Albrecht v Commissioner of Taxation

The tax and pensions involved 4 The surcharge tax is imposed on high income members of defined benefits schemes where some or all of the defined benefits are unfunded; that is to say, when the benefits are fixed in advance and do not reflect the investment performance of an underlying fund and where part or all of those benefits are not paid out of income generated by any contributions made (whether by the employee or employer). The tax is imposed by calculating the notional contribution which would have needed to have been made in each year to fund the presently unfunded element of the future defined benefits and then levying the tax by reference to that notional amount. This involves a process of actuarial estimation in which the major inputs are the expected number of years before the member retires, the expected rate of return on the notional contributions and the expected age at which the member will die. Another way of looking at the tax is as a tax levied by reference to the estimated unfunded liabilities of the fund to its members. 5 In cases not involving senior State officials, the surcharge tax is not collected from a fund's members but is instead collected from the fund itself under the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (Cth). It is convenient to refer to this general form of the tax as the General Surcharge Tax. The philosophy behind the General Surcharge Tax emerges more clearly when it is understood that in the case of accumulation funds (where members receive back on retirement their and their employer's contributions together with the income thereon) a tax is payable on contributions. The concern of the General Surcharge Tax is to ensure that tax is collected with respect to unfunded benefits, even where no contributions are made. 6 For somewhat technical reasons, the General Surcharge Tax does not apply to some senior State officials. The reasons for this are thought to be constitutional and centre upon the fact that the Commonwealth lacks the constitutional power to levy taxes on the property of a State: Constitution, s 114. There is a view that this would prevent the General Surcharge Tax from being applied to a fund whose corpus was held by a State. It is not necessary to determine the correctness of that view, but it explains the passage by the Parliament of legislation designed to collect the same tax (in economic terms) not from a constitutionally protected fund itself but instead from its members. These funds prepare returns of the annual position of each member but the assessment of the amount of the surcharge tax which is due is then issued to the member who can either pay it or elect to have it debited against a surcharge account held in his or her name with the Australian Taxation Office. Interest accrues on a compounding basis on this surcharge account and it becomes payable upon the member's retirement. These various outcomes are achieved by machinery provisions in the Imposition and Assessment Acts. The funds to which this regime applies are referred to as 'constitutionally protected superannuation funds' which is a reference to the perceived requirements of s 114. These are defined in a complicated way which has its endpoint in a list contained in Schedule 4 to the Income Tax Assessment Regulations 1997 (Cth). 7 The trial judge described the superannuation arrangements of the appellants as falling into two categories. In the first was the appellant Mr Atherton. He was a member of the West State Superannuation Scheme ('West State Scheme'). It was administered by the Government Employees Superannuation Board, a Western Australian statutory body. It is a 'constitutionally protected superannuation fund' because it is on the list referred to in the preceding paragraph. The other category consisted of the remaining appellants. They each belonged to the Gold State Superannuation Scheme ('Gold State Scheme'). It was established under Part 2 of the State Superannuation Regulations 2001 (WA) and was a constitutionally protected superannuation fund for the same reason. 8 The West State Scheme was an accumulation fund in which both members and the employer made contributions and which entitled its members to a lump sum on retirement made up of the contributions made and income earned upon them. However, for reasons which are not pertinent, the police service did not make the contemplated contributions to the fund and the lump sum which Mr Atherton was eventually paid on retirement had an unfunded component which was paid out of Consolidated Revenue. In all events, it is not in dispute that the Assessment Act brought to tax what turned out to be the unfunded portion of this benefit. 9 In the case of the Gold State Scheme, the members made regular contributions which were deducted from their salaries but the police service itself made no contributions. The Scheme provided for the payment of a lump sum referrable to the amount of salary in the final period of the member's service. Again, it is not in dispute that this generated an unfunded liability in the State to which the provisions of the Assessment Act applied. 10 The position of each of the appellants was then assessed under the Assessment Act on an annual basis. Some of the appellants paid the assessments each year on the advice of their accountants to avoid the compounding of interest; others did not and the tax was debited against their surcharge accounts. The State responded to the tax imposed upon the members of the West State and Gold State Schemes by permitting members to pay the tax from their defined benefits upon retirement: regs 49A and 81A. Since the appellants were to be paid a lump sum in any event, this liberty is largely cosmetic in their case. Similar commutation provisions were present in Austin and Clarke but there the defined benefits in question were periodic pensions. The commutation provisions permitted the member to commute part of the future pension to meet the lump sum surcharge liability on retirement. In this case, where the defined benefit was already a lump sum, the commutation right appears to serve little purpose.

