Clarke v Commissioner of Taxation

Clarke v Commissioner of Taxation - [2009] HCA 33 - HCA 2009 case summary — Zoe

[25]

Under the authority conferred upon it by the Constitution the Parliament of the Commonwealth can make laws affecting the States and their agencies. It cannot, however, make laws which destroy or significantly burden, curtail or weaken either the capacity of the States to carry out their proper legislative, executive and judicial functions or their exercise of those functions. An Act of the Commonwealth Parliament imposing a surcharge specifically upon the pension entitlements of State politicians is said to be such a law.
Ralph Desmond Clarke, who was born on 4 October 1951, was elected in 1993 to the Parliament of South Australia as a member of the House of Assembly. He commenced his term on 11 December 1993. He was re-elected in December 1997 and served as a member until 8 February 2002, when he lost his seat at the State election.
Between 15 February 2000 and 15 February 2005 the Commissioner of Taxation ("the Commissioner") issued assessments of superannuation contribution surcharge in respect of Mr Clarke's entitlements under three State superannuation schemes for the financial year ended 30 June 1997 up to and including the financial year ended 30 June 2001. The funds were the contributory Parliamentary Superannuation Scheme ("the PS Scheme") established by the Parliamentary Superannuation Act 1948 (SA) and continued under the Parliamentary Superannuation Act 1974 (SA) ("the PS Act"); the Southern State Superannuation Scheme ("the SSS Scheme") established by the Southern State Superannuation Act 1994 (SA) ("the SSS Act"); and the State Superannuation Benefit Scheme, which was established by the Superannuation (Benefit Scheme) Act 1992 (SA) ("the SBS Act"), and was effectively rolled over into the SSS Scheme by the Southern State Superannuation (Merger of Schemes) Amendment Act 1998 (SA).
The Commissioner's assessments were issued pursuant to the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (Cth) ("the CPSF Assessment Act") and the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Imposition Act 1997 (Cth) ("the CPSF Imposition Act").
Mr Clarke objected to the assessments. His objections were disallowed and on 2 May 2006 he sought review by the Administrative Appeals Tribunal ("the Tribunal") of the Commissioner's disallowance decisions[1]. On the basis of a statement of agreed facts the Tribunal referred questions of law to the Full Court of the Federal Court, including the question:

[42]

What Isaacs J said in dissent in Pirrie v McFarlane might have to be considered in the light of the distinction which he made, again in dissent, in the Teachers' Case[38] between "the primary and inalienable functions of a constitutional Government", and other functions "voluntarily undertaken by the State, but which are ordinarily or primarily the subject of private individual enterprise". The distinction was rejected by Windeyer J in the Professional Engineers' Case[39]. A similar distinction between "governmental functions" and "trading functions" was rejected in the AEU Case[40]. The rejection of such distinctions makes no difference to the content of the limitation, but rather widens the scope of its application.
The principle emerging from the Engineers Case was formulated by Dixon J in a number of cases as requiring a broad interpretation of Commonwealth legislative power, and an acceptance of the capacity of the Commonwealth to enact legislation affecting States and their agencies[41]. But no law of the Commonwealth could "impair or affect the Constitution of a State"[42]. In Farley's Case[43], in obiter on the constitutional question, Dixon J referred to the identification in the Engineers Case of the taxation power as one which might come up for special consideration in relation to the States[44]. And in Essendon Corporation v Criterion Theatres Ltd[45] he said that the extent of the taxation power was a third reservation in relation to the principle in the Engineers Case, as he had reformulated it. Nevertheless, the States have no general immunity from the taxation power of the Commonwealth[46]. State employees or what might broadly be described as "constitutional office holders" do not enjoy such an immunity. The imposition of income tax on the salaries of members of Parliament, State Ministers, and judges does not infringe any implied prohibition. Nor does the imposition of fringe benefits tax in respect of benefits provided to them by the State. These are laws of general application which do not inhibit the capacity of the States to appoint and remunerate public officers[47].
In a multifactorial approach to ascertaining whether a law of the Commonwealth infringes the general limitation against laws which destroy or weaken the capacity or functions of the States, the nature and subject matter of the law may be relevant. Thus a law with respect to taxation may be viewed differently from a law with respect to defence. As was said in the joint judgment in Austin[48]:

