Parliamentary Trustee of the Parliamentary Contribution Superannuation Fund v Commissioner of Taxation

Solicitor for the Respondent: Australian Government Solicitor

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 541 of 2012

BETWEEN: PARLIAMENTARY TRUSTEE OF THE PARLIAMENTARY CONTRIBUTION SUPERANNUATION FUND

JUDGES: KENNY, PERRAM & ROBERTSON JJ DATE OF ORDER: 14 NOVEMBER 2013 WHERE MADE: MELBOURNE

1. The appeal be dismissed.
2. The appellant pay the respondent's costs of the appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 541 of 2012

BETWEEN: PARLIAMENTARY TRUSTEE OF THE PARLIAMENTARY CONTRIBUTION SUPERANNUATION FUND

JUDGES: KENNY, PERRAM & ROBERTSON JJ DATE: 14 NOVEMBER 2013 PLACE: MELBOURNE

The Court 1 The appellant is the trustee of the Parliamentary Contributory Superannuation Fund ('the Fund') which provides a defined benefits scheme for the benefit of members of the Victorian Parliament upon their retirement. On a range of dates between 1999 and 2009 the respondent Commissioner of Taxation issued assessments to the appellant pursuant to the Superannuation Contributions Tax (Assessment and Collection) Act 1997 (Cth) ('the Assessment Act') for superannuation contributions surcharge in respect of the parliamentarians who were members of the Fund. On 14 July 2010 the appellant lodged a notice of objection against all of those assessments on the basis that the Assessment Act and the Act imposing the surcharge, the Superannuation Contributions Tax Imposition Act 1997 (Cth) ('the Imposition Act'), were invalid. We will refer to these two Acts together as 'the Surcharge Acts'. The Surcharge Acts were invalid, so it was submitted, because they impaired, in a significant manner, the capacity of the State of Victoria to exercise its powers with respect to the remuneration of the members of its Parliament contrary to the requirements articulated by the High Court in Clarke v Federal Commissioner of Taxation (2009) 240 CLR 272 ('Clarke') and Austin v The Commonwealth (2003) 215 CLR 185 ('Austin'). It may be doubted whether the Commissioner was constitutionally capable of proceeding other than on the basis that the legislation was valid in the absence of a direct judicial determination to the effect that it was not: Re Adams and the Tax Agents' Board (1976) 12 ALR 239. This question need not be pursued, however, because on 28 July 2011 the Commissioner disallowed the objection. Following this the appellant commenced proceedings in this Court pursuant to s 14ZZ(1)(a)(ii) of the Taxation Administration Act 1953 (Cth) to set aside that disallowance. The ground pursued in that proceeding was, in substance, the same. On 16 July 2012 Jessup J dismissed that application holding that the Surcharge Acts were not invalid as claimed: Parliamentary Trustee of the Parliamentary Contributory Superannuation Fund v Federal Commissioner of Taxation (2012) 203 FCR 146; [2012] FCA 740. 2 It is from the learned primary judge's dismissal of the appellant's application that it now appeals to the Full Court on the same ground. We conclude that the Surcharge Acts are not invalid as claimed and affirm the orders made by Jessup J. The appeal should, therefore, be dismissed with costs.

The Fund 3 We begin with a description of the Fund. Section 11 of the Parliamentary Salaries and Superannuation Act 1968 (Vic) ('the PSS Act') continued a fund originally established under the Parliamentary Contributory Superannuation Act 1962 (Vic). Between 1 July 1996 and 30 June 2005 membership of the Fund was compulsory for those parliamentarians who had become entitled to a parliamentary salary after 1968. The Fund was closed on Saturday 25 November 2006 to persons who were elected for the first time on or after the election held on that day (by force of the Parliamentary Superannuation Legislation (Reform) Act 2004 (Vic) s 7). 4 The Fund is a funded contributory defined benefits scheme. Putting the matter shortly, this means that the Fund seeks to hold sufficient assets to meet its projected future liabilities ('funded'); that its members make contributions to the Fund from their salaries ('contributory'); and that the benefits provided by the Fund to members on retirement are fixed in advance ('defined benefits'). The details of these three aspects of the Fund are as follows.

'Funded' 5 The Fund is said to be funded because of the operation of s 13 of the PSS Act. It provides for a triennial actuarial assessment of the sufficiency of the Fund's resources to meet the pension payments due by it over the following 25 years and for the determination of the amounts which should be contributed from the State's Consolidated Fund to ensure that it remains fully funded. It will be necessary later in these reasons to return to the second of these triennial assessments conducted in December 1999 by the Fund's actuary, William Mercer (a firm) ('Mercer'), which dealt with the impact of the surcharge levied under the Assessment Act from 1997 on the on-going position of the Fund.

