, and to relieve the States from the result of having to suffer a diminution of their respective revenues by reason of not imposing taxation on incomes. The distinction between what is essential and what is not essential is just as impossible to draw as in the Engineers' Case 5. In ordinary times the collecting of money may be regarded as only incidentally essential, but now it is very essential that the money should be collected in order that the Commonwealth Parliament may be able to perform that very necessary and essential function of waging the war. All resources should be directed to that purpose (Andrews v. Howell 6 ).

The principles in The King v. Barger (1) and in In re Insurance Act of Canada (3) are applicable only in cases in which either within the four corners of the Act itself it can be seen that it is not for the purpose it pretends to be, or else, looked at in connection with other Acts with which it is connected, that purpose can be found. A consideration of other Acts in Attorney-General for Alberta v. Attorney- General for Canada (2) showed that the real purpose of the Act particularly under consideration was not as expressed therein See Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran

1(1908) 6 C.L.R. 41. 2(1939) A.C. 117. 514 [81 Law. Ed. 772, at pp. 3(1932) A.C. 41. 775, 776]. 4(1937) 300 U.S. 506, at pp. 512- 5(1920) 28 C.L.R. 129. 6(1941) 65 C.L.R., at pp. 278, 279. 65 CLR 398

Pty. Ltd. 1. The question of purpose, or purposes to be gathered from other Acts, is not applicable to this case. Each of these must be judged by itself. The Commonwealth Parliament is entitled to exercise the taxation power to the fullest extent (Bank of Toronto V. Lambe 2 ). It is immaterial that certain indirect consequences, which may have been contemplated and desired by the legislature, flow from the proper exercise of a power (Osborne v. The Common- wealth 3 ).

The Court is not concerned with the wisdom or fairness of the legislation. The only question is one of power. It is enough if the legislation can possibly operate for the peace, order and good government of the Commonwealth, either with respect to defence, or taxation, or borrowing, or grants, or matters incidental thereto. If the legislation can possibly operate in respect of any one of these things, then the Commonwealth has power, and it does not matter whether it has used the power wisely or unwisely. If other ways of providing the necessary finance for defence are available, that does not affect the question. It is for the Commonwealth Parlia- ment to determine which means should be applied. It is necessary for the Commonwealth Parliament to be enabled to raise unprece- dented sums of money by income tax, and that implies the necessity for rates of tax which leave very little margin for the taxpayer, and, in case of necessity, the Commonwealth Parliament may require the whole of the available taxable surplus of income. In the war conditions prevailing it was necessary to provide, in financing the defence expenditure and making provision for future necessities, that the Commonwealth Parliament should take control of the imposition and collection of income tax. By enacting this legisla- tion, administration was simplified by avoiding the former multi- plicity of taxes and assessments. It releases for manpower require- ments the surplus personnel employed under the then existing system it saves unnecessary expense of administration: it deters the States from increasing their exactions from the margin left after the Commonwealth requirements are provided for, and it limits the quantum of revenue of the States provided for from this source of their normal requirements as determined by their actual reliance on income tax upon the average of the years 1939-1940 and 1940-1941, or the basis of assistance to the States may be varied if it becomes necessary. The Commonwealth Parliament, in the exercise of a power conferred upon it, may pass an Act which does directly or indirectly affect operations of the States. If the exigencies of the war situation required it the Constitution permits the Commonwealth Parliament to take over

1(1939) 61 C.L.R., at pp. 759, 760. 2(1887) 12 App. Cas. 575, at p. 586. 3(1911) 12 C.L.R. 321, at p. 335. 65 CLR 399

State departments compulsorily for its own purposes. To effectuate H. the control the Commonwealth Parliament did not purport to prohibit the States, nor did it coerce the States into agreeing to suspend their powers; but it exercised its own powers under sec. 51 (ii.), (iv.), (vi.), (xxxix.), and sec. 96. The exercise of those powers drastically affects the practicability of the States continuing to impose or collect income tax; but SO as not to disrupt their functions or arrangements provision is made to grant financial assistance under sec. 96. This grant is not a grant of the taxes which the States would otherwise be able to collect under their own taxation. It is politically an undesirable thing that a State should by reason of having a lower tax and yet having to pay the same tax as the others, be put in the position of paying more tax under this scheme than it would have paid if the Commonwealth tax and the State tax had been collected separately. But that is necessitated by the provision in sec. 51 (ii.), that there is not to be any discrimination between the States. The whole tax had there- fore to be spread ratably over the people of the Commonwealth in whatever State they resided; all are required to pay the same tax ratably. The disproportion between New South Wales and Victoria is partly due to the difference in grant and partly to the difference in population and wealth. It is accentuated by the fact that the rate of the State tax in New South Wales is higher (Colonial Sugar Refining Co. Ltd. v. Irving 1 ). The taxation Acts now under consideration do not discriminate between the States, and that being SO it does not matter if the people are required to pay disproportionately. The moneys provided for the States in the States Grants Act were SO provided in exercise of the grants power conferred by sec. 96 of the Constitution. That section is silent on the matter of discrimination, and, therefore, grants thereunder may be made on such terms and conditions as the Commonwealth Parlia- ment thinks fit.