[45]

Consistently with the broad approach to the interpretation of Commonwealth legislative power enunciated in the Engineers Case, a Commonwealth bankruptcy law under which a court ordered a weekly contribution to creditors out of a bankrupt State parliamentarian's allowances survived scrutiny in Stuart-Robertson v Lloyd[52]. It did so on the basis that it did not impose any burden upon legislators as such[53]. It was unnecessary to consider how much further the power of the Commonwealth Parliament could have extended[54]. The law was evidently, although not expressly, upheld on the basis that it was a law of general application and did not interfere with governmental functions. A submission to the contrary was made and implicitly rejected[55].
Although characterisation was sufficient in R v Commonwealth Court of Conciliation and Arbitration; Ex parte Victoria[56] to invalidate regulations purporting to control the conditions of Victorian public servants not engaged in war‑related work, Starke J foreshadowed a formulation of the limitation in terms of laws "singling out the States"[57]. While he did not use that expression, he said that the Engineers Case was not authority for the general proposition that the States were subject "as such" to the legislation of the Commonwealth[58].
It was primarily the character of the law under challenge in the Melbourne Corporation Case as "singling out another government and specifically legislating about it"[59] that led to its invalidation. The law prohibited banks from dealing with States or their authorities without written consent from the Treasurer. Latham CJ relied upon its characterisation as a law with respect to State government functions, which did not fall within any head of Commonwealth power[60]. Rich J, on the other hand, held it invalid because it impaired the powers of the States, essential to the effective working of their governments, to freely use banking functions[61]. Starke J saw it as "a practical question" whether legislation or executive action by the Commonwealth destroyed, curtailed or interfered with the operations of a State. He said[62]:

[70]

The constitutional implication considered in Austin and its precursors means that the Commonwealth cannot, by the exercise of its legislative power, significantly impair, curtail or weaken the capacity of the States to exercise their constitutional powers and functions (be they legislative, executive or judicial) or significantly impair, curtail or weaken the actual exercise of those powers or functions. The Constitution assumes the existence of the States as "independent entities". This implies recognition of the importance of their status as components of the federation. The "significance" of a Commonwealth law affecting the States' functions is not solely to be determined by reference to its practical effects on those functions. This is not a return to any generalised concept of inter‑governmental immunity. It simply recognises that there may be some species of Commonwealth laws which would represent such an intrusion upon the functions or powers of the States as to be inconsistent with the constitutional assumption about their status as independent entities.
The application of the implied limitation is evaluative. It has always been thus. There is a normative element in the criterion of "significance" by which the adverse effects of a Commonwealth law on State capacities or functions must be characterised, before such a law will be held to be invalid. Whether the effects of a law upon the capacities or functions of the States are "significant" is to be judged qualitatively and also, but not only, by reference to its practical effects. To take an extreme example, a law of the Commonwealth purporting to subject the Governor of each of the States to a special "gubernatorial privileges tax" might fix the tax at a level which, in a financial sense, would be of little practical importance to the States or to their Governors. It might be thought, nevertheless, that the nature of such a law would mark it as asserting an intrusive legislative authority with respect to the constitutional office of Governor that was inconsistent with the status of the States as independent entities under the Constitution.
In my opinion, the application of the implied limitation requires a multifactorial assessment. Factors relevant to its application include:

[85]

For the preceding reasons, in my opinion, the appeal should be allowed and question 3(a) should be answered in the affirmative. I agree with the orders proposed in the joint judgment.
GUMMOW, HEYDON, KIEFEL AND BELL JJ. This appeal from the Full Court of the Federal Court (Branson, Sundberg and Dowsett JJ)[96] is a sequel to Austin v The Commonwealth[97]. In that decision this Court held invalid two laws of the Commonwealth in their application to Justice Austin of the Supreme Court of New South Wales, on the ground that they placed a particular disability or burden upon the operations or activities of the State of New South Wales so as to be beyond the legislative power of the Commonwealth[98].
The laws in question are the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Imposition Act 1997 (Cth) ("the Imposition Act") and the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (Cth) ("the Assessment Act"). They commenced on 7 December 1997 and have been amended. The legislation received detailed treatment in Austin[99] and what follows should be read with an appreciation of that earlier analysis.
In broad terms, the legislation imposed a new tax, called a "surcharge"[100], upon contributions actually or notionally paid for the provision of retirement benefits to a class of persons including the appellant. The appellant complains that, as a former member of the South Australian legislature, he is subjected in a constitutionally impermissible manner to a special and legally different taxation regime from that applicable to persons eligible for, or in receipt of, pensions or superannuation.
In this Court, the second respondent, the Attorney‑General for South Australia, supported the appellant, as did the intervening Attorneys‑General for New South Wales, Victoria, Queensland and Western Australia. The Commonwealth Attorney‑General intervened in support of the first respondent ("the Commissioner") and the Commissioner adopted the submissions of the Attorney‑General.

