State Chamber of Commerce & Industry v Commonwealth

1. (1949) 79 C.L.R. 101, at p. 116. 2. (1949) 79 C.L.R. 121, at pp. 148-149. 3. (1951) 83 C.L.R. 1, at p. 188.

The Application Act is a law for the regulation and supervision of the provision of fringe benefits by Commonwealth departments and authorities to Commonwealth employees, and as such is a law which the power to enact is necessarily implied from the establishment and nature of the Commonwealth of Australia. It may also be supported as an exercise of the express incidental power in s. 51(xxxix) in combination with other constitutional provisions.

But in any event the invalidity of the Application Act, if it could be established, would not lead to the invalidity of the Tax Act and the Assessment Act. The operation of the Tax Act and the Assessment Act is not expressed to be conditional on the operation of the Application Act: Deputy Federal Commissioner of Taxation (N.S.W.) v. W. R. Moran Pty. Ltd. [18] ; Logan Downs Pty. Ltd. v. Federal Commissioner of Taxation [19] . Moreover, the Tax Act, the Assessment Act and the Application Act do not form interdependent elements in a general scheme because the rights and liabilities created by the first two statutes are not related to the operation of the Application Act: W. R. Moran Pty. Ltd. [20] ; South Australia v. The Commonwealth ("the First Uniform Tax Case") [21] . The plaintiffs relied on statements in Hansard made with reference to the Application Act with a view to showing that the three Acts form part of a general interdependent scheme. The statements do not go that far and, even if they did, they provide no basis for giving the statutes an interpretation which finds no support at all in their language.

1. (1939) 61 C.L.R. 735, at pp. 762, 772. 2. (1965) 112 C.L.R. 177, at pp. 187, 190. 3. (1942) 65 C.L.R. 373, at pp. 411, 447-448, 456, 462. 4. (1939) 61 C.L.R., at pp. 762, 772.

In the result we would answer the questions asked in the following way. We do so in order to give effect to the submissions put to the Court on behalf of the parties. Taken literally, questions (e) and (f) relate to standing, a matter that had ceased to be live when the hearing began: (a) (i) No. (ii) No. (b) No. (c) Unnecessary to answer. (d) Unnecessary to answer. (e) The Application Act is valid. (f) The Tax Act is valid. (g) Does not arise.

I agree with the reasons for judgment of Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. except in one respect. I would hold that the Fringe Benefits Tax Act 1986 Cth ("the Tax Act") and the Fringe Benefits Tax Assessment Act 1986 Cth ("the Assessment Act") do not validly impose tax on a State in respect of so much of the fringe benefits taxable amount of a State as represents the value of fringe benefits provided in respect of the "employment" of members of the State Parliament, Ministers of the Crown and judges of the State Supreme Court. It may be that on the true construction of the definition of employee in s. 136 of the Assessment Act, the value of fringe benefits provided in respect of the "employment" of State judges or any State Ministers of the Crown who are not members of the State Parliament is not included in the fringe benefits taxable amount of the State. The judgment of Deane J. states the difficulty in the way of including that value. However, I do not find it necessary to decide the point for I would rest my conclusion on a different principle. The relevant principle, implied in the Constitution, is that a law of the Commonwealth cannot unduly impair the capacity of a State to perform its constitutional functions. The implication of a prohibition of this kind in the Constitution has long been recognized, though its formulation has not been uniform and its scope uncertain:Melbourne Corporation v. The Commonwealth [22] ; Bank of N.S.W. v. The Commonwealth [23] ; Victoria v. The Commonwealth ("the Pay-roll Tax Case") [24] ; Victoria v. Australian Building Construction Employees' and Builders Labourers' Federation [25] ; Koowarta v. Bjelke-Petersen [26] ; The Commonwealth v. Tasmania ("the Tasmanian Dam Case") [27] ; Queensland Electricity Commission v. The Commonwealth [28] . The principle, however it is stated, is to be distinguished from a complementary but different principle recently considered in Queensland Electricity Commission v. The Commonwealth, namely, that a law of the Commonwealth cannot discriminate against a State unless the power under which the law is made authorizes the discrimination.