'Contributory' 6 During the period subject to the Commissioner's assessments the sitting parliamentarians who were members of the Fund contributed an amount equivalent to 11.5% of their total salary which was deducted from their remuneration and paid into the Fund. After 20.5 years of parliamentary service the contribution rate dropped to nil unless the member in question was also the holder of an additional senior position (such as that of a Minister) in which case a contribution rate of 11.5% of the extra salary due as a result of that additional office was deducted.

'Defined Benefits' 7 The Fund's defined benefits comprise two schemes and all the members are in one or the other. These are the Existing Benefits Scheme and the New Benefits Scheme. The former scheme is governed by ss 14A-21 of the PSS Act and the latter, by force of ss 21A-21C of the PSS Act, by the terms of the Parliamentary Contributory Superannuation Act 1948 (Cth). Only the New Benefits Scheme is relevant to this appeal. 8 Broadly speaking, the scheme provides a pension for an eligible member calculated as a percentage of the salary paid to the member at the time of his or her retirement commencing at 50% after eight years of service and reaching a maximum of 75% after eighteen years of service.

Other Features 9 No express provision is made in the PSS Act as to the ownership of the Fund. Section 11(2) provides that the Fund is to be administered by the appellant Parliamentary Trustee, a body corporate comprising senior parliamentary officers such as the Speaker: s 12. Section 11(3) contemplates that the investments of the Fund will be held in its name. Members have a statutory right to be paid their benefits under ss 21A - 21C and these are paid out of the Fund. The beneficial ownership of the Fund is left unspecified. 10 If the beneficial ownership in the Fund were vested in the State of Victoria there might have been an argument that the Fund was the property of a State and hence not subject to taxation at the hands of the Commonwealth by reason of s 114 of the Constitution ('… nor shall the Commonwealth impose any tax on property of any kind belonging to a State'). There may have been, however, difficulties with such an argument. The surcharge tax, although levied on the Fund, may not be a tax on 'property qua property' or 'property as such': cf. South Australia v The Commonwealth (1992) 174 CLR 235 at 247. In any event, we need not determine these issues. In the course of argument we invited the appellant to consider whether it wished to raise an argument based upon s 114 but it expressly declined to seek leave to do so. We make no finding as to the beneficial ownership of the Fund. 11 We turn now to the surcharge tax.