[86]

The Constitution Act 1934 (SA) provides that the Parliament of South Australia comprises the Legislative Council and the House of Assembly (s 4). In the period in which the appellant was a member of the House of Assembly it consisted of 47 members elected by the inhabitants of the State legally qualified to vote (s 27). The Parliamentary Remuneration Act 1990 (SA) ("the Remuneration Act") conferred authority for payment from the Consolidated Account of amounts of remuneration fixed under that statute (s 6). The Consolidated Account is one of the most important of the ledger accounts maintained at the Treasury[101]. The "basic salary" of a member of the Parliament was fixed by s 3 as an annual salary at a rate equal to $2,000 less than that from time to time payable to members of the House of Representatives as "Commonwealth basic salary".
The appellant was a member of the House of Assembly between 1993 and 2002. During part of that period he was Deputy Leader of the Opposition, an office which attracted additional salary under s 4(1)(b) of the Remuneration Act. The appellant was a member of three superannuation schemes established by statutes of South Australia. The most significant of these for the financial position of the appellant was the Parliamentary Superannuation Scheme ("the PSS"). This was established by the Parliamentary Superannuation Act 1948 (SA) and continued by the Parliamentary Superannuation Act 1974 (SA) ("the PSS Act"). The PSS Act was amended from time to time during the period in which the appellant served in the House of Assembly, in particular by the Parliamentary Superannuation (Establishment of Fund) Amendment Act 1999 (SA) ("the 1999 Act"). It will be sufficient to refer to the statute as in force as at 1 January 2002[102].
Section 8 of the PSS Act established the South Australian Parliamentary Superannuation Board ("the Board") and s 12 obliged it to submit a report each year to the Treasurer on the operation of the Act.
The PSS Act defined (s 5(1)) a "member" as a member of either House of Parliament of the State, and included those former members still in receipt of a salary. As a member, the appellant was obliged by s 14 of the PSS Act to contribute 11.5 per cent of his salary which was deducted by the Treasurer from his salary. Upon the appellant ceasing to be a member of the House of Assembly on 8 February 2002 by reason of the loss of his seat at an election, and having had not less than six years service, he became entitled for life, pursuant to s 16 of that statute, to a pension of about 43 per cent of his final salary. He continues to receive that pension. There was a limited right of commutation under s 21 of a proportion of the pension which had to be exercised by the appellant within three months of the loss of his seat. The appellant did not exercise that right.
The pension may not be assigned or charged and cannot pass by operation of law (s 38). Were the appellant to be re‑elected in the future his pension would cease, but his previous service would again be taken into account for subsequent pension entitlement (s 20). Section 39(1) states that the money required for the purposes of the PSS Act is payable by the Treasurer from the Consolidated Account or from a special deposit account established by the Treasurer for that purpose.
Since the amendments made by the 1999 Act, benefits have been paid from the Parliamentary Superannuation Fund established by s 13 of the PSS Act. The assets of the fund belong, at law and in equity, to the Crown in right of the State (s 13(2)). The fund receives from the Treasurer payments equal to member contributions (s 13(4)(a)); the Treasury may charge the fund with the amount of benefits which are paid and thereby reimburse the Consolidated Account or other special deposit account (s 39(2)).
The particulars of the other two superannuation schemes of which the appellant was a member appear later in these reasons under the heading "The other schemes".