The provisions of the Tax Act are well within the taxation power. The moneys raised thereunder are paid into the consolidated revenue, and even if some of those moneys were raised for the purpose of making grants, the Act would still be valid, for that is one of the powers and purposes of the Commonwealth. This case is covered by and is an a-fortiori case to Deputy Federal Commissioner of Taxa- tion (N.S.W.) v. W. R. Moran Pty. Ltd. 2. There is not a dis- crimination in favour of States that take the benefit of the States Grants Act as against those which, by continuing to impose income tax, do not: See Massachusetts v. Mellon 3; Victoria v. The Com-

1(1906) A.C. 360, at p. 367. 2(1939) 61 C.L.R. 735. 480, 482 [67 Law. Ed. 1078, at pp. 1081-1083]. 3(1922) 262 U.S. 447, at pp. 479, 65 CLR 400

monwealth 1; Colonial Sugar Refining Co. Ltd. v. Irving 2 Cameron v. Deputy Federal Commissioner of Taxation (Tas.) 3. The two last-mentioned cases definitely lay it down that any inequality resulting not from the law of the Commonwealth but from the different conditions of the States is not a discrimination within the meaning of the Constitution. The only discrimination within sec. 51 (ii) that the Constitution recognizes is a discrimination between States or parts of States according to their geographical limitations (The King v. Barger 4; Cameron v. Deputy Federal Commissioner of Taxation (Tas.) 5 ).

A consideration of the Income Tax (War-time Arrangements) Act shows that it was enacted for the purpose of defence see particu- larly the recital thereto and secs. 4, 16. In the exceptional state of affairs now prevailing all the matters therein provided for come within the defence power, and are certainly matters incidental to the execution of that power within the meaning of sec. 51 (xxxix.) (Farey v. Burvett 6 ). The Commonwealth Parliament would be neglecting its duty if it did not ensure that the defence of every part of the Commonwealth was under the control of people who, in the opinion of its advisors, were proper and sufficient. If the validity of the Act depends upon the purpose being for the benefit of the war and defence, the Court must be clearly of opinion that the Act is not, and cannot be, for that purpose before it can be declared invalid on that ground. The purpose of the Act is made manifest by its own provisions. The personnel, accommodation, equipment and other matters referred to therein are all part of the national resources and should be available to the Commonwealth for the purposes of defence (Pankhurst v. Kiernan 7 ). Regard should be had to the size of the conflict and the imminence of the danger (Andrews V. Howell 8 ). The Commonwealth is in imminent danger and every resource of the Commonwealth should be directed freely to it and not checked by technicalities and imaginary difficulties. The war power is paramount (Northern Pacific Railway Co. v. North Dakota 9; Dakota Central Telephone Co. v. South Dakota 10 ). The tax being a valid tax, it is incidental to it under the power of taxation that the Commonwealth should have a right to acquire an organiza- tion to collect the tax, and, in the exercise of that right, to call upon any citizens to perform that duty. A law cannot simply because it might be misused. There is no implied prohibition