The appellants' first argument: immunity of State Governments from federal regulation in areas of core constitutional significance 11 As a matter of general theory, the States are not immune from Commonwealth regulation. The federal nature of the Commonwealth has as its corollary, however, State immunity from Commonwealth legislation which significantly interferes with a State's capacity to function as a government: Bayside City Council v Telstra Corporation Ltd [2004] HCA 19; (2004) 216 CLR 595 at [31]. The precise metes and bounds of the immunity have proved elusive but its central element strikes down Commonwealth legislation which restricts or burdens one or more of the States in the exercise of their constitutional powers: Fortescue Metals Group Ltd v Commonwealth [2013] HCA 34; (2013) 250 CLR 548 ('Fortescue') at [134]-[137]. One example of a law which infringes the principle is a law discriminating against the States by placing upon them some special burden or disability: see Queensland Electricity Commission v Commonwealth (1985) 159 CLR 192 at 217. 12 The appellants' first argument is that there are some areas of State activity which, by their nature, lie beyond the reach of Commonwealth regulation. An example is afforded by the decision in Melbourne Corporation itself. There it was held that the Commonwealth could not pass a law which prevented banks from conducting banking business for a State because '[t]he management and control by the States and by local governing authorities of their revenues and funds is a constitutional power of vital importance to them' (at 75). Here the appellants contend that the maintenance of a police force is to be viewed in a similar light. 13 The appellants' contention that the maintenance of peace and order by the State is a central constitutional aspect of a State should be accepted. By s 2(1) of the Constitution Act 1889 (WA) the legislature is given the power 'to make laws for the peace, order, and good Government of the Colony of Western Australia'. It is apparent that the passage of the Police Act 1892 (WA) ('the Act') was a law providing for peace and order. By s 7, for example, the Commissioner is authorised to appoint 'so many non-commissioned officers and constables of different grades as he shall deem necessary for preservation of peace and order throughout the said State' and the role of commissioned officers is, by s 6, 'the government and superintendence of such portion of the Police Force as such Commissioner may from time to time direct'. The idea that a police force is a central constitutional aspect of a modern State is not new. In Coomber (Surveyor of Taxes) v Justices of the County of Berks (1883) 9 App Cas 61 Lord Blackburn said (at 67): 'I do not think it can be disputed that the administration of justice, both criminal and civil, and the preservation of order and prevention of crime by means of what is now called police, are among the most important functions of Government, nor that by the constitution of this country these functions do, of common right, belong to the Crown.' 14 This passage was in turn applied by the Privy Council in Attorney-General (NSW) v Perpetual Trustee Company Ltd (1955) 92 CLR 113 at 120. It might also be noted that in Re Australian Education Union; Ex parte Victoria (1995) 184 CLR 188 ('Re Australian Education Union') at 231, the plurality described as having 'some force' the argument that the Melbourne Corporation implied limitation protects the integrity or autonomy of a State and, in this context, the police were expressly identified as being included in a genus of 'internal services' which were protected by the implied limitation. 15 That conclusion does not mean, however, that State police forces are beyond federal regulation. For example, in Fortescue the Court accepted that a State's ownership, management and control of its territory was a necessary attribute of statehood (at [129]) and that '[t]he extent and importance of the States' function of managing their land and minerals must be acknowledged' (at [131]). Nevertheless, it concluded that there was no infringement of the Melbourne Corporation doctrine by a law which imposed a tax on mining profits. It had been argued that in order to encourage development of mineral resources it was necessary for a State to be able to reduce the level of royalties on minerals and that the mining tax removed this ability because any reduction in the level of royalties would be cancelled out by a corresponding increase in the mining tax. The Court explicitly analysed the situation by asking whether the tax imposed any special disability or burden on the States and concluded (at [137]) that it did not. 16 What this means is that it is not sufficient, without further consideration, simply to identify some State activity as being concerned with a core constitutional function in order to attract the Melbourne Corporation doctrine. Rather, it is necessary, having identified a core constitutional function, to explain why the challenged federal regulation interferes with the capacity of the State to continue to function as a government. 