[95]

Section 15(6) of the Assessment Act, in the form in which it applies to the appellant, provides that when a lump sum or pension becomes payable for a member whose "surcharge debt account" is in debit, the member is liable to pay the Commissioner the lesser of the amount of the debit and 15 per cent of the employer‑financed component of that part of the benefits which accrued after 20 August 1996.
Between 15 February 2000 and 15 February 2005 the Commissioner issued to the appellant assessments of superannuation contributions surcharge in respect of his membership of each of the three superannuation schemes. On 16 August 2004, under s 15(7) of the Assessment Act, the Commissioner issued to the appellant a notice of liability to pay surcharge in respect of his membership of the PSS. Surchargeable contributions under the PSS for the periods ending 30 June 1997-30 June 2001 had been reported in a total of $181,402 and the "surcharge rate" was 15 per cent. A surcharge amount was included in the taxable income of the appellant for each of these five years. Some 93 per cent of the surchargeable contributions were calculated in respect of membership of the PSS, with the result that of the assessed surcharge of $29,260 approximately $27,210 was imposed in respect of the PSS membership of the appellant. Objections by the appellant, based upon the application to his position of the reasoning and outcome in Austin, were disallowed by the Commissioner.
The appellant applied to the Administrative Appeals Tribunal ("the AAT") for review of those decisions of the Commissioner. The AAT then referred three questions to the Federal Court. These were argued before the Full Court which answered the two limbs of Question 3 adversely to the interests of the appellant.
The Full Court, consistently with the decision in Austin, answered "No" to Question 3(b)[108]. This asked whether the Imposition Act imposed a tax on property belonging to a State, contrary to s 114 of the Constitution.
In this Court the appellant confines his case to the treatment by the Full Court of Question 3(a). The Full Court answered "No" to the question whether the Imposition Act and the Assessment Act are invalid in their application to the appellant on the ground that they so discriminate against the State of South Australia, or so place a particular disability or burden upon the operations and activities of that State, as to be beyond the legislative power of the Commonwealth.
For the reasons that follow, together with those of Hayne J, the appellant should succeed in respect of liability to pay surcharge by reason of his membership of the PSS and of the other two schemes.

[98]

The fourth point is a corollary to the third. The governmental capacities of the States, for example with respect to the terms and conditions under which parliamentarians serve, often will be manifested in legislation. But this will not always be so. The Melbourne Corporation Case immediately concerned the effect of the Banking Act 1945 (Cth) upon the freedom of the plaintiff to continue to bank with the National Bank of Australasia Ltd, a private bank, rather than with the Commonwealth Bank of Australia[115]. The more general consideration, emphasised by Dixon J[116], was that State and federal governments being separate bodies politic, "prima facie each controls its own moneys". Further, where there is State legislation, as in the present case, this does not entail the consequence that the question of the application of the Melbourne Corporation doctrine as a restraint upon federal legislative power is to be determined by the methods of comparison between federal and State laws enacted under concurrent powers but said to attract the operation of s 109 of the Constitution. The issue in this appeal concerns alleged federal legislative impairment of the relevant capacity of the State of South Australia.
The fifth point is that in Austin, a majority of the Court, Gleeson CJ[117] and Gaudron, Gummow and Hayne JJ[118], concluded that the notion of "discrimination" by federal law against a State is but an illustration of a law which impairs the capacity of the State to function in accordance with the constitutional conception of the Commonwealth and States as constituent entities of the federal structure. Too intense a concern with identification of discrimination as a necessity to attract the Melbourne Corporation doctrine involves the search for the appropriate comparator, which can be a difficult inquiry[119] and is apt to confuse, rather than to focus upon the answering of the essential question of interference with or impairment of State functions. It also may be that the references to discrimination by Dixon J in Melbourne Corporation[120] use the term in the somewhat different sense of a law which is "aimed at" or places a "special burden" on the States.
This leads to the final point, which indicates the nature of the inquiry for the present appeal. It was made as follows in the joint reasons in Austin[121]:

[100]