1(1926) 38 C.L.R. 399. 2(1906) A.C., at p. 367. 3(1923) 32 C.L.R. 68, at p. 79. 4(1908) 6 C.L.R., at pp. 105-111. 5(1923) 32 C.L.R., at p. 76. Law. Ed. 897, at p. 904]. 6(1916) 21 C.L.R., at pp. 441, 450- 7(1917) 24 C.L.R. 120, at pp. 128, 8(1941) 65 C.L.R., at p. 278. 9(1918) 250 U.S. 135, at p. 150 [63 10(1918) 250 U.S. 163 [63 Law. Ed. 453, 455, 457, 458. 65 CLR 401

against the taking over by the Commonwealth in the exercise H. C. OF of its powers of State officers and property (Engineers' Case 1; Attorney-General of New South Wales v. Collector of Customs for New South Wales 2 ). The defence power resides in the Commonwealth and is a very extensive power. Under that power the Common- wealth may take over anything which can conceivably be used for the war purpose (Farey v. Burvett 3 The Commonwealth Parlia- ment is the sole repository of the Royal prerogative as regards war (Chitty on The Prerogatives of the Crown, (1820), p. 18, sec. 3; Joseph V. Colonial Treasurer (N.S.W.) 4 Farey v. Burvett 5 ). The Act, and also the Acts, dealing with separate things, is and are, severable (Acts Interpretation Act 1901-1937, sec. 15A; Huddart Parker Ltd. V. The Commonwealth 6 Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. 7; Newcastle and Hunter River Steamship Co. Ltd. v. Attorney-General for the Commonwealth 8 Grants of financial assistance to the States may be made on such terms and conditions as the Commonwealth Parliament thinks fit, and are therefore unaffected by sec. 99 or any other provision of the Constitution (Deputy Federal Commissioner of Taxation (N.S.W.) V. W. R. Moran Pty. Ltd. 9 ). The condition of the grants that the States should vacate the income-taxation field is not different in principle from the condition in Victoria v. The Commonwealth 10. A State is not bound to accept the grant. If it regards the condition as too onerous it may continue to impose a tax on incomes within the State.

Sec. 31 of the Income Tax Assessment Act, the "priority" provision, relates to postponing State income tax in a particular year of income, when in respect of that year of income Commonwealth tax is imposed, until the taxpayer "has paid that last-mentioned tax," which is the Commonwealth tax in respect of the year as to which the State has imposed tax. The section postpones the State tax in a particular year it is not in respect of any tax that is not assessed.

Fullagar K.C. The Tax Act and the Assessment Act are the principal Acts in the scheme. The States Grants Act and the War-time Arrangements Act may be regarded as, in effect, consequential upon the new system of taxation introduced. The conflict between the taxing authorities is only an economical one. There is no constitu- tional limit to the amount the Commonwealth Parliament may seek

1(1920) 28 C.L.R., at pp. 150, 151, 2(1908) 5 C.L.R. 818. 3(1916) 21 C.L.R., at pp. 441, 445. 4(1918) 25 C.L.R. 32, at pp. 45-47. 5(1916) 21 C.L.R., at p. 452. 6(1931) 44 C.L.R. 492, at pp. 500, 7(1939) 61 C.L.R., at pp. 772, 773. 8(1921) 29 C.L.R. 357, at p. 369. 9(1939) 61 C.L.R., at p. 771. 10(1926) 38 C.L.R. 399 65 CLR 402

to obtain from the people under its taxation power. The Common- wealth Parliament has power to enact any provision reasonably considered necessary to render its taxing power effective, and has power to bind the States thereby, although, of course, by sec. 114 of the Constitution it is expressly prohibited from imposing a tax on the States. It must follow, quite apart from the incidental power given by sec. 51 (xxxix.), that if the Commonwealth Parliament has power to create an obligation it has power to enact any law necessary to secure the fulfilment of that obligation. Therefore the Common- wealth Parliament was entitled to enact that Commonwealth income tax should be paid in priority to State income tax (Federal Commis- sioner of Taxation v. Official Liquidator of E. O. Farley Ltd. 1; In re Silver Brothers Ltd. 2 ). A law which gives priority to Commonwealth taxation as such is a law with respect to Common- wealth taxation, and therefore valid. A conflict between the Crown in one aspect and the Crown in another aspect was dealt with in Liquidators of the Maritime Bank of Canada v. Receiver-General of New Brunswick 3. Whenever the Commonwealth creates rights against itself it is entitled to attach conditions in respect of the protection and exercise of those rights (The Commonwealth V. Queensland 4 The King v. Commonwealth Court of Conciliation and Arbitration 5 ). The same principle must apply to enable the Commonwealth Parliament to legislate to protect and secure the satisfactory performance of obligations to which persons have become subject by reason of Commonwealth law. Sec. 31 of the Assessment Act also is within the defence power. It is required, in the opinion of the Parliament "for the better securing to the Commonwealth of the revenue required for the efficient prosecution of the present war and has operation "during the present war." The exercise of the defence power cannot be affected by the States (Pirrie V. McFarlane 6 ). The powers conferred by the Constitution should not be construed as limited by considerations of inconvenience or prejudice to the States, or expediency, or imagined abuse (Merchant Service Guild of Australasia v. Commonwealth Steamship Owners' Association [No. 2] 7 -see also Federated Municipal and Shire Council Employees' Union of Australia v. Melbourne Corporation 8. The case of McCulloch v. Maryland 9 affords no ground for any suggestion that State instrumentalities, merely because they are State instrumentalities, are immune from Commonwealth inter- ference. The doctrine of reciprocity introduced in the Railway