17 Similar reasoning can be found in Western Australia v Commonwealth (1995) 183 CLR 373 (the Native Title Case) at 478-479. In that case the Court rejected Western Australia's argument that its obligation under the Native Title Act 1993 (Cth) to pay compensation when native title was extinguished by an act of the State interfered with 'the sovereign function of the State of Western Australia as a State'. It did so in these terms (at 481): 'The [Native Title Act] does not purport to affect the machinery of the government of the State. The constitution of the three branches of government is unimpaired; the capacity of the State to engage the servants it needs is unaffected; the acquisition of goods and services is not impeded; nor is any impediment placed in the way of acquiring the land needed for the discharge of the essential functions of the State save in one respect, namely, the payment of compensation. The Act does not impair what Dawson J described [in Queensland Electricity Commission v Commonwealth at 250] as 'the capacity to exercise' constitutional functions though it may affect the ease with which those functions are exercised.' 18 In rejecting the challenge to the mining tax on essentially identical grounds the Court in Fortescue applied this passage (at [132]). 19 The same is true of the position of the Western Australian police. It may be accepted that they do perform an important, indeed, critical role in the maintenance of peace and order in the State and this role may be described as having a constitutional aspect to it. However, apart from any effect the surcharge tax has upon the terms of and conditions of employment of the State's high level officials (which is the subject of the appellants' second argument dealt with further below), the tax has no impact upon the performance by the State of the policing function. It does not affect the number of police, the way in which their duties are performed, how they are supervised, what standards they are subject to or, indeed, policing in any way at all. It may well be that federal regulation of some aspects of State policing would infringe the Melbourne Corporation principle. For example, a federal law which prevented State police from investigating federal public servants for breaches of State criminal law might well have its difficulties. But there is nothing in the current situation of that kind. Ultimately, the appellants conflate the constitutional prohibition against interference with important State constitutional functions with a blanket ban on legislating about such functions at all. That conflation was rejected in the Native Title Case and Fortescue. At a fundamental level, it is inconsistent with the established principle that the interpretation of the Constitution is not to be approached on the assumption that there are certain matters reserved to the States: Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920) 28 CLR 129. The argument should be rejected. 20 The Commissioner contended, and the trial judge agreed, that a passage in Re Australian Education Union precluded the appellants' first argument from being accepted in any event. That passage, at 241, was as follows: 'The prosecutor argued that the implied limitation precludes the exercise of the Commission's powers with respect to a dispute between a State and its police officers and that such a dispute cannot amount to an industrial dispute within the meaning of s 51(xxxv). The prosecutor's argument was an extension of its principal contention relating to governmental functions on the footing that the police discharge a primary and inalienable governmental function. The short answer is that the granting of consent by the Commission to an alteration of the eligibility rules of the Australian Federal Police Association would not in itself work any impairment of the capacity of the prosecutor to function as a government. Further, having regard to conclusions earlier stated in these reasons, there is no basis for holding that the Commission is precluded from exercising some powers in relation to the fixing by award of minimum wages for State police officers. Further, having regard to conclusions earlier stated in these reasons, there is no basis for holding that the Commission is precluded from exercising some powers in relation to the fixing by award of minimum wages for State police officers. The fact that a log of claims seeks more than the Commission has power to award is not a ground for holding that there is no industrial dispute so long as the Commission has power to make an award in relation to something that is sought in the log. The application for relief, as with the prosecutor's challenge to the findings of dispute in the other cases, is premature' 21 This passage is consistent with the conclusion that the argument should be rejected. And, as the trial judge correctly held, it does present a stumbling block to the appellants' first argument, for it shows that the immunity is not attracted merely because an inalienable governmental function is involved. It is necessary in each case to examine the measure in question and to ask whether it has the effect of impairing the capacity of a State to function. That issue, in short, cannot be addressed in a vacuum. What occurred in Re Australian Education Union bears this out. There, the Court observed that all that had been before the Commission was a log of claims by a union and that the Commission had not yet made any decision about what award to make. There were some parts of that log of claims which, if ultimately granted by the Commission, would plainly not impair the capacity of the State to function - the Court instanced a change to the eligibility rules of the police union. On the other hand, whilst there might have been some elements in the log of claims which would have constituted such an interference if the Commission made an award addressing them, it was premature to grant any relief before the Commission had actually acted. Put another way, the Commission did not cease to have jurisdiction merely because some parts of the log of claims might be beyond power.