The Surcharge Tax 12 Before describing the tax, it is necessary to understand the purpose which it is designed to address. The arrangements for the taxation of superannuation and pensions under Commonwealth law are complex. The superannuation industry in Australia is largely regulated by the Australian Prudential Regulation Authority ('APRA') under the Superannuation Industry (Supervision) Act 1993 (Cth) ('the SIS Act'). APRA maintains data about the number of funds which it supervises. A small number of funds (including the Fund) are not subject to the SIS Act. Nevertheless, the data is informative. 13 The APRA data divides funds into three categories. The first are accumulation funds which are superannuation entities where the members receive benefits based on defined contributions; the second are defined benefits funds which are superannuation entities where members are entitled to receive defined benefits; and the third are hybrid funds having a combination of both features. 14 In 2004, there were 77 defined benefits funds subject to the SIS Act in the corporate sector. In the same year there were five public sector defined benefits funds governed by the SIS Act. There are a number of public sector funds not subject to the SIS Act so this figure is certainly lower than the actual number of defined benefits funds. At the same time there were 232 hybrid funds with 193 in the corporate sector, 13 in the public sector, 10 in the industry sector and 16 in the retail sector. The public sector funds which were not covered by the SIS Act mostly involved schemes for judges and parliamentarians. 15 It will be apparent that defined benefits funds are less common than accumulation funds. 16 Upon retirement a pension is paid out of an accumulation fund typically in the form of an annuity, that is, by means of a payment comprising an element of income earned on the fund and an element of capital. The benefit may also be taken partially or fully as a lump sum depending on the circumstances and entitlements of the members. If the fund is exhausted because the annuity is pitched at too generous a level or because the member lives longer than expected then the fund will become exhausted and the payments will necessarily stop. 17 The opposite is the case with a defined benefits scheme. In the case of such funds, whether they are contributory or not, the fund usually carries the burden of meeting the payment of the members' defined benefits for as long as the member (or in some cases, the member's spouse) is alive. The choices for an employer operating a defined benefits scheme include seeking to make it fully funded by contributing amounts of money actuarially recommended to it on an on-going basis. Collecting contributions from employees is also an option in seeking to put a fund on a funded basis. Where such contributions are collected they will, depending on their size, reduce the amount the employer will need to contribute. Another approach for an employer is not to seek to put aside capital on an on-going basis at all and, instead, to meet the obligations to pay the defined benefits as and when they fall due. Such an arrangement is said to be unfunded. 18 An accumulation fund and a defined benefits scheme are economically distinct in their operation. The taxation challenge thrown up by them is the desire, so far as possible, to tax them in equivalent fashions. There are at least three obvious taxing points. A tax could be imposed on the money as it went into a fund as a contribution; a tax could be imposed on the income earned on the content of the fund during its life; or it a tax could be imposed on the benefits as they were paid out of the fund on and after retirement. In fact, Commonwealth law adopts all three approaches to varying degrees. 19 This gives rise to a conceptual problem so far as contributions are concerned. It is easy enough to understand how a tax might be levied upon contributions in the case of an accumulation fund. But for obvious reasons a straightforward contributions tax will raise no revenue from a non-contributory scheme. 20 In between the opposite positions represented by the accumulation fund, on the one hand, and the unfunded non-contributory defined benefits fund, on the other, are gradations where this problem occurs to varying extents. A contributory funded defined benefits scheme will generate tax revenue from the contributions made by members but, as with an unfunded defined benefits plan, there will usually be an element of the eventual defined benefits paid out which will not be referable to any contributions upon which contribution tax will have been levied, that is to say, there will be components of the benefits which are solely derived from sources other than contributions. 21 This then, at least at first blush, may present a problem of equality of treatment. Stated at its highest level of generality the problem is this: to the extent that the payments obtained in a defined benefits scheme are not referable to contributions made, this may mean that the tax treatment of accumulation funds and defined benefits schemes is unequal. 22 If one took the view that accumulation funds and non-contributory defined benefits schemes were relevantly alike for taxation purposes then a desire to achieve an equality of outcomes would warrant seeking to levy a contribution tax on non-contributory defined benefits schemes (or on contributory schemes to the extent that benefits paid were not derived from contributions made). To do so it would be necessary to bring to tax hypothetical contributions. The scheme of the Surcharge Acts, discussed below, operates in this manner. 23 There was much discussion in this case about discrimination against the members of the Fund by reason of this tax. For reasons which will become clearer below, and contrary to the submissions of the appellant, we do not need to engage with this issue. We would, however, observe that if the question of discrimination and equality were to be addressed directly it would be necessary to have regard to the tax treatment across the life of a fund and not just at some point such as during the accumulation phase. For example, it is far from obvious that the issue of equality could be addressed without taking into account the fact that the pension payable out of an accumulation fund is tax free whereas a defined benefits pension is assessable income. 24 Although minds might legitimately differ on whether accumulation and defined benefits funds are relevantly alike for the purposes of a contribution tax, the Commonwealth Parliament has decided that they are to be treated as if they were. Section 7(1) of the Assessment Act makes payable a 'superannuation contributions surcharge' calculated on a member's 'surchargeable contributions' in a particular range of years including those in dispute. This provision operates on defined benefits schemes in a way which is distinct from the position of accumulation funds.

Accumulation Funds: Surchargeable Contributions 25 The application of the surcharge to funds which are not defined benefits schemes is governed by s 8(2) of the Assessment Act which provides, subject to certain presently irrelevant limits, that the surchargeable contributions will consist of the contributions made to a fund. There are some matters of detail which should be noted. First the surcharge is not payable unless the member's adjusted taxable income is greater than $70,000 in the 1996-97 financial year or, in later years, that sum indexed by reference to increases in the full-time adult average wage. This is the combined effect of ss 7(2), 9(1), 9(2) and 9(4). Secondly, the surcharge is generally not payable by the member but instead by the fund. Leaving aside for now the situation obtaining in the year where a member retires and benefits become payable (a matter to which we return below at paragraph [58]), the situation is governed by s 10(2) which provides: Liability to pay surcharge (2) If a superannuation provider is the holder of the surchargeable contributions when an assessment of the surcharge on those contributions is made, the provider is liable to pay the surcharge. 26 In this appeal it is not in issue that in respect of the years in dispute the appellant was the relevant 'superannuation provider'. In all cases presently relevant, it is the 'superannuation provider' which is liable to the surcharge: Assessment Act, s 10(2). This is a matter which deserves emphasis for it shows, at the outset, that as a matter of federal law the liability to pay the surcharge is not imposed on members of the Victorian Parliament but instead on the appellant. 27 The Commissioner is in no position to know what contributions have been made in any given financial year. This problem is addressed by s 13 of the Assessment Act which requires superannuation providers (including the appellant) to give particulars to the Commissioner of the amounts contributed to a fund. On the basis of that information the Commissioner may then issue assessments of superannuation contributions surcharge in respect of each member. The surcharge is payable within one month (s 15(3)). By s 5 of the Imposition Act the rate of the surcharge is between 12.5% and 14.5% depending on the circumstances of the individual member.