1(1940) 63 C.L.R., at pp. 324, 325. 2(1932) A.C., at pp. 520, 521. 3(1892) A.C. 437. 4(1920) 29 C.L.R. 1. 5(1926) 38 C.L.R. 563, at pp. 570, 6(1925) 36 C.L.R., at pp. 191, 192. 7(1920) 28 C.L.R. 436, at pp. 451, 8(1919) 26 C.L.R., at pp. 532, 533. 9(1819) 4 Wheat, 316 [4 Law. Ed. 65 CLR 403

Servants' Case 1 was negatived, and that case was overruled by the Engineers' Case 2. A similar result seems to have been arrived at in the United States of America (Graves v. New York 3 ).

The validity of the Acts cannot be determined in accordance with the order in which they were passed by the legislature.

The Commonwealth has the prior call on manpower, and it is entitled to have the taxation officers before anybody else. If the Commonwealth chooses, it may specify the men it takes by referring to them as employees of a State department, and such a reference does not invalidate the exercise of the general power.

This legislation can be defended under secs. 51 (ii.) and 96 of the Constitution. It also can be justified under sec. 51 (vi.).

The object of the States Grants Act is to ensure a minimum of dislocation in the States, brought about by the Tax Act and the Assessment Act.

Ham K.C. The case of United States v. Butler 4 is distinguish- able, it was not taxing for taxation purposes; it was simply the taking of money from one person to give it to another for the carrying out of a policy, and it did not pass through the consolidated revenue. In Carter v. Carter Coal Co. 5 the so-called tax was held to be a penalty for not conforming to certain social legislation. In Steward Machine Co. v. Davis 6 a condition similar to that contained in the States Grants Act was approved.

It was strongly urged that the condition in sec. 4 of the Grants Act is unlawful because it requires a State to surrender its sovereign rights to levy income tax in order to qualify for a grant. Sec. 96 of the Constitution authorizes the Commonwealth Parliament to grant financial assistance to any State on such terms and conditions as the Parliament thinks fit. The grants to each State are not made conditional upon acceptance by all the States. A separate offer is made to each State. The offer is made upon an annual basis, SO that if a State which accepts a grant the first year finds it an insuffi- cient reimbursement it will be able to refuse the grant in subsequent years. There is no illegal interference with the sovereignty of the States, because the matter of levying or not levying their own income tax is left entirely to the discretion of their own Parliaments. An analogous case would be where the Commonwealth Parliament offered a State assistance on condition it ceased to carry on the mining of a profitable ore, which the Commonwealth thought it was inadvisable to exhaust in the national interest, the Commonwealth offering the State assistance under sec. 96 to offset the loss of revenue it would suffer by doing SO. The present case may be summed up as follows. The Parliament, when the Commonwealth is in imminent danger, considers that it is not in the national interest for the States to levy

65 CLR 464

income tax. But it recognizes that, if they co-operate by agreeing not to do so, they will require financial assistance to reimburse them for their loss of revenue. So it makes its offer of assistance depen- dent on their co-operation. The condition is one which is capable of aiding in the defence of the realm. Sec. 5 offers an inducement to the States to collect their arrears of tax in respect of the financial years up to and including that of 1st July 1941. It is a fair and equitable provision, as it gives to all States ultimately the benefit of all the taxes they levied prior to the Tax Act coming into force. Faint objection was taken to sec. 6 of the Act on the ground that Parliament and not the Treasurer must fix the amount of a grant; but, as Latham C.J. pointed out in Deputy Federal Com- missioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. 1, where several authorities are cited "It is too late now to argue that terms and conditions determined by a Minister under such legislation are not determined by the Parliament." The allotments to the State are not made on any ratable basis, but sec. 96 does not prohibit dis- crimination, and grants may be made to one State and not to others and between the States on an unequal basis. Under the circum- stances the Grants Act is, in my opinion, a valid exercise by the Parliament of its powers under sec. 96.