1. (1947) 74 C.L.R. 31, at pp. 66, 75, 80, 99. 2. (1948) 76 C.L.R. 1, at pp. 242-243, 325-326, 338. 3. (1971) 122 C.L.R. 353, at pp. 392, 403, 411, 424. 4. (1982) 152 C.L.R. 25, at p. 93. 5. (1982) 153 C.L.R. 168, at pp. 191-192, 216, 225-226, 240. 6. (1983) 158 C.L.R. 1, at pp. 128, 212-214, 281. 7. (1985) 159 C.L.R. 192, at pp. 206, 217, 222, 231, 247, 260.

In this case, the Acts are general in their application. They do not discriminate against the States (except, perhaps, in reference to members of a State Parliament who are included in the definition of "current employee" though they might not otherwise fall within that category). But if the Acts sweep into the general net of taxation the value of the fringe benefits provided in respect of the "employment" of the State officers mentioned, a tax is imposed on the States in respect of the emoluments provided to their essential functionaries. As Dixon J. pointed out in Melbourne Corporation [29] , most of the legislative powers assigned to the Commonwealth would not support a law which offends the implied prohibition against unduly impairing the capacity of a State to perform its constitutional functions, but the tax power is an exception. His Honour noted:

to attempt to burden the exercise of State functions by means of the power to tax needs no ingenuity, and that, no doubt, is why that power occupies such a conspicuous place in the long history both in the United States and here of the question how far federal power may be used to interfere with the States in the exercise of their powers. Attempts to answer the question how far federal taxing power may validly burden the exercise of State functions have not yielded in this country a general criterion which distinguishes between those taxes to which a State is subject and those from which it is immune. In America, the problem was considered inNew York v. United States [30] , a case to which reference has been made in this Court. It was a case where a federal tax was imposed on a State in respect of activities in which the State had engaged in exercise of its powers. A suggested criterion for determining whether the State was immune from the tax was the governmental character of the power which the State was exercising, but that criterion proved too elusive. In the leading opinion, Frankfurter J. said [31] : Any implied limitation upon the supremacy of the federal power to levy a tax like that now before us, in the absence of discrimination against State activities, brings fiscal and political factors into play. The problem cannot escape issues that do not lend themselves to judgment by criteria and methods of reasoning that are within the professional training and special competence of judges. The principle expressed by Stone C.J., with the concurrence of Reed, Murphy and Burton JJ., was that a tax, though non-discriminatory, should not "interfere unduly with the State's performance of its sovereign functions of government" [32] . As Latham C.J. observed in Melbourne Corporation [33] : "this statement of principle renders it necessary to distinguish between the "sovereign functions of Government" performed by a State and other functions assumed and performed by it." 1. (1947) 74 C.L.R., at p. 80. 2. (1946) 326 U.S. 572. 3. (1946) 326 U.S., at p. 581. 4. (1946) 326 U.S., at pp. 587, 588. 5. (1947) 74 C.L.R., at p. 60.

A distinction between essential and inessential functions of government for the purpose of determining the tax immunity of a State has not been recognized as valid in this Court in modern times (see per Gibbs J. in the Pay-roll Tax Case [34] ) and, in the United States, a similar distinction - between "governmental" and "proprietary" functions - was abandoned as untenable and unworkable: see the discussion in Garcia v. San Antonio Metro [35] . The criterion of "undue" interference has also proved to be insufficiently precise for application under our Constitution, for we have not adopted the doctrine which Stone C.J. espoused in New York v. United States [36] that the tax immunity "be so construed as to allow to each government reasonable scope for its taxing power". In the Pay-roll Tax Case [37] Walsh J., while acknowledging that there was some implied limitation on the power of the Commonwealth Parliament to affect the States by a law imposing taxation, said:

I have said above that the limitations have been described in various ways. Some of these descriptions have been in terms which, in my opinion, do not provide satisfactory tests for determining whether or not a law is valid. For example, a statement that a law is invalid if it subjects the governmental functions of a State to "undue interference" provides no satisfactory means for determining what is "undue". Again there are difficulties in a test which makes the decision of a legal question depend upon a distinction made by the Court between functions of governments which are "normal" or are "essential" and those which are not. Barwick C.J. rejected the approach of implied limitations on the federal taxing power. Noting that "States and their functions are not matters committed to the Parliament", his Honour's approach was to determine the validity of an impugned law by ascertaining its true character and subject-matter. The supposed implied limitation was, in his Honour's view, too imprecise [38] : the concept of an "undue" interference with State functions attracting invalidity provides but a question begging formula. And to attempt to use a distinction between governmental and other functions of a State in the modern world as a legal criterion of validity is, in my opinion, without promise. New York v. United States, to my mind, illustrates the difficulties without affording any sure guide to their resolution. Owen J. agreed with the Chief Justice and McTiernan J. adopted a somewhat similar approach. 1. (1971) 122 C.L.R., at p. 424. 2. (1985) 469 U.S. 528, at pp. 542-543. 3. (1946) 326 U.S., at p. 589. 4. (1971) 122 C.L.R., at pp. 410-411. 5. (1971) 122 C.L.R., at pp. 382-383.

It is not surprising that the Pay-roll Tax Case was decided without the enunciation of a general criterion by reference to which the immunity of a State from a general federal tax might be determined. Menzies J. [39] declined to offer "an exhaustive formulation". Windeyer J. [40] , accepting that implied limitations might restrict the Parliament's exercise of its powers, upheld the tax because it was not "directed to the States to prevent their carrying out their functions as parts of the Commonwealth". Walsh J. [41] accepted that a non-discriminatory taxing law affecting the States might be beyond power but did not regard the laws there under challenge as impermissibly affecting the capacity of the States to carry out their functions. Gibbs J. [42] said that a "general law of the Commonwealth which would prevent a State from continuing to exist and function as such would in my opinion be invalid". His Honour did not regard the laws there under challenge as infringing any implied prohibition, however the prohibition might be framed. I shall presently return to his Honour's reasons for holding the pay-roll tax to have been validly imposed.

1. (1971) 122 C.L.R., at p. 392. 2. (1971) 122 C.L.R., at p. 403. 3. (1971) 122 C.L.R., at p. 413. 4. (1971) 122 C.L.R., at p. 424.

When the Parliament imposes a tax on any person who engages in a particular activity and a State in exercise of its powers is among those who engage in that activity, the State is not exempt from the tax merely because the exercise of its powers is burdened by the tax. No satisfactory criterion has been found and, in my opinion, none can be found to isolate the exercise of State powers from the burden of a federal non-discriminatory tax. The Constitution confers on the Parliament power to select whatever subject of taxation it chooses and a State procures no immunity by exercising its powers to engage in an activity on which a general federal tax is imposed. The exercise by a State of its powers is not protected if the tax does not single out the State and impose a discriminatory burden upon it. But there is a distinction, material in the present case, between the exercise by a State of its powers and the steps which a State takes to ensure or facilitate the performance by the essential organs of government of their respective functions in exercising or directing the exercise of the powers of the State. The distinction was pointed to by Dixon J. in Melbourne Corporation [43] :

The foundation of the Constitution is the conception of a central government and a number of State governments separately organized. The Constitution predicates their continued existence as independent entities. Among them it distributes powers of governing the country. The framers of the Constitution do not appear to have considered that power itself forms part of the conception of a government. They appear rather to have conceived the States as bodies politic whose existence and nature are independent of the powers allocated to them. Accordingly, his Honour held that the foundation of State immunity is not the preservation of the powers of the States but the preservation of their governments [44] : Accordingly the considerations upon which the States' title to protection from Commonwealth control depends arise not from the character of the powers retained by the States but from their position as separate governments in the system exercising independent functions. 1. (1947) 74 C.L.R., at p. 82. 2. (1947) 74 C.L.R., at p. 83.