The appellants' second argument: the immunity and the surcharge tax 22 The High Court has held that 'critical to a State's capacity to function as a government is its ability, not only to determine the number and identity of those whom it wishes to engage at the higher levels of government, but also to determine the terms and conditions on which those persons shall be engaged': Re Australian Education Union at 233. This statement formed the basis of the appellants' second argument that they are at the higher levels of government and hence immune. Of course, an objection might be raised that we are here concerned with a tax on superannuation rather than with the terms and conditions of engagement. But both Austin and Clarke held that the surcharge tax was invalid when applied to judges and parliamentarians because it interfered with the terms upon which the State retained these senior officials. There is arguably some difference in the reasoning in the two decisions, but whatever their original basis, the High Court has recently explained that they rest upon the theory that 'the perceived vice of the Commonwealth law in question lay in its impact upon the capacity of a State to fix the terms of its relationships with its judiciary and legislature as branches of the government of that State': Fortescue at [135]. So viewed, it is difficult to identify the principle in Austin and Clarke as being any different in substance to the general principle identified in Re Australian Education Union. Those two decisions therefore hold that the surcharge tax involved in this case does have a Melbourne Corporation problem if applied to the upper levels of a State government. This Court is therefore relieved of the need to explain what the Melbourne Corporation problem with the surcharge tax actually is and may focus on the question of whether the appellants are the kinds of officials to whom the principle applies. 23 Mr Bennett QC, who appeared with Ms Price for the appellants, emphasised that in the passage from Re Australian Education Union just quoted the High Court referred not to the highest levels but only to the higher levels. Further, the High Court elsewhere gave examples of what some of these levels might be and these, so Mr Bennett submitted, were consistent with commissioned officers being within the immunity. The full passage at 233 was in these terms: 'In our view, also critical to a State's capacity to function as a government is its ability, not only to determine the number and identity of those whom it wishes to engage at the higher levels of government, but also to determine the terms and conditions on which those persons shall be engaged. Hence, Ministers, ministerial assistants and advisers, heads of departments and high level statutory office holders, parliamentary officers and judges would clearly fall within this group. The implied limitation would protect the States from the exercise by the Commission of power to fix minimum wages and working conditions in respect of such persons and possibly others as well. And, in any event, Ministers and judges are not employees of a State.' 24 As developed on appeal, the commissioned officers were to be seen as within the immunity either because they were 'high level statutory office holders' or were at the 'higher levels of government', or because they fell within the catchall expression in the quoted passage, 'possibly others as well'. The question then is whether any of the commissioned officer ranks can be seen as falling within the genus which this passage contemplates. Mr Bennett QC emphasised that the commissioned ranks were in some sense like ministerial assistants and advisers in that they provided advice to the Commissioner of Police. 25 To assess this submission one needs to know a little more about the nature of the commissioned ranks, of which there are six. These are in order of seniority: Commissioner, Deputy Commissioner, Assistant Commissioner, Commander, Superintendent and Inspector. Each is appointed by the Governor (ss 5 and 6) and each may be removed only by the Governor (s 8(1)). The Act requires only the existence of the Commissioner (s 5) but permits the Governor to appoint the other commissioned ranks without specifying what they are: s 6. Clause 201 of the Police Force Regulations 1979 (WA) ('the Regulations') identifies the five other commissioned ranks. The current appellants include amongst their number persons who have filled each of these ranks. One of the appellants, Mr Atherton, was for some periods also the acting Commissioner. 