The practical operation of the Imposition Act and the Assessment Act with respect to State parliamentarians, as much as to State judges in the position of Justice Austin, is to create an obligation on their part to pay a deferred compounding tax when leaving office. An occasion for the imposition of that obligation upon the appellant was his membership of the PSS, which was an incident of his service as a member of the House of Assembly.
The tax which is assessed and imposed by the federal legislation upon the appellant, as upon Justice Austin, is based upon notional contributions and these are determined by actuarial calculations. The result is that the notional contributions upon which the appellant has been assessed bear no necessary relation to the pension he receives. Assumptions as to salary increases, increases in the Consumer Price Index, marital status upon retirement, likely commutation and mortality may reflect "average" experience of members of the PSS without being accurate in their application to the appellant. The result, as New South Wales submitted, is that benefits actually received may be less than those assumed in the actuarial calculations. Moreover, the tax accrues, compounding at market interest rates, until the defined benefit is received, and may approximate the whole of the pension paid under the PSS for the first year.
It may be accepted that some of the considerations present in Austin do not apply to the appellant. In particular, there is the absence of judicial tenure and the requirement for continued electoral success. But the interest of the State in attracting, by the making of suitable remuneration, competent persons to serve as legislators, and thus as potential Ministers, is a long‑standing constitutional value. The matter was considered by this Court in Theophanous v The Commonwealth[123] where reference was made to the remuneration, before Federation, of members of the colonial legislatures. The fixing of the amount and terms of that remuneration is a critical aspect of the capacity of a State to conduct the parliamentary form of government. Numerous provisions of the Constitution[124] assume the continued operation of that form of government in the States.
Section 21 of the PSS Act permitted partial commutation but this was likely to produce a lump sum less than the present value of the pension entitlement. To the federal laws introduced in 1997, the Parliament of South Australia responded in the Statutes Amendment (Commutation for Superannuation Surcharge) Act 1999 (SA) ("the Commutation Act"), s 4 of which introduced s 21AA of the PSS Act. This obliged the Board, on application of a member liable under s 15(6) of the Assessment Act to a deferred superannuation contribution surcharge, to "commute so much of the pension as is required to provide a lump sum equivalent to the amount of the surcharge". The application had to be made not within three months of leaving the Parliament, but within three months of the receipt of the notice by the Commissioner under s 15(7) of the Assessment Act (s 21AA(2)).
The Second Reading Speech in the House of Assembly on the Bill for the 1999 Act indicates the legislative purpose of assisting members who might otherwise lack the means to meet the deferred surcharge liability, the final amount of which might not be known until the due date for payment was past[125].
The Full Court said of the enactment of s 21AA that the State "was not compelled by the surcharge legislation to make the amendment" and that s 21AA was "a piece of fine tuning"[126]. However, the introduction of that provision had a greater significance. It was indicative of the curtailment or restriction of legislative choice for South Australia to provide remuneration to senior office holders. The appellant entered the Parliament under a system provided by the PSS. This provided a life pension after at least six years of service, with a limited right of commutation under s 21. The practical operation of the Assessment Act and the Imposition Act was to curtail the continued exercise of State legislative choice, as expressed in the PSS. The introduction of s 21AA was responsive to and indicative of that curtailment. As Hayne J explains in his reasons, the State was left with no real choice but to provide retirement benefits by a method which enabled parliamentarians to meet the burden imposed by the surcharge legislation.
The Commonwealth Solicitor‑General submitted, with respect to the PSS Act, that the basic question was (i) whether the liability to pay the surcharge created a substantial disincentive to take, stand for, or continue in parliamentary office and (ii) if so, whether there was thereby a significant impairment of the ability of the State of South Australia to attract and retain appropriate people as parliamentarians. This frames the basic question too narrowly.
Reference has been made earlier in these reasons to the interest of the State in attracting competent persons to serve as legislators. This supports the proposition that the capacity to fix the amount and terms of remuneration of parliamentarians is a critical aspect of the conduct of the parliamentary form of government by the State.
To adapt what was said in the joint reasons in Austin[127], one tendency of the federal laws in question here is to induce the States to vary their method of remuneration of members of the legislatures, and:

[105]