The essential organs of government - the Governor, the Parliament, the Ministry and the Supreme Court - are the organs on which the "existence and nature" of the body politic depends. (I mention only the Supreme Court, for that is the court of general jurisdiction in which, subject to the jurisdiction of this Court, the laws of the State are finally interpreted and the constitutional and administrative law of the State is applied.) The existence and nature of the body politic depends on the attendance to their duties of the officers of the essential organs of government and their capacity to exercise their functions. The emoluments which a State provides to the officers of the essential organs of government ensure or facilitate the performance by those organs of their respective functions, and a tax on a State in respect of the value of those emoluments is not merely a tax on an activity in which the State engages in exercise of its powers; it is a tax on what is done to secure the continued existence and functioning of the government of the State.

It may be objected that, if a State must have the services of the officers of the essential organs of government, equally it must have a public service and yet, in the Pay-roll Tax Case, a tax on the salary or wages paid to the public service was upheld. In that case, an argument founded on the necessity for employing servants of the Crown was rejected. Menzies J. said [45] :

It was argued that, because the State needs Crown servants to carry out its functions of government, the payment of tax upon wages paid to such servants interfered with the performance of those functions. This I do not accept. At this point, I think, the argument for the State moved from the operation of the laws to their economic consequence, an entirely different matter. The most that can be said is that, because the State pays the tax to the Commonwealth, it has so much less money with which to carry out the functions of government. Such a consequence does not spell invalidity. And Gibbs J. said [46] : Although in some cases it may be possible to show that the nature of a tax on a particular activity, such as the employment of servants, renders the continuance of that activity practically impossible, it has not been shown that the tax in the present case prevents the States from employing civil servants or operates as a substantial impediment to their employment. The tax has now been imposed upon and paid by the States for nearly thirty years, and it has not been shown to have prevented the States from discharging their functions or to have impeded them in so doing. They may have less money available for public purposes because they have to pay the tax, but that could be said in every case in which a tax is imposed on the States, and in itself it cannot amount to an impediment against State activity sufficient to invalidate the tax. I would respectfully agree that a diminution in the States' resources by paying a non-discriminatory federal tax is insufficient in itself to establish the invalidity of the impost upon them. 1. (1971) 122 C.L.R., at p. 392. 2. (1971) 122 C.L.R., at p. 425.

However, the employment of a public service does not have the same significance for the existence and functioning of the government of a State as the securing of attendance to their duties by the officers of the essential organs of that government. When a tax falls on the employment of a public service, a test of practical impossibility of continuing the employment may be the appropriate criterion of invalidity. But a test of practical impossibility is far too onerous to be applied to determine the validity of a tax which falls on the emoluments provided in respect of the "employment" of the officers of the essential organs of the government of a State. A tax of that kind is in substance a tax on a State's essential organs of government and is, in my opinion, an undue impairment of the State's capacity to perform its functions. If one were to adopt the approach favoured by Barwick C.J., it can be said that the essential organs of government are not a subject of taxation within the taxing power. Though State immunity from a non-discriminatory federal tax cannot be invoked in protection merely of the freedom of the State to exercise a particular power, in my opinion it can be invoked in protection of the State's freedom to benefit the officers of the essential organs of government and thereby to ensure or facilitate the performance by those organs of their respective functions. I would therefore hold that the Tax Act and the Assessment Act cannot validly impose a tax in respect of "employment" of those officers.