26 The Act specifies that the Commissioner shall be 'charged and vested with the general control and management of the Police Force of the said State' (s 5). Neither the Act nor the Regulations confer, however, any particular function on the specified commissioned ranks. They do contemplate the possible delineation of the State into regions, divisions, sub-divisions, sections, branches and sub-branches: cl 301(1). It is the Commissioner who determines what these are to be and what functions are to be given to them: cl 301. Clause 303(1) specifies that an officer is to be in charge of each region and division but beyond that the Regulations do not specify any particular role for commissioned officers. The evidence suggested that, in practice, commanders are in charge of regions and inspectors are in charge of divisions. The duties of the police force, including its commissioned officers, are specified in cll 401-407. Compendiously these are: to obey the directions of the Commissioner or directions given on his behalf, zealously and exclusively to discharge the functions conferred upon them, to be courteous to the public, to obey lawful instructions, to carry out their duties, to obey the law, to take proper care of firearms and to take notice of other members' duties. 27 Thus depicted is an organisation which is quasi-military in structure and geared towards the performance of the function of maintaining law and order. Whilst the Act contemplates a distinction between commissioned officers and other members of the force, neither it nor the Regulations expressly explains the difference beyond assuming that commissioned officers will be in charge of divisions and regions. 28 The salary of the ranks of Commissioner, Deputy Commissioner and Assistant Commissioner are determined by the Salaries and Allowances Tribunal of Western Australia under the provisions of the Salaries and Allowances Act 1975 (WA). That Tribunal must determine the salaries and allowances of 'prescribed officers' and these three ranks are prescribed by cl 3 of the Salaries and Allowances Regulation 1975 (WA). It is worth noting the positions whose salaries are fixed by this Tribunal. It determines the salaries and allowances of the Governor (s 5A) and, by s 5, Ministers of the Crown, Parliamentary Secretaries, the Secretary of the Cabinet, officers and members of Parliament, the Clerk and Deputy Clerk of either House, officers of the public services within 'the special division' and 'prescribed' positions. It also determines the arrangement for judicial officers under s 7. The 'special division' may be specified by the Public Sector Commissioner: Public Sector Management Act 1980 (WA), s 38. The prescribed offices in cl 3 are: Commissioner for Children and Young People Executive Director of the Department of Environment and Conservation Director of Public Prosecutions Deputy Director of Public Prosecution (sic) Electoral Commissioner Deputy Electoral Commissioner Commissioner for Equal Opportunity Auditor General Chief Executive Officer General Manager, Forest Products Commission Information Commissioner Director, Office of Health Review Inspector of Custodial Services State Librarian Commissioner of Main Roads President, Mental Health Review Board Commissioner for Occupational Health and Safety Parliamentary Commissioner for Administrative Investigations Deputy Parliamentary Commissioner for Administrative Investigations Commissioner of Police Deputy Commissioner of Police (Operations) Deputy Commissioner of Police (Specialist Services) Assistant Commissioners of Police Public Sector Commissioner Solicitor-General of the State of Western Australia Ordinary members and senior members of the State Administrative Tribunal Chief Executive Officer, Western Australian Tourism Commission 29 Each of the appellants who was a deputy commissioner was either a deputy commissioner for operations or for specialist services, that is to say, each was on this list. It is not difficult to describe the list in cl 3 as encompassing 'high level statutory office holders' within Re Australian Education Union. Indeed, it is difficult to describe it otherwise. These two ranks of commissioned police officers are placed in the same company as the Solicitor-General, the Director of Public Prosecutions, the Auditor General and the Commissioner of Police and their pay is fixed by the same independent tribunal. Counsel for the Commissioner submitted that the immunity extended to those four offices. We agree. If one were looking then for a list of 'high level statutory office holders', cl 3 would appear to be Western Australia's effort to identify them all in one place. There is no suggestion that this list had not been compiled in good faith. For these reasons, we would conclude that these two ranks were within the immunity. 30 The argument that the appellants were high level statutory office holders was expressly advanced in this Court and the possibility that there might be different outcomes for different ranks was discussed in argument. It is not altogether clear, however, whether the argument was run before the trial judge. His examination of the issue turned, instead, on whether the commissioned officers were performing such core functions of the State that they should be taken to operate at 'the higher levels' of government. His Honour correctly dismissed this argument concluding that it was a disguised version of the first argument. We agree. In any event, whether the argument was advanced at trial, it was advanced on appeal without objection. In our view, it should be accepted. 