Defined Benefits Schemes: Surchargeable Contributions 28 In relation to defined benefits schemes the rÈgime is more complex. Section 8(3) of the Assessment Act provides an alternative definition of 'surchargeable contributions' to deal with the fact that the benefits paid out need not necessarily be derived from contributions. It provides: Member of defined benefits superannuation scheme (3) The surchargeable contributions for a financial year of a member of a defined benefits superannuation scheme are 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 financial year. 29 Section 8(4) then provides, in a very detailed way, for a mechanism by which this may be estimated. In effect the provisions seek to capture the potential future liabilities of a fund to the member and to work out what contributions would need to be made to meet those liabilities if the fund were an accumulation fund. There are several unknowns in this process of assessment, the principal ones of which are the age at which the member is expected to die and the notional rate of return on the hypothetical contributions. 30 There are different ways of viewing this tax. One is as a tax on a non-existent payment which is deemed to exist for tax purposes. A perhaps more sophisticated view is that it is a tax on the liabilities of the provider of a defined benefits pension scheme to its members. Taxes on liabilities are not uncommon as the imposition of stamp duty on mortgage securities shows. This view of the surcharge perhaps fits more comfortably with the fact that it is the superannuation provider (here the trustee) which is generally liable to pay the tax.

The Victorian Legislative Response 31 The immediate impact of the Surcharge Acts was to impose upon the appellant, on the issue of the relevant notices of assessment, a liability to pay the surcharge. Neither of the Surcharge Acts affected the entitlement of qualified members to receive the defined benefits for which ss 21A-21C of the PSS Act provided. Put another way, the Surcharge Acts did not have an impact on the entitlement of the Fund's members to receive under the scheme precisely what they were entitled to receive before the Surcharge Acts came into force. From an actuarial perspective what occurred, therefore, involved an increase in the present liabilities of the Fund (by the amount of the surcharge) unaccompanied by any decrease in its future liabilities. Reference has already been made to s 13 of the PSS Act which calls for a triennial actuarial assessment of the amount needed to be paid out of the Consolidated Fund to enable the Fund to meet its liabilities. The only direct impact of the surcharge was to require increased payments out of the Consolidated Fund to cover the appellant's surcharge liability. 32 The actuarial investigation conducted by Mercer as at 30 June 1999 found that the Fund was in a fully funded position as at that date and recommended that three annual payments of $10,600,000 be made into it out of the Consolidated Fund. This investigation was prepared on the basis that the Fund, and not its members, would meet the surcharge which was due. This was estimated to be $1,100,000 in the first year and to increase steadily thereafter. The three payments of $10,600,000 out of the Consolidated Fund included an allowance to cover the appellant's surcharge liability. 33 It will be seen that no member of the Victorian Parliament was affected by the surcharge because none of them had to pay it (there is an exception to this discussed below at [58] but it may be put to one side for now). In substance, the only entity affected was the State of Victoria which found itself with an increased claim on the Consolidated Fund by the appellant. 34 This was not satisfactory to the State. In 2000, the Victorian Parliament enacted the Superannuation Acts (Amendment) Act 2000 (Vic). Presumably, a large number of the members of that Parliament were members of the Fund. This legislation amended the PSS Act by creating a 'surcharge debt account' for each member which was debited each time the Fund paid the surcharge in respect of that member (s 24D). Provision was made for a member to discharge part or all of his or her surcharge debt account by a direct payment to the Fund (s 24D(3)(c)). The most important repayment mechanism, however, permitted the appellant to reduce the recurrent payment of a members' defined benefits by an amount determined by an actuary to be sufficient taking into account various matters such as the value of the benefits payable (s 24D(4)). In effect, this would operate as a partial commutation of any benefit to meet the surcharge debt (s 24D(7)). 35 The effect of these amendments was to shift a liability which had previously fallen on the Consolidated Fund onto the members of the Fund. It should be noted that was the consequence of Victorian, not Commonwealth, law.