The surcharge liabilities of the appellant which arose under s 15(6) of the Assessment Act included assessments for 1997 and 1998 in respect of his membership of the State Superannuation Benefit Scheme ("the SBS"), and for 1999, 2000 and 2001 in respect of his membership of the Southern State Superannuation Scheme ("the Southern Scheme").
The first of these was established under the Superannuation (Benefit Scheme) Act 1992 (SA) ("the SBS Act") and the other under the Southern State Superannuation Act 1994 (SA) ("the Southern Scheme Act"). The SBS Act was repealed with effect 1 July 1998 by s 32 of the Southern State Superannuation (Merger of Schemes) Amendment Act 1998 (SA) ("the Merger Act")[130]. The appellant was a member of the SBS from 11 December 1993 to 30 June 1998 and of the Southern Scheme from 1 July 1998 to 8 February 2002; on repeal of the SBS Act by the Merger Act, his benefits in the first scheme were transferred by operation of law to the second scheme[131]. In 2002 the appellant carried over his entitlement (consisting of an "employer" component) to another scheme which does not attract the surcharge under the Assessment and Imposition Acts. The Southern Scheme and the SBS both attracted the surcharge provisions and under the former the appellant would have been entitled to a lump sum benefit on attaining 55 years of age.
Section 14(1) of the Southern Scheme Act rendered, by its own force, a member of that scheme a person in relation to whom the Crown in right of South Australia was liable to pay a superannuation guarantee charge under the Superannuation Guarantee (Administration) Act 1992 (Cth) ("the Guarantee Act").
That federal statute applied to State employees and s 12(5) classified a member of the Parliament of a State as "an employee of the State". Section 16 obliged employers to pay a "superannuation guarantee charge" in respect of the employer's "shortfall" in making stipulated contributions in respect of employees. The effect was to require employers to pay stipulated contributions to a "complying superannuation fund"[132].
The same state of affairs respecting the treatment of parliamentarians as employees of the State and so as members of the SBS had been established by s 4(1) of the SBS Act. This also had "picked up" the definition in s 12(5) of the Guarantee Act.
Unlike the PSS, the membership of these two schemes was not confined to parliamentarians. Membership was linked to the operation of the Guarantee Act which imposed liability to pay a superannuation guarantee charge upon a widely drawn class of employers and employees. This relevantly included "employees" of the State of South Australia and its agencies and instrumentalities. Further, as already remarked, the surcharge amounts in respect of the appellant's membership of the SBS ($491.70 for 1997 and $424.60 for 1998) and the Southern Scheme ($359.35 for 1999, $368.65 for 2000 and $405 for 2001) were much smaller than those in respect of the PSS.
It also should be noted that the appellant, and the State, were drawn into these two schemes only because of the artificial classification by the Guarantee Act of the appellant as a State employee. That may raise a question of whether in this respect the Guarantee Act itself had the character of a law of general application in the sense discussed earlier in these reasons. The circumstances in which the Guarantee Act was introduced were discussed in Austin[133]. But neither in that case nor in the present litigation is any point taken respecting the validity of the Guarantee Act and nothing more should be said here on the matter.
However, the assets of the fund maintained under the Southern Scheme Act (s 4(2)), like those of the fund maintained under the PSS Act, belonged both in law and in equity to the Crown in right of South Australia. Both the SBS and the Southern Scheme, like the PSS, were classed as constitutionally protected superannuation funds[134]. Further, the surcharge legislation represented by the Imposition Act and the Assessment Act was attracted to the appellant as a "high‑income" member of constitutionally protected funds, regardless of the amounts later payable in respect of any of the three funds.
The Parliament of the State responded with respect to the operation of the surcharge upon members of the Southern Scheme by the Statutes Amendment (Miscellaneous Superannuation Measures) Act 2004 (SA) ("the Second Commutation Act"). This commenced on 19 August 2004. Section 14 added s 35AA to the Southern Scheme Act, which provided, upon application, for a member liable for a deferred superannuation contributions surcharge, as a result of a benefit becoming payable under the scheme, to commute fully the pension or to receive part of the benefit in the form of a commutable pension.
The Attorney‑General, in the Second Reading Speech on the Bill for the Second Commutation Act, said that the proposed law would, among other things, bring members of any of the government's lump sum schemes "into line" with members of the PSS, who "already have the ability to leave part of their retirement benefit in the scheme and use it to extinguish a surcharge liability"[135].
The Southern Scheme was of the general character described above but the Attorney‑General was concerned with the differential treatment of "private sector schemes, [where] the fund itself is liable for the surcharge tax" and the impact upon members of "government superannuation funds"[136] generally. To that broad concern the Melbourne Corporation doctrine is not directed. But to higher office holders such as the appellant the same reasoning applies here as to the PSS. There was the necessary impairment of the governmental functions of South Australia. Matters of evaluation and degree are necessarily involved in reaching that conclusion.

