Are these Tax Zones Constitutional?

Courtesy of paid subscribing of Crikey Mid-2005

14. Is Barnaby’s tax plan unconstitutional?

Charles Richardson writes:

Senator Barnaby Joyce, possibly suffering withdrawal symptoms after two days out of the headlines, popped up again yesterday calling for lower tax rates for “the most needy and depressed regions” of Australia – being
coincidentally the ones that vote National Party.

This produced an odd response from his party leader, Mark Vaile, as reported by The Australian: “Mr Vaile said such a plan was unconstitutional and would require a referendum.” This was said to have “effectively killed
off” the idea.

Perhaps politicians should be required to do their own tax returns rather than send them to accountants. If Mr Vaile did his tax, he would find, on pages 44-50 of this year’s Tax Pack Supplement, the rules for a complicated
system of zonal rebates currently available to people in remote and regional Australia. (Read more about it at the ATO website here.)

A single taxpayer with no dependants in Zone A, for example (which includes places like Broome, Port Hedland, Darwin, Mt Isa and Alice Springs), gets $338 off their tax. For a taxpayer in a “special area” – defined as being
more than 250km from a population centre of 2,500 or more people – this rises to $1,173. Taxpayers with dependants get significantly more.

In principle, this is not a bad way of compensating people for the disadvantage of living in remote areas. It is certainly fairer than, for example, discounted utility bills, which subsidise country people in
proportion to how much electricity they use (not a good measure of disadvantage). If we could replace the existing plethora of rural subsidies with a simple distance-based formula administered through the tax system it
would be a real gain. Somehow I doubt that is what Senator Joyce had in mind.

On the other hand, the legal basis for the zone system looks a bit shaky.

Section 51(ii) of the Constitution (evidently what Mark Vaile was thinking of), gives the Commonwealth power over “Taxation; but not so as to discriminate between States or parts of States.” Perhaps a tax lawyer among
Crikey’s readers could tell us whether the constitutionality of present arrangements has ever been seriously tested.

Read the answer over the fold.

The following is a rather large extract of legal counsel of the Constitutionality of Enterprise Zones by Pat Brazil of Phillips Fox. I have edited it to apply to the question at hand Zonal Tax Rebates only. It is equally applicable to the concept of Enterprise Zones.

There has been a significant development in that “regional development” has now been specified in the current Administrative Arrangements Order made by the Governor-General as a matter to be dealt with by a Federal Department of State, namely the Department of Transport and Regional Services.

This means that it has been made a subject for the exercise of the executive power of the Commonwealth referred to in Section 61 of the Constitution,and this provides a basis for constitutional support.

Constitutional Prohibitions Against Discrimination and Preference as Between States and Parts of States.

The prohibitions are contained in Sections 51(ii) and 99 of theConstitution. They read:

51. The Parliament shall, subject to this Constitution, have power to make laws for the peace, order, and good government of the Commonwealth with respect to:-

(ii) Taxation; but so as not to discriminate between States or parts of States:

99. The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.

One

1. The first thing to note is that these prohibitions only apply to laws and regulations of a limited kind – namely those
made under the inter-State and overseas trade and commerce power in Section 51(i) of the Constitution and tax laws made under Section 51(ii). They do not apply to State grants under Section 96 of the Constitution, if they do not discriminate between States: Moran’s Case (1939) 61 CLR 735 at 763 (High Court) and (1940) 63 CLR 338 at 348-9 (Privy Council).