The Tax Act (ss. 4 and 5) imposes tax on the fringe benefits taxable amount of the respective States which includes the value of all fringe benefits provided "in respect of the employment of the employee": the Assessment Act, s. 136(1). It seems that the value of fringe benefits provided to a State Governor is not included in the amount. It is by no means clear that the definitions of employee, current employee, fringe benefit and fringe benefits taxable amount in s. 136(1) of the Assessment Act, coupled with the definition of employee in Div. 2 of Pt VI of the Income Tax Assessment Act 1936 Cth (to which the definition of "current employee" refers) result in the value of fringe benefits provided to State Ministers of the Crown and judges of the Supreme Courts of the States being taken into account in determining the tax liability of a State under the Tax Act. That question is not resolved by pointing to the phrase "the holding of any office" in the definition of employment in s. 136(1) of the Assessment Act, for the critical part of the definition of "fringe benefit" requires that the benefit be provided in respect of the "employment" not of a "person" but of "the employee", and the term "employee", which has its own exhaustive catena of definitions, is not expanded by the definition of "employment". However, the term "current employee" is defined to include a member of a State Parliament and that results in the imposition of a tax on the State which is to be assessed by taking into account at least the value of fringe benefits provided to members of State Parliaments. To that extent at least and, if the Acts would bring to tax the value of fringe benefits provided in respect of the "employment" of State Ministers and judges of the State Supreme Courts, to that extent also, I would hold the Acts to be invalid.

This conclusion does not spell the invalidity of the Tax Act and the Assessment Act. Their general operation is saved by s. 15A of the Acts Interpretation Act 1901 Cth for reasons explained in R. v. Poole; Ex parte Henry [No. 2] [47] ; Pidoto v. Victoria [48] and Strickland v. Rocla Concrete Pipes Ltd. [49] . The tax is imposed in respect of the "fringe benefits taxable amount" of an employer and that term is defined to mean the sum of the taxable values of all the relevant fringe benefits. The Acts have a clear distributive operation upon the value of each fringe benefit, and there is no difficulty in giving the Acts an operation which leaves out of account the value of some fringe benefits in ascertaining the fringe benefits taxable amount of a State.

1. (1939) 61 C.L.R. 634, at pp. 652-653. 2. (1943) 68 C.L.R. 87, at pp. 109-110. 3. (1971) 124 C.L.R. 468, at pp. 492-494, 516-520.

I would answer the questions in the special case other than question (f) as Mason C.J., Wilson, Dawson, Toohey and Gaudron JJ. propose. I would answer question (f) as follows: The Tax Act is valid except in so far as it imposes tax in respect of the taxable value of fringe benefits provided in respect of the "employment" of Ministers of the Crown in right of a State, judges of the Supreme Courts of the States and members of State Parliaments.

Subject to what is said hereunder in relation to two of the issues involved in this case, I am in general agreement with the joint judgment of the Chief Justice, Wilson, Dawson, Toohey and Gaudron JJ. The issues upon which I make my own comments are whether the Commonwealth Fringe Benefits Tax legislation is wholly or partly invalid for the reason that it discriminates against the States or for the reason that it infringes s. 55 of the Constitution.

Is the Legislation Invalid for the Reason that it Discriminates against the States?

The joint judgment traces the chain of definitions through which the definition of employee in s. 221A(1) of the Income Tax Assessment Act 1936 Cth becomes the basis of the definition of employee in s. 136 of the Fringe Benefits Tax Assessment Act 1986 Cth ("the Assessment Act"). The central element of the definition of employee in s. 221A(1) is "a person who receives, or is entitled to receive, salary or wages". If the relevant chain of definitions ended there, there would be force in the view that that central element was not confined by traditional notions of what constitutes a relationship of employment but included any relationship constituted by the payment of wages or salary. The relevant chain of definitions does not, however, end there. Section 221A(1) also provides that, for the purposes of the Division (Div. 2 of Pt VI) in which the section appears:

"salary or wages" means salary, wages, commission, bonuses or allowances paid (whether at piece-work rates or otherwise) to an employee as such, and, without limiting the generality of the foregoing, includes There follows a number of specific inclusions in the meaning of the phrase "salary or wages" for the purposes of Div. 2. Reference is made to them hereunder. It would seem clear enough that the phrase "salary or wages" should be given its defined meaning in the definition of "employee". Otherwise, any person who was an employee in the ordinary sense but whose remuneration was paid otherwise than by payments which could properly be described as a matter of ordinary language as "salary" or "wages" (e.g. by "commission, bonuses or allowances") would not be an employee for the purposes of Div. 2.