The Appellant's Argument 36 The appellant submits that the application of the principle in Melbourne Corporation v The Commonwealth (1947) 74 CLR 31 ('Melbourne Corporation') means that the Surcharge Acts are invalid. It invokes the idea that a law which 'looking to its substance and operation, in a significant manner curtails or interferes with the capacity of the States to function as governments' is invalid citing Bayside City Council v Telstra Corporation Ltd (2004) 216 CLR 595 at 626 [31] and argues that the Surcharge Acts have precisely that operation. 37 In pursuit of this argument it points to several features of the current arrangement which it says are on all fours with the superannuation surcharge legislation struck down by the High Court in Austin and Clarke. The legislation at issue in those cases was not the legislation involved in this case although it is unquestionably closely related. The Surcharge Acts the subject of this appeal apply to all superannuation providers apart from those which are termed 'constitutionally protected': Assessment Act s 7(4). The position of 'constitutionally protected' funds is governed by two pieces of separate surcharge tax legislation entitled the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act 1997 (Cth) and the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Imposition Act 1997 (Cth). It is convenient to refer to these two Acts as the 'Constitutionally Protected Funds Assessment Act' and 'Constitutionally Protected Funds Imposition Act' respectively and, together, as the 'Constitutionally Protected Funds Surcharge Acts'. Those two Acts picked up (through s 38 of the Constitutionally Protected Funds Assessment Act) the definition of a 'constitutionally protected fund' appearing in Regulation 995-1.04 of the Income Tax Assessment Regulations 1997 (Cth) which, so far as is relevant, in turn set out in a schedule to the regulation a list of certain funds established under State Acts. The informing concept underpinning the regulation was the idea that the capital of a fund owned by a State could not be subject to federal taxation because of the prohibition in s 114 of the Constitution (above at [10]) which prevents the Commonwealth from taxing the property of a State. This had resulted in the conclusion in South Australia v The Commonwealth (1992) 174 CLR 235 that the Income Tax Assessment Act 1936 (Cth) could not apply to impose income tax on capital gains made by a superannuation fund vested in South Australia (although it could impose income tax on the income earned on that fund). The enactment of the Constitutionally Protected Funds Surcharge Acts at the same time as the generally applying Surcharge Acts (which applied to all other funds) exhibited a concern that the surcharge could not be imposed on funds which might be owned by a State because of s 114 of the Constitution. The expression 'constitutionally protected', therefore, refers to the protection of a fund owned by a State from a tax imposed on its property by the Commonwealth. 38 The critical difference between the general scheme of the Surcharge Acts and the particular scheme of the Constitutionally Protected Funds Surcharge Acts was that the latter sought to evade any difficulty with s 114 by imposing the surcharge on the individual member whereas the former was imposed on the relevant fund: Constitutionally Protected Funds Assessment Act, s 11. It was this scheme which was subject to challenge in Austin and Clarke. All of the schemes in those cases were 'constitutionally protected' in the sense discussed. Apart from being a tax on members rather than being a tax on a fund, the operation of the legislation was otherwise largely identical. 39 It was this which led the appellant to contend that the Surcharge Acts in this case were essentially the same as the Constitutionally Protected Funds Surcharge Acts in Austin and Clarke and that they pursued the same goal, namely, the imposition of a surcharge on 'surchargeable contributions' deemed to arise under a defined benefits scheme. Further, it pointed to the fact that the Victorian Parliament responded to the Surcharge Acts by passing the Superannuation Acts (Amendment) Act 2000 and submitted that this was the same as that which had occurred in both Austin and Clarke. In those cases, the Parliaments of New South Wales and South Australia both passed laws in response to the Constitutionally Protected Funds Surcharge Acts to allow members of the funds in question partially to commute their pension entitlements to a lump sum in order to meet the member's surcharge obligation.

The Decision in Melbourne Corporation 40 The principle in Melbourne Corporation permits of no precise definition. In many cases, however, it has been thought useful to ask (a) whether the law in question discriminates against the States by placing upon them some special burden or disability or (b) whether it operates to destroy or curtail the continued existence of the States or their capacity to function as governments (see, for example, Queensland Electricity Commission v The Commonwealth ('Queensland Electricity') (1985) 159 CLR 192 at 217). It is equally clear, however, that the alternate (b) is not an exhaustive statement of the principle and that the real question is whether the law is inconsistent with the 'fundamental constitutional conception which underlies the prohibition': Queensland Electricity at 216. Austin (at [143]) appears to identify the 'essential question in all cases' as being whether the law in question 'restricts or burdens one or more of the States in the exercise of their constitutional powers'. See generally Fortescue Metals Group Ltd v The Commonwealth (2013) 300 ALR 26 at [134] - [137]. 41 Instances of non-discriminatory laws which nevertheless impair the constitutional functions of a State are, perhaps, relatively rare. One example is afforded by the High Court's decision in Re Australian Education Union (1995) 184 CLR 188. There the Industrial Relations Act 1988 (Cth), which applied not only to the States but also to a large number of non-governmental employers, was held not to authorise the former Australian Industrial Relations Commission to make awards determining the terms and conditions of employment or engagement of persons such as State Ministers, ministerial assistants and advisers, heads of Department and senior office holders as well as parliamentarians and judges. The Court referred to Queensland Electricity and Melbourne Corporation before concluding that the ability of a State to determine the number and identity of those whom it wished to engage at the higher levels of government was 'critical to a State's capacity to function as a government' (at 233).