Although the language of sec. 31 of the Assessment Act is not as clear as it might be, I agree with Mr. Ham that it means Common- wealth income tax on the income of any year of income must be paid in priority to the State tax for that year of income, SO that, once the Commonwealth tax for any financial year has been paid, the section does not prevent a taxpayer from then paying his State tax for that financial year. Counsel for the States contended that, as both the Commonwealth and State Parliaments are entitled by the exercise of their sovereign rights to impose income tax, there can be no inconsistency between the two impositions, each of which operates concurrently but independently of the other, SO that it is not an exercise of the taxing power or incidental thereto for the Commonwealth to provide that its tax shall be paid in priority to that of a State. But the Privy Council in In re Silver Bros. Ltd. 2, and the majority of the Justices of this Court in Federal Commis- sioner of Taxation v. Official Liquidator of E. O. Farley Ltd. 3, appear to me to have considered, I would respectfully say correctly, that it is possible for the Canadian and Australian national Parlia- ments respectively, by aptly framed legislation, to give priority to their taxation statutes over those of the Provinces in the case of

1(1939) 61 C.L.R. 735, at p. 763. 2(1932) A.C. 514. 3(1940) 63 C.L.R. 278. 65 CLR 465

Canada and of the States in the case of Australia, where they come into conflict in the same field in the sense that a taxpayer who has to pay the two exactions is unlikely to be able to meet them both in full. In In re Silver Bros. Ltd. 1 Viscount Dunedin said: "The two taxations, Dominion and Provincial, can stand side by side without interfering with each other, but as soon as you come to the concomitant privileges of absolute priority they cannot stand side by side and must clash; consequently the Dominion must prevail." After pointing out, quite rightly, that each of these decisions relates to the liquidation of a company, counsel for the States contended in the alternative that, even if the Commonwealth can make its tax a prior charge upon a taxpayer's assets, it would still not be incidental to the taxation power to prevent a taxpayer from paying his debts, including a State assessment, as they become due. It would be impossible to make an income tax a fixed charge on a taxpayer's assets generally, some of which he is acquiring and disposing of from day to day, while many taxpayers would not possess particular assets of an appropriate nature to be charged specifically. Grave difficulties would be encountered in evolving and heavy expense incurred in administering a system of fixed charges. The only practical way, therefore, to prefer the Common- wealth debt would be to provide that it should be paid in priority to the State debt. To do this would not be to manufacture incon- sistency between Federal and State laws. It would be a means of aiding the effective operation of the power comparable to the right of the Commonwealth under the borrowing power, sec. 51 (iv.), to make its loans attractive to investors by freeing them from State taxation (The Commonwealth v. Queensland 2 ). It would be strange if the Commonwealth could protect interest on its loans from State taxes, but could not take effective measures against the States to ensure the getting in of revenue required to pay the interest. The section is, in my opinion, a valid exercise of power.

Under arrangements made with the States pursuant to the Income Tax Collection Act 1923 the Commonwealth in Western Australia is at present collecting its own income tax and the income tax of that State through its own income tax department, while, in the other States, the State income tax departments are collecting their own income tax and that of the Commonwealth. The affidavits filed on behalf of the States show that they each maintain a department for the collection of State income taxes, in which a large staff is employed consisting of officers the senior members of whom have

1(1932) A.C., at p. 521. 2(1920) 29 C.L.R. 1. 65 CLR 466

spent many years in the department and thereby acquired a special- ized knowledge of the administration of the State's income tax Acts. Each department uses for the purposes of its work large numbers of typewriters, adding machines and other mechanical equipment. They are housed in extensive offices in their respective capital cities, and, in the present conditions, it would be impossible or impracticable to replace their personnel or equipment or to find other suitable premises for their accommodation.