[106]

The appeal should be allowed and, in place of the answer given by the Full Court to Question 3(a) of the Questions referred by the AAT, it should be answered that the Imposition Act and the Assessment Act are invalid insofar as they purport to create the liability of the appellant to superannuation contributions surcharge in respect of his membership of the PSS, the SBS and the Southern Scheme, the details of which are set out in par 59 of the Statement of Agreed Facts. The first respondent should pay the costs of the appellant. The second respondent, like the State interveners, should bear his own costs.
HAYNE J. I agree with Gummow, Heydon, Kiefel and Bell JJ that, for the reasons they give, the appeal should be allowed and consequential orders made in the form proposed.
The appellant's argument gave greater prominence to the Parliamentary Superannuation Scheme ("the PSS") than to the other two schemes: the State Superannuation Benefit Scheme ("the SBS") and the Southern State Superannuation Scheme ("the Southern Scheme"). There were at least two reasons for the focus of argument falling upon the PSS. First, the amounts at stake in relation to the appellant's membership of the PSS were much larger than the amounts referable to the other two schemes. Secondly, membership of the PSS was evidently related to the appellant's membership of a State legislature whereas membership of the other two schemes was not. The SBS and the Southern Scheme each embraced a wide range of State government employees.
It is important, however, to recognise that the fact that membership of the SBS and the Southern Scheme was not confined to parliamentarians or others "at the higher levels of government"[137] is not relevant to the question that arises in this matter. The principle that is engaged directs attention to whether the laws in issue interfere with, or impair, the governmental capacities of the States[138] (in this case, a State's capacity to decide the terms and conditions under which members of the State Parliament serve).
As pointed out in Austin v The Commonwealth[139], that inquiry "turns upon matters of evaluation and degree" and "requires assessment of the impact of particular laws by such criteria as 'special burden' and 'curtailment' of 'capacity' of the States 'to function as governments'". The matter of evaluation and degree in this case concerns the effect of imposing a surcharge on superannuation entitlements of State parliamentarians which, as explained in the reasons of Gummow, Heydon, Kiefel and Bell JJ, created an obligation to pay a deferred compounding tax when the superannuation benefits in question become payable.
In explaining why a State's capacity to choose the way in which State parliamentarians are remunerated is constitutionally significant, it is necessary to begin by recalling that, as pointed out in Austin[140], the principle which is engaged in this matter is necessarily expressed in negative terms and at a high level of abstraction. But as the plurality reasons in Austin also show, examination of the application of the relevant principle must begin from an understanding of what was said about that principle in Melbourne Corporation v The Commonwealth[141].
The root of the relevant principle is found in the proposition, often quoted from the reasons of Dixon J in Melbourne Corporation[142], that "[t]he foundation of the Constitution is the conception of a central government and a number of State governments separately organised. The Constitution predicates their continued existence as independent entities." This proposition, and particularly the reference to the continued existence of independent polities, must be understood in the context of the reasons as a whole.
The law in question in Melbourne Corporation in effect required States and their authorities (including local government authorities) to conduct their banking business only with the Commonwealth Bank or a State bank. A central thrust of the argument advanced by counsel for the plaintiff (Mr Garfield Barwick) against the validity of that law was that it was not properly to be characterised as a law with respect to banking "because it discriminates against (in the sense that it is 'aimed at') the States and State authorities"[143]. This argument, in so far as it was founded on ascribing a single characterisation to the law in question, was rejected[144] by Dixon J:

[112]