Discussion 42 The immediate problem for the appellant's argument is the High Court's decision in The State of Victoria v The Commonwealth (1971) 122 CLR 353 ('The Pay-Roll Tax Case'). The Pay-Roll Tax Act 1941 (Cth) imposed a pay-roll tax on all employers which was defined to include the Crown in right of a State. There was no doubt, therefore, that the tax did not discriminate against the States. Nevertheless, on the basis of Melbourne Corporation Victoria (in the Pay-Roll Tax Case) argued that the tax was invalid in relation to it because 'a tax on the revenues of a State, even though not discriminating against the State, is invalid because it is imposed on the exercise of constitutional functions' (at 356) and this was because the essence of Melbourne Corporation was an 'interference with State functions'. The Court rejected this argument and upheld the tax. For Barwick CJ with whom Owen J agreed, whether or not a Commonwealth law purporting to bind the Crown in right of the State was a valid law depended entirely upon whether or not it was a law on a stated subject matter (at 367). If it singled out a State for particular treatment, it may be concluded that the law was not a law on a stated subject matter but was a law the subject matter of which was the State or a power or function of the State (at 381 and 383). McTiernan J said it was not unconstitutional to tax equally payment of salaries or wages or other remuneration by private employers and State governments as such (at 386). Menzies J reached the same conclusion but also observed (at 392) that the fact that a State had to pay tax to the Commonwealth and therefore had less money at its disposal was a consequence which 'does not spell invalidity'. Windeyer J reached a similar conclusion and observed (at 404) that: … the financial relations between the Commonwealth and the States do, I have no doubt, create serious problems for governments. But they are political not legal problems. Walsh J likewise thought that whilst a general law might infringe the principle a law imposing a pay-roll tax was not such a law (at 411). Gibbs J reached a similar conclusion (at 423-424). 43 The application of that principle to the position of State parliamentarians was expressly considered by the High Court in State Chamber of Commerce & Industry v The Commonwealth (1987) 163 CLR 329 in relation to the question of whether the Commonwealth could impose fringe benefits tax upon a State in respect of fringe benefits afforded to judges and parliamentarians. At 356 the Court said: The alternative contention that the legislation interferes with, impairs or curtails the States in the exercise of their functions of government rests on the view that anything which inhibits a State in establishing the terms and conditions upon which the persons who constitute the organs of government shall be remunerated is an interference with the capacity of the State to govern. The short answer is that the States are subject to the Commonwealth Parliament's exercise of the taxation power; they have no immunity from Commonwealth taxation: the Pay-roll Tax Case. And, as it is accepted that the imposition of income tax on the salaries of State Ministers, members of Parliament and judges is not an infringement of any implied prohibition under the Constitution, it must follow that the imposition of a tax on the States in respect of fringe benefits provided by the States to such persons as part of a general fringe benefits tax on those who pay salaries and wages is not an infringement of the implied prohibition. 44 If one accepts that there is no relevant distinction between a pay-roll tax, a fringe benefits tax and a superannuation surcharge tax insofar as the question of whether the Commonwealth may impose a general tax which also falls also on the States is concerned, then the Pay-Roll Tax Case appears to require the conclusion that the Surcharge Acts are valid. 45 The appellant accepted the significance of the Pay-Roll Tax Case but sought to distinguish it in several ways. First, it was said that in that case the tax fell directly on the State whereas in this case it fell upon the Fund. This is true but in our opinion that does not assist the appellant. On the assumption, which we do not necessarily share, that the Fund is not and is not part of the State of Victoria, there is less of a basis for concluding that the Surcharge Acts infringe the principle associated with Melbourne Corporation. 46 Secondly, the appellant submitted that in the Pay-Roll Tax Case the focus had been on the economic effect of the tax whereas it was now submitted that the focus of the argument was on the fact that the State had been forced to respond to the Surcharge Acts by varying its pension scheme by means of the Superannuation Acts (Amendment) Act 2000; that is to say, the argument being advanced was not that the Commonwealth could not impose a tax on a State but rather that it could not impose a tax which caused the State to take some legislative step in response. This distinction was said to be justified by the facts in Austin and Clarke. In both of those cases, as already noted, the States in question had passed legislation allowing the members involved partially to commute their pension entitlements in order to meet their surcharge obligations. That was said to be analogous to this case. 47 The appellant's argument, however, skates over the question: "what was it that the legislation in those cases was responding to?". A distinct feature in Austin and Clarke was that the surcharge fell upon the member and not the entity operating the fund. In Austin, at least, the High Court concluded that the surcharge provided a strong incentive for the members to retire early in order to reduce the size of their surcharge obligations on retirement. 48 The longer the member served the larger the surcharge liability would be. In the case of Justice Austin himself, Gaudron, Gummow and Hayne JJ observed at [91] that if the judge had served until the statutory age of retirement his surcharge liability would have been in the order of $550,000 which was more than double the gross pension he would have received in the year that liability fell due. This significant effect encouraged, indeed probably compelled, persons subject to the surcharge to retire before serving the 'maximum possible term' (at [169]). 