The Arrangements Act provides for the suspension of the existing arrangements with the States for the assessment and collection of income tax, and the assessment and collection of the tax imposed by the Tax Act in all States by the Commonwealth from a date fixed by proclamation until the Act ceases to operate for the compulsory temporary transfer of officers employed by the States in assessing and collecting income tax to the Public Service of the Commonwealth and their subsequent retransfer to the States; for the compulsory temporary use by the Commonwealth of any office accommodation, furniture and equipment owned by a State and for the compulsory permanent acquisition by the Commonwealth of any records in the possession of a State relating to the assessment and collection of Commonwealth income tax. The Act applies to all State servants, permanent or temporary. The transfer to the Commonwealth Public Service is effected by the Treasurer of the Commonwealth addressing a notice in writing to the Treasurer of a State. The transfer can be called for if, in the opinion of the Treasurer of the Commonwealth, it is necessary for the efficient collection of revenue required for the prosecution of the war, for the effective use of manpower, or otherwise for the defence of the Commonwealth. The rights conferred upon the Treasurer of the Commonwealth with respect to the office accommodation, furniture and equipment of the States are also very extensive. He can demand the temporary possession and exclusive use of this property for the Commonwealth when it is required for the efficient collection of revenue, for the effective use of manpower, or otherwise for the defence of the Com- monwealth. The Act provides that, in default of agreement between the parties, compensation for the possession and use of such property and the obligations of the Commonwealth with respect to keeping it in good order and repair and otherwise shall be determined by an arbitrator appointed by the Governor-General. No compensation is provided for the acquisition of the returns and records, but the States are given the right to have access to and inspect those which relate to the assessment or collection of any tax imposed upon income by or under any law of the State. No argument was addressed to the

65 CLR 467

Court whether the entry into the possession and use of the office accommodation, furniture and equipment or the transfer of the returns and records would be an acquisition by the Commonwealth of State property within the meaning of sec. 51 (xxxi.); or whether, if AUSTRALIA it is, provision for an arbitration by an arbitrator appointed by the Federal Executive Council and therefore in effect by one of the parties is a compliance with the placitum; or whether a right given to a State, from whom the returns or records are acquired, to have access to and to inspect them is a fair equivalent for their value

SO I shall not express any opinion on these points. It is obvious from the framework of the Act as a whole that it is sought to justify its constitutional validity as an exercise of the defence power. In what Mr. Ham described as the piping times of peace there could be no question, I should imagine, that the collection of taxes would be incidental to the execution of the taxation and not the defence power. The defence power does not become in time of war paramount power (Andrews v. Howell 1, per Starke J.), but, as Dixon J. pointed out in the same case 2, though its meaning does not change, " its application depends upon facts, and as those facts change SO may its actual operation as a power enabling the legislature to make a particular law." In Farey v. Burvett 3 Isaacs J. said: (It is) " a power which is commensurate with the peril it is designed to encounter, or as that peril may appear to the Parliament itself; and, if need be, it is a power to command, control, organize and regulate, for the purpose of guarding against that peril the whole resources of the continent, living and inert, and the activities of every inhabitant of the territory. The problem of national defence is not confined to operations on the battlefield or the deck of a man-of-war; its factors enter into every phase of life, and embrace the co-operation of every individual with all that he possesses-his property, his energy, his life itself." The necessary steps to meet the peril depend SO greatly upon the knowledge of the Parliament and the Executive it controls that the Court, in deter- mining whether a particular Act is within the ambit of the power, is only concerned to see that its provisions are such as to be capable even incidentally of aiding the effectuation of the power. After that the Court must stay its hand, for " no authority other than the central Government is in a position to deal with the problem which is essentially one of statesmanship" " (per Viscount Haldane when delivering the judgment of the Privy Council in Fort Francis Pulp and Power Co. v. Manitoba Free Press Co. 4 ).

1(1941) 65 C.L.R., at p. 268. 2(1941) 65 C.L.R., at p. 278. 3(1916) 21 C.L.R. 433, at p. 455. 4(1923) A.C. 695, at p. 706. 65 CLR 468

In Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd. 1, Knox C.J., Isaacs, Rich and Starke JJ., in their joint judg- ment, said "It is undoubted that those who maintain the authority of the Commonwealth Parliament to pass a certain law should be able to point to some enumerated power containing the requisite authority. But we also hold that, where the affirmative terms of a stated power would justify an enactment, it rests upon those who rely on some limitation or restriction upon the power, to indicate it in the Constitution' 2.

It was there held that States and their agencies, when parties to industrial disputes in fact, are subject to Commonwealth legislation under placitum XXXV. of sec. 51 of the Constitution, if such legislation on its true construction applies to them. This is because, when States become merchants and traders and engage in industrial activities which the general public may carry on, the subject matter of the power conferred on the Parliament by this placitum is such as to embrace States acting in such a capacity as well as individuals within its scope.