Two

2. This still leaves the possibility that tax incentives and other incentives that deal with overseas or interstate commerce might conflict with Sections 51(ii) and 96. As to what is meant in this regard by a preference or discrimination against a State or part thereof, in Elliott v Commonwealth (1936) 54 CLR 657 the majority of the High Court thought a preference was invalidated by section 99 only if given to localities which are taken as States or parts of States as such (at 675) or are selected by virtue of their character as parts of a State. This had been the view of Isaacs J speaking of the prohibition of discrimination in section 51(ii) in The King v Barger (1908) 6 CLR 41 and by the majority of the Court in Cameron v Deputy Federal Commissioner of Taxation (1923) 32 CLR 68. Isaacs J said (at 107):

The pervading idea is the preference of locality merely because it is locality, and because it is a particular part of a particular State. It does not include a differentiation based on other considerations, which are dependent on natural or business circumstances, and may operate with more or less force in different localities; and there is nothing, in my opinion, to prevent the Australian Parliament, charged with the welfare of the people as a whole, from doing what every State in the Commonwealth has power to do for its own citizens, that is to say, from basing its taxation measures on considerations of fairness and justice, always observing the constitutional injunction not to prefer States or parts of States

Three

3. Subsequently in Clyne’s Case (1958) 100 CLR 246 which involved a specific challenge to federal income tax zonal concessions, Dixon CJ, Williams, Kitto and Taylor JJ begged to differ from Elliott and Isaacs J, saying they were unable to appreciate the distinction between the selection of an area and the selection of the same area for the same purpose ‘as part of a State’ (at 266). However, the challenge failed on other grounds, and income tax zonal concessions to residents of defined areas in the States have continued to apply ever since. The view expressed in Elliott was questioned but not overruled.

Four

4. This being the state of play in the High Court, there has been a relevant development that helps significantly in resolving the difference of judicial views in a way that supports the constitutionality of the Proposal. This is the decision of the United States Supreme Court in United States v Ptasynaski (1983) 62 US 74.

It dealt with the provision in the United States Constitution requiring “taxes be uniform throughout the United States”, on
which Sections 51(ii) and 96 of our Constitution was based. The decision concerned the US Crude Oil Windfall Profit Tax Act of 1980 which exempted from the tax imposed by the Act domestic crude oil defined as oil produced from wells located north of the Arctic Circle or on the northerly side of the divide of the Alaska-Aleutian Range and at least 75 miles from the nearest point on the Trans-Alaska Pipeline system. The US Supreme Court unanimously held that this exemption did not violate the Uniformity Clause’s requirement that taxes be “uniform throughout the United States”:

  • The Uniformity Clause did not require Congress to devise a tax that falls equally or proportionately on each State nor did the Clause prevent Congress from defining the subject of a tax by drawing distinctions between similar cases (at 80-82).
  • Identifying “exempt Alaskan oil” in terms of its geographic boundaries did not render the exemption invalid. Neither the language of the Uniformity Clause nor previous decisions prohibited all geographically defined classifications. That Clause gave Congress wide latitude in deciding what to tax and did not prohibit it from considering geographically isolated problems. Congress could not be faulted for determining, based on neutral factors, that “exempt Alaskan oil” required separate favourable treatment. Such determination reflected Congress’ considered judgment that unique climatic and geographic conditions required that oil produced from the defined region be exempted from the windfall profit tax which was devised to tax “windfalls” that some oil producers would receive as the result of the deregulation of domestic oil prices that was part of the Government’s program to encourage the exploration for and production of oil (at 84-86).

Conclusion

The recent trend of the Court towards looking at the purpose and effect of government initiatives in determining constitutional validity extends to taking notice of social facts, as shown in Castlemaine Tooheys Ltd v South Australia (1990) 90 ALR 371. In that case weight was a given to United States decisions and doctrines, and this seems to us to be a similar situation in that regard. Even more pertinently, reference is made in the judgment of Gaudron and McHugh JJ to the meaning of discrimination for constitutional purposes in the following terms (at 387- 388):

a law is discriminatory if, although it operates by reference to a relevant distinction, the different treatment thereby assigned is not appropriate and adapted to difference or differences which support the distinction. A law is also discriminatory if, although there is a relevant difference, it proceeds as though there were no such difference, or in other words if it treats equally things that are unequal “unless perhaps there is no practical basis for the differentiation.”

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