49 The surcharge law in question, therefore, directly interfered with the terms upon which the State retained its judges because it strongly encouraged them to retire at the earliest moment. Further, as the Court also noted at [169] it interfered with the interests of the State in providing adequate remuneration to its judges. The legislative response in those cases was designed to reverse that effect by allowing the members to commute a part of their pension to meet the surcharge obligation on retirement. The High Court observed that the occasion for that legislative response was 'supplied solely by the operation of the federal legislation' (at [173]). 50 That is not what has occurred in this case. The tax levied by the Surcharge Acts never fell on the members. The effect which arose in Austin and Clarke has never occurred in this case. The legislative response of the State embodied in the Superannuation Acts (Amendment) Act 2000 was not the removal from its senior officials of the burden of a tax which constituted an interference with the terms of their remuneration and an incentive to retire but instead the transfer of a tax liability which had previously fallen on the State to the members of the Fund. This marks the facts in this case as being fundamentally different to those in Austin and Clarke. 51 Thirdly, the appellant submitted that the pay-roll tax had been in force for 30 years when it came to be challenged and there was no evidence over that period that the ability of the States to function had been impaired: see Pay-Roll Tax Case at 425 per Gibbs J. In this case, however, evidence of impairment was said by the appellant to be provided by the passage of the Superannuation Acts (Amendment) Act 2000. In substance, this is the same point as the second point and the answer is, again, similar. The Superannuation Acts (Amendment) Act 2000 is not evidence, as it was in Austin and Clarke, that the constitutional functions of Victoria were impaired by the Surcharge Acts. Rather, it is evidence that the State of Victoria wished to shift the burden of a tax it had to pay itself on to the members of the Fund. So viewed, the burden is to be seen as neither more nor less than the exposure of the State to Commonwealth taxation. That the State, in contrast to the superannuation providers of all other defined benefits schemes subject to the Surcharge Acts, had at its disposal the legislative power to permit it to shift its own tax burdens on to others (as it did) is beside the point. 52 Finally, it was submitted that whilst it was true as a matter of form that the Surcharge Acts operated on the appellant rather than the members 'the legislative intention was that those assessments would inevitably, albeit indirectly, find reflection in a corresponding diminution in retirement benefits'. This proposition was said to be supported by three matters. The first was what Jessup J had said at first instance at [30]. In fact, at that paragraph his Honour was recording the appellant's submission to that effect: It was submitted that, in the present case, both the policy underlying the Assessment Act and the explicit contemplation of the legislature was that the surcharge, although payable by the superannuation provider, would inevitably find reflection in a corresponding diminution in the retirement benefits, whether by way of pension or otherwise, to which the members of funds themselves would otherwise be entitled. In enacting the 2000 amendment to the PSS Act, the Victorian Parliament was, in the submission of counsel for the applicant, doing no more than "seeking to fulfil the expectation of the Commonwealth to achieve this policy measure of equity in the payment of taxation by high income earners with regard to taxation." 53 The second was a passage from the reasons of McHugh J in Austin at [229]: … The federal legislation assumes - no doubt with good reason - that the surcharge will be passed on to the high income earner in his or her capacity as a member of the superannuation scheme in the form of reduced benefits. But in so far as the federal legislation deals with these private "high income earners", it does not impose any surcharge on them personally. It does not make them liable to pay a debt of hundreds of thousands of dollars, as these federal laws make State judicial officers liable to pay. 54 This does not suggest that this was the legislature's intent but rather only its assumption. An assumption it may well be, but there is nothing in the Surcharge Acts which requires the State of Victoria to act as it did. We do not accept that, relevantly, responsibility for the Superannuation Acts (Amendment) Act 2000 is to be attributed to the Commonwealth. 55 The third matter relied upon was said to be a passage from the second reading speeches accompanying the passage of the Constitutionally Protected Funds Surcharge Acts. However, the point of those statutes was to make the members of constitutionally protected funds directly liable for the surcharge to avoid a perceived difficulty with s 114. The second reading speech has nothing permissibly to say about the legislative intention underlying the passage of the Surcharge Acts: see Certain Lloyd's Underwriters Subscribing to Contract No IH00AAQS v Cross (2012) 293 ALR 412 at 419 [26]. 56 None of the appellant's reasons for distinguishing the Pay-Roll Tax Case are, therefore, persuasive. 57 The short of the matter then is that the State of Victoria has had imposed upon it a tax of general application: unlike the legislation considered in Austin and in Clarke there is no special legislation singling out high office-holders of the State. The State of Victoria has chosen to pass that tax on to the members of the Fund. It did not have to do that. Unlike Austin where the State was confronted with its judges being exposed to a very substantial incentive to retire to reduce their surcharge exposure and where commutation legislation was necessitated to reduce the effect of that incentive, here the members were not affected by the Surcharge Acts. The State of Victoria chose to respond legislatively not to head off an interference with the terms of the engagement of its members of Parliament but instead to relieve itself of an unwanted pressure on the Consolidated Fund. The Pay-Roll Tax Case shows that this kind of economic consequence is not sufficient to bring the matter within Melbourne Corporation doctrine. There is nothing discriminatory in the Surcharge Acts and there is nothing, in terms of the basic question posed in Austin, which 'restricts or burdens one or more of the States in the exercise of their constitutional powers'. The Surcharge Acts are not invalid, as claimed.