31 It is equally plain, however, that the three ranks of commander, superintendent and inspector do not fall within the appellation 'high level statutory office holder' if only because they do not appear on the list in cl 3. In fact, the salaries of the lower three ranks are fixed under an industrial instrument made pursuant to the Industrial Relations Act 1979 (WA) and entitled the 'Western Australian Police Industrial Agreement'. As was submitted on the appellants' behalf, the fact that they are not high level statutory office holders does leave open the possibility that these ranks might nevertheless be at the 'higher levels' of government, fall within the 'possibly others as well' category in Re Australian Education Union or perhaps be otherwise analogous with the position of ministerial advisers. 32 To assess the correctness of that submission it is necessary to understand what the ranks of commander, superintendent and inspector do. The trial judge found (at [39]) that to varying degrees and depending on his rank, each of the commissioned officers undertook an executive role in police management and operational policies. In that capacity, they utilised advanced policing and management skills at the highest level. They also had a high public profile. His Honour also found that some of the appellants had, from time to time, provided assistance and advice with respect to policy and legal issues to ministers of the State. They had also developed partnerships with government agencies and public interest groups to develop policy and facilitate legislative change for better policing. 33 His Honour did not, however, make any explicit findings about particular ranks. The evidence at trial was also before the Full Court, however, and was not in dispute. One of the appellants, Mr Power, testified that he had occupied all three of these ranks and his position may be taken as representative. He had been responsible for up to 800 police officers with a multi-million dollar budget to match. As an inspector, he had commanded two police districts and as a commander, he was in charge of a region which contained five districts. 34 Whilst accepting the importance of these positions, they are not analogous with the position of ministerial assistants and advisers, heads of department or high level statutory officers. The list in Re Australian Education Union has as its defining feature persons who either exercise constitutional functions of the State or who proffer advice directly to those who are involved in the performance of those functions. The intrusion of federal legislation in a way which interferes with the capacity of a minister to select his or her own direct advisers just as much impermissibly intrudes as if it had operated on the minister himself or herself. But what causes the immunity to attach in such cases is not the concept of advice - it is the propinquity of the adviser to the advised. That this is so is confirmed by the observation that whilst it is true that the central purpose of a government department is to advise its ministers, it is certainly not true that the Melbourne Corporation principle protects every official inside the department involved in the preparation of that advice. The zone of immunity does not extend very far from the minister's office. 35 The identification of other officials who might be protected by the doctrine should therefore proceed by reference to what the doctrine seeks to protect and this is the interest of the State in being kept free from undue interference in its capacity to function. In this case, these three more junior ranks are answerable to the three senior ranks who are all high level statutory officers. The imposition of the surcharge tax on the individuals in the more junior ranks does not compromise the ability of the State to continue to receive important advice from whom it wishes. The second argument should be rejected in respect of these three more junior ranks.

Conclusion 36 The appeals should be allowed in part and the appeals to the Court below allowed to the extent that the objection decisions considered that some of the appellants were liable to pay the tax whilst they held the rank of deputy commissioner of police (operations), deputy commissioner of police (specialist services) or assistant commissioner. The appeals should be otherwise dismissed. There should be no order as to costs as the matter was part of the respondent's test case programme. The parties should bring in orders to give effect to these reasons on or before 12 January 2015. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Perram, Robertson and Griffiths.