The above general words of the definition of salary or wages in s. 221A(1) of the Income Tax Assessment Act are, at the one time, both expansive and restrictive of the ordinary meaning of that phrase. They are expansive in that they embrace, in addition to "salary" and "wages", "commission, bonuses or allowances". They are restrictive in that they are limited to payments made "to an employee as such". The effect of that limitation seems to me to be to preclude the conclusion that the reference, in the central element of the definition of employee in s. 221A(1), to the receipt of "salary or wages" is unconfined by traditional notions of the relationship of employer and employee. The reason why that is so is that the reference to payments made "to an employee as such" can only sensibly be read as a reference to an employee in the traditional sense since it would introduce an interminable and nonsensical circularity of definitions if the word "employee" in the definition of "salary or wages" was given the defined meaning of which "salary or wages" form the essential component.

Moreover, consideration of the context of the definitions of employee and salary or wages in s. 221A(1) of the Income Tax Assessment Act confirms that the reference to payment "to an employee as such" in the definition of "salary or wages" must be construed as payment to a person who is an employee in the ordinary or traditional meaning of that word. The definitions in s. 221A(1) are framed for the purposes of provisions concerned with the deduction by "an employer" of P.A.Y.E. instalments at the prescribed rate from the salary or wages of "an employee". If the word "employee" in the general words of the definition of "salary or wages" is not construed in that ordinary sense but is construed as meaning anyone to whom "salary, wages, commission, bonuses or allowances" is paid or payable, the consequence would be that, for the purposes of those P.A.Y.E. provisions, any person who received, or was entitled to receive, a commission, bonus or allowance from another person was to be treated as the employee of that other person. For example, every person who sold a house, a car, a share or a postage stamp through an agent to whom he was liable to pay a commission or a bonus would become, for the purposes of the provisions of the Income Tax Assessment Act dealing with the obligation to deduct P.A.Y.E. instalments, an employer of that agent. And any payment of commission to that agent would, for those purposes, be made to him as "an employee as such". Such a construction of the definitions in Div. 2 would make the P.A.Y.E. system of deductions from the income of "an employee" simply unworkable and would be in the teeth of the long-established understanding of lawyers, accountants and taxation officials that the "generality of the opening words of the definition" of "salary or wages" is confined by the words "paid to an employee as such" with the result that the liability of "an employer" to make a deduction under Div. 2 "therefore depends in most cases upon the existence of an employer-employee, that is, a master-servant relationship": see Mannix & Harris, Australian Income Tax Law and Practice, 11th ed. vol. 5, p. 4196.1, par. 221a/1; C.C.H. Australian Federal Tax Reporter, vol. 6, p. 50,315, par. 83-771. Such a construction also seems to me to be inconsistent with the long-settled effect of the corresponding definitions of "wages" in pay-roll tax legislation: see, e.g.,Mutual Acceptance Co. Ltd. v. Federal Commissioner of Taxation [50] ; Queensland Stations Pty. Ltd. v. Federal Commissioner of Taxation [51] ; Federal Commissioner of Taxation v. Barrett [52] ; Sentry Life Assurance Ltd. v. Commissioner of Pay-roll Tax; General Accident Fire & Life Assurance Corporation Ltd. v. Commissioner of Pay-roll Tax [53] ; and Commissioner of Pay-roll Tax v. Mary Kay Cosmetics Pty. Ltd. [54] .