The laws in question in this matter and in Austin were directed only to those who were to receive benefits from "constitutionally protected" funds. They were not laws of general application. They did not impose taxes upon the States but they did single out those "at the higher levels of government"[149]: in this case State parliamentarians; in Austin, State judges. The laws in issue in this matter imposed on those persons a special and legally different taxation regime from that which generally applied to those who were to receive pensions or superannuation benefits. Under the generally applicable regime, a surcharge was imposed on the amount of tax deductible contributions made to superannuation funds by those identified as "high income earners". That surcharge was payable by superannuation providers, not members of the fund. The laws now in issue required those who were to receive retirement benefits to which the laws applied to pay the surcharge on what the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (Cth) ("the Assessment and Collection Act") identified[150] as the "surchargeable contributions" of the recipient.
If, as with the SBS and the Southern Scheme, there were amounts contributed by an "employer" for the appellant, to a constitutionally protected superannuation fund that was a complying superannuation fund within the meaning of s 45 of the Superannuation Industry (Supervision) Act 1993 (Cth), those contributions were part of the surchargeable contributions of the appellant[151]. And if, as with the PSS, the appellant was a member of a defined benefits superannuation scheme, the surchargeable contributions were[152] "the amounts that constitute the actuarial value of the benefits that accrued to, and the value of the administration expenses and risk benefits provided in respect of, the member" for the relevant financial year.
Satisfaction of the obligation to pay the surcharge could be deferred until receipt of the benefits[153] but interest accrued and compounded in respect of each annual assessment[154]. As pointed out in Austin[155], the choice whether to pay the surcharge as it accrued necessarily chanced fortune. And, as also discussed in Austin[156], the use of actuarial calculations to determine the value of benefits accruing to a member of a defined benefits superannuation scheme did not always accurately reflect the position of any particular member.
As remarked in Austin[157], there is an apparent incongruity in singling out for the same impost those who are entitled to concessional deductions for contributions to superannuation funds and those in the public sector whose superannuation arrangements are non‑contributory. But whether, or to what extent, the features of the legislation just mentioned lead to a result that members of constitutionally protected superannuation funds are taxed in a way that provides some measure of economic equivalence with the position of "high income earners"[158] made subject to a surcharge payable by their superannuation funds is not to the point.
What is important is that the laws now in issue, by their effect on how States may choose to remunerate their parliamentarians, place a special disability or burden upon the exercise of powers and the fulfilment of functions of the States. It is for a State to decide how and in what amount its parliamentarians are to be remunerated. Is it to be by salary, with or without funded or unfunded retirement benefits, or other forms of benefit? Are some or all of those benefits to be provided with or without contribution by the beneficiary? Are any or all of the benefits to be defined or are they to be an accumulation of whatever is contributed with interest? Are benefits to be paid by pension or in lump sum? The legislation imposing the surcharge in issue in this matter impairs the capacity of a State to choose between these various forms of remuneration of its parliamentarians in one particular but important respect: the State has no real choice but to adopt a method of providing retirement benefits that will enable parliamentarians to meet the tax liability specially imposed on them.
That a State may have made particular choices about these matters in the past, and the effect of the surcharge on the arrangements chosen, is not to the point. Whether a State has chosen to administer the superannuation entitlements of State parliamentarians through one or more separately established schemes, or in conjunction with other superannuation arrangements for other State "employees", does not alter the effect of the surcharge upon the capacity of the State to fix the terms and conditions under which State parliamentarians serve. The effect of the surcharge on that capacity remains the same, no matter whether, before the enactment of the legislation imposing the surcharge, the State had chosen to provide retirement benefits for parliamentarians through a separate unfunded parliamentary pension scheme providing defined benefits, or had chosen to do so through one or more general public sector schemes providing undefined benefits.
And if, as here, a part of the overall retirement benefits provided for parliamentarians is attributable to contributions which the State makes to a superannuation fund in satisfaction of an obligation imposed on all employers to make not less than a minimum superannuation contribution, there remains the question about the effect of the surcharge on the capacity of the State to fix the terms and conditions upon which the State parliamentarians serve. Even if the law imposing an obligation on employers to make contributions is a law of general application (an issue not examined in this matter) the tax imposed on members of constitutionally protected funds is not. The tax imposes a special burden on the exercise of powers or the fulfilment of functions of the State.
Neither the destination of any superannuation contributions made by the State of South Australia in respect of the appellant's service as a parliamentarian, nor the reason or occasion for making those contributions, affects the assessment of the impact of the relevant provisions upon the capacity of the State to function as a government. That some of the benefits provided for State parliamentarians are defined benefits and others are not is likewise irrelevant. The necessary impairment of the governmental functions of the State was demonstrated in respect of the whole of the amounts at issue in this case.
The appeal should be allowed.

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