The Imposition of the Surcharge on Individual Members 58 The appellant also pointed to the fact that if a member began to receive a pension in a particular year the effect of ss 8A(4) and 10(4) of the Assessment Act was to constitute as the 'holder' of any surchargeable contributions made the member in that year (including notional surchargeable contributions). Because the surcharge imposed by s 10(1) is imposed upon the 'holder' this has the consequence that in the year of retirement, and in that year alone, the person liable to pay the surcharge is the member. 59 The appellant contended that this brought the matter within the principle in Austin and Clarke where the tax fell on the members too. 60 As Jessup J noted, this is a matter about which the appellant can have no direct concern. The only liability it contests in these proceedings is its liability as the superannuation provider. No member has come forward to challenge any surcharge assessed under ss 8A(4) and 10(4). There is, therefore, no direct question in the appeal before us as to the position of such a member. 61 It may be that this means that any determination of this issue is hypothetical. The appellant argued that it would not be because the surcharge had to be seen in its full context in order to assess its practical operation and that context included not only its effect upon the appellant but also upon the members of Parliament who made up its members. Although it is not altogether free from doubt, it is convenient to proceed on the basis that we may legitimately examine this question. 62 It is convenient because there is no substance to the point. There are four problems. First, the legislation does not have a discriminatory operation in relation to members. Secondly, looked at purely as a matter of theory the parliamentarians affected by ss 8A(4) and 10(4) are those who have just retired so that this aspect of the surcharge can have no direct impact on sitting members. Thirdly, the material before this Court confirmed that whatever the effect is it is mild. At stake is a surcharge tax levied at between 12.5% and 14.5% on notional surchargeable contributions. In a single year, as the amount in question always will be, this is likely to be modest. The Court was taken to the position of a member of the Fund who had retired and then received a notice of assessment for the 2002-2003 financial year for $741.80 on notional surchargeable contributions of $5,779.64. Although this appears to have been cancelled when the Fund voluntarily took over responsibility for the assessment, as we understood it, the point was to show that the member could be exposed to a liability. The size of the liability is, however, such that it is unlikely to give rise to any of the problems with which Austin and Clarke were concerned. We reach the same conclusion in relation to the submissions put as to the consequences of any delay by the Commissioner in acting in relation to any year. 63 Fourthly, even if this was not so and the appellant was correct in submitting that it was not constitutionally possible to levy a member directly, it would only follow that ss 8A(4) and 10(4) were severable leaving the liability of the appellant under s 10(2) otherwise unaffected. This is so either under the Imposition Act's own severance provision (s 8) or under s 15A of the Acts Interpretation Act 1901 (Cth).

Disposition 64 The appeal should be dismissed with costs. I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Kenny, Perram & Robertson.