Applying the principles laid down in the Engineers' Case (1), there can be no doubt, in my opinion, that States, like individuals, are within the ambit of the defence power, SO that, where it is incidental to the execution of the power to take some action to meet an emergency which affects rights which in normal times are within the domain exclusively reserved to the States by the Constitu- tion, the Commonwealth Parliament can do SO. In Farey v. Burvett 3 legislation under the power was held to be valid, although relating to a subject matter, i.e., the price of bread, which in times of peace would have been only within the powers of the States. Any attempt at State legislation on this subject which came into collision with the Federal Act would have been to that extent void under sec. 109 of the Constitution. But in times of peace the State legislation would have been valid and the Commonwealth legislation invalid. In mobilizing the resources of the nation under the defence power, the Parliament has the same right to call for the services of those employed by the States as of those employed by private employers, and the same power to enter into possession of property owned by the States as in the case of property privately owned. If the real substance and purpose of a statute is incidental to defence, then, however seriously its operation may hinder the carrying on of the government of a State, this would simply be the indirect result of the lawful action of the Commonwealth undertaken to meet the

1(1920) 28 C.L.R. 129. 2(1920) 28 C.L.R., at p. 154. 3(1916) 21 C.L.R. 433. 65 CLR 469

national emergency. It is one thing for the Commonwealth Parlia- ment to attempt directly to prevent a State exercising its legislative, judicial, or executive functions, which would be an illegal interference with the prerogative rights of the State, and quite another thing to claim the services of a body of individuals employed by or the possession of property owned by a State where the employees and property are organized, as they are here, SO as to possess some special attribute capable of advancing the total war effort. But legislation which appears to discriminate against a State by the mass transfer of its public officers in one department and the exclusive acquisition of its property must be carefully scrutinized to see that its real substance and purpose is to assist defence and not under colour of such a purpose to intermeddle in the sovereignty of a State. The affidavits filed on behalf of the States them- selves show that the collection of the new tax would be gravely impeded if the Commonwealth had to organize a new depart- ment in every State except Western Australia. It was suggested that the existing arrangements, which have worked satisfactorily since 1923, should be allowed to continue. Their provisions are not before us, but it appears that they would have to be at least revised because, if the Commonwealth is to become during the war the sole income-tax authority, the expense which is now shared between the Commonwealth and the States will become the sole burden of the Commonwealth. The only reason Mr. Ham gave for the Commonwealth requiring a transfer of the officers and accommodation was that, as the tax was being collected on behalf of the Commonwealth, it ought to have control of its own affairs. It is not for us to weigh the merits of this reason. The question whether the Commonwealth should have direct control or should have to rely upon an agent to perform this important work is one of policy which must be decided by the Government and not by the Court. It is clear that an Act to enable the Treasurer to get in expeditiously the sinews of war to the extent of £145,000,000 can assist in the prosecution of the war, and is, therefore, incidental to the execution of the power of defence. If the Commonwealth could call up all officers by some form of legislation, and this must, I think, be conceded, it is a matter of convenience and not of substance that the Act provides for the Treasurer of the Commonwealth giving the notice to the Treasurer of a State instead of to each officer personally.

Secs. 5-10 of the Act contain provisions with respect to the pay of transferred officers whilst in the service of the Commonwealth and their rights on death, retirement, or at the conclusion of their

65 CLR 470

service with the Commonwealth. Whilst they are employed by the Commonwealth they are to receive the same pay from the Commonwealth as, but for the transfer, they would have received from the State. Upon retirement they are retransferred to the State and become entitled to the same pension and other benefits they would have received if they had not been transferred. The sections provide for the continuation of payments to superannuation funds by the officers themselves, and the Commonwealth making the same payments as a State would have made if they had been serving the State. The Commonwealth also contributes to pensions or other payments which dependents of officers who die become entitled to receive from the State, the respective obligations of the Commonwealth and the State being adjusted on the basis of the officers' length of service with the Commonwealth and the State.

A transferred officer is deemed to be an officer of the State for the purpose of promotion or transfer from a temporary to a permanent position. The purpose of the sections is to provide a scheme to prevent officers suffering from the temporary transfer, the Common- wealth taking over a fair share of the burdens of any emoluments which would have accrued from long service if their employment by the State had been continuous. In America it has been held that, under the commerce power, Congress can legislate to prevent any person engaging in unfair labour practices which affect com- merce. The National Labor Relations Act 1935, after defining unfair labour practices, by sec. 10 (c) authorized a Board to require the reinstatement of employees who had been discharged for engaging in trade union activities which the Act authorized them to engage in against the wishes of their employers. The Supreme Court held the provision to be valid. It did not interfere with the contractual relationship of the parties except to the extent necessary to give effect to the policy of the Act (National Labor Relations Board v. Jones &Laughlin Steel Corporation 1 ). So, under the defence power, the Commonwealth can, in my opinion, legislate with respect to the reinstatement of citizens called up for some national duty, to prevent them being prejudiced in their civil employment when their services are no longer required for this purpose. The present Act purports to do nothing more. It does not deprive the States of any rights the States would have against the officers on the basis that they had not been transferred. The States can legislate as freely as before to affect any existing rights of public servants with respect to pay, contribu- tions to superannuation funds, amounts of pensions, and SO on, and the officers transferred to the Commonwealth will be bound by all

1(1937) 301 U.S. 1, at pp. 45-48 [81 Law. Ed. 893, at pp. 916-918]. 65 CLR 471

such legislation. If the Commonwealth Parliament can pass legis- lation making awards binding on the States under the conciliation and arbitration power, it would be a strange result if, under the defence power, it cannot legislate with respect to the reinstatement of men employed by a State and called up by the Commonwealth for national service in the same way as it can legislate for this purpose with respect to private employers. It is suggested that the powers conferred on the Treasurer are in terms wide enough to enable him to call up any officers whom a State, in order to collect arrears of or to levy its own income tax, might engage from time to time to replace those who had been transferred, and to take possession of any new office accommodation they might commence to use for this purpose but the Treasurer can only call up officers, on the recom- mendation of the Public Service Board, if they are required in the Public Service of the Commonwealth for one of the three purposes mentioned and it is preposterous to believe that the Public Service Board and the Treasurer would conspire together to call them up when they were not required, and thereby deliberately overstaff the Commonwealth Public Service at the expense of the taxpayers in order to deprive a State of their services. To do SO would be to make a colourable use of the power which could be restrained by the Court. The Grants Act, sec. 4, contemplates that existing arrears of State income tax will be collected, if necessary, by the Common- wealth, and it is to the advantage of both the Commonwealth and the States that they should be got in.

The Arrangements Act is, in my opinion, a valid exercise of the defence power. As it is with considerable diffidence that I have reached a different conclusion from that arrived at by the Chief Justice and my brother Starke with respect to the validity of this Act, I desire to say that, even I considered the Act invalid, this would not affect the validity of the Tax Act, the Grants Act, or sec. 31 of the Assessment Act.

The States also allege that the effect of the Acts regarded as single legislative scheme is to spread the burden of existing Com- monwealth and State income taxes over the taxpayers of the Com- monwealth as such and thereby to effect a discrimination between the States and the taxpayers of each State as such by reference to the varying rates of income tax at present in force therein. It is sufficient to say with respect to this contention that, although admittedly taxpayers in the different States previously paid income tax to a State and the Commonwealth at varying aggregate rates, this was due to the difference in the taxation laws of the States and not to the law of the Commonwealth (Colonial Sugar Refining Co.

65 CLR 472

Ltd. v. Irving 1 ). Taxpayers in the States who paid State income tax at lower rates than those in the other States will now have to pay more to the Commonwealth in comparison, but any attempt by the Commonwealth to make rebates to adjust this position would bring about a result in conflict with the prohibition against dis- crimination contained in sec. 51 (ii.) of the Constitution.

In my opinion, the actions should be dismissed.

Actions dismissed. Solicitor for the plaintiffs, the State of South Australia and the Attorney-General thereof, A. J. Hannan K.C., Crown Solicitor for South Australia, by F. G. Menzies, Crown Solicitor for Victoria.

Solicitor for the plaintiffs, the State of Victoria and the Attorney- General thereof, F. G. Menzies, Crown Solicitor for Victoria.

Solicitor for the plaintiffs, the State of Queensland and the Attorney-General thereof, William G. Hamilton, Crown Solicitor for Queensland, by F. G. Menzies, Crown Solicitor for Victoria.

Solicitor for the plaintiffs, the State of Western Australia and the Attorney-General thereof, E. A. Dunphy, Crown Solicitor for Western Australia, by F. G. Menzies, Crown Solicitor for Victoria.

Solicitor for the defendants, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.

1(1906) A.C. 360