1. (1944) 69 C.L.R. 389, at pp. 396, 398, 403. 2. (1945) 70 C.L.R. 539, at pp. 546, 554. 3. (1973) 129 C.L.R. 395, at p. 403. 4. [1979] 2 N.S.W.L.R. 685. 5. [1982] V.R. 871.

Analysis of the list of specific inclusions which follows the general words of the definition of salary or wages in s. 221A(1) discloses that none of them militates against the view that the words "paid to an employee as such" have the restrictive effect which has been explained above. The most important of those specific inclusions is the inclusion (cl. (a)) of certain payments made "under a contract that is wholly or principally for the labour" of the payee. The purpose of that provision has been generally accepted as being to extend the P.A.Y.E. system to contractors whose position can be equated to that of an "employee" in the ordinary sense: see, e.g., Taxation Ruling IT2129. All of those specific inclusions deal with particular classes of payments which are not here in point.

The central element of the definition of employee in s. 221A(1) of the Income Tax Assessment Act is also expanded by a number of specific clauses. Only one of them (cl. (b)) is relevant for present purposes. Reference will subsequently be made to it. Otherwise, the Income Tax Assessment Act contains no relevant interpretation provision which operates to extend the central element of the definition of "employee" for the purposes of Div. 2 of Pt VI beyond the traditional employer-employee relationship which is imported by the words "paid to an employee as such" in the definition of "salary or wages". On the other hand, s. 136 of the Assessment Act defines "employment" as including "the holding of any office or appointment, the performance of any functions or duties, the engaging in of any work, or the doing of any acts or things that results, will result or has resulted in the person being treated as an employee". There was some discussion in the course of argument about whether the concluding words of that definition (i.e. "that results, will result or has resulted in the person being treated as an employee") qualify all of the preceding phrases or only qualify the phrase "the doing of any acts or things". It seems to me to be clear that, as a matter of construction, they qualify all of the preceding phrases. What is more in point for present purposes, however, is that the definition of "employment" in the Assessment Act plainly does not operate to extend the central element of the definition of employee in s. 221a(1) of the Income Tax Assessment Act which, through the definitions of current employee, future employee and former employee in s. 136 of the Assessment Act, is indirectly imported as the central element of the definition of "employee" for the purposes of the latter Act.

It follows from what has been said above that, disregarding the effect of special inclusions, the central element of the definition of "employee" for the purposes of the Assessment Act carries over the restriction imported by the definition of salary or wages in s. 221A(1) of the Income Tax Assessment Act, namely, that an employee is a person to whom payments of the relevant kind ("salary, wages, commission, bonuses or allowances") are paid in the capacity of an employee in the ordinary master and servant sense. A member of a State Parliament and a judge of a State court do not receive payment in that capacity since they do not fall within any traditional notion of the employer-employee relationship. There are, no doubt, other State holders of office of whom a like comment could be made. If State members of Parliament and judges and any other such State holders of office are "employees" for the purposes of the Act, it must be because they are caught by special provisions which operate to include them in the definition of "employee" for the purposes of Div. 2 of Pt VI of the Income Tax Assessment Act for which operate directly to include them within the definition of employee in s. 136 of the Assessment Act. The only provisions which could arguably operate to have either of those effects are to be found in the words of cl. (b) of the definition of employee in s. 221A(1) of the Income Tax Assessment Act and in the additional words of the definition of employee in s. 136 of the Assessment Act. Both cl. (b) and those additional words specifically refer to persons having a relationship with either a State or a State authority.

Clause (b) in the definition of employee in s. 221A(1) is one of three clauses which follow the central element of the definition. It provides that:

where the Governor-General has entered into an arrangement with the Governor in Council of a State in accordance with section 221B, subject to the terms of the arrangement, ["employee"] includes a member of the Parliament of that State and a person employed by that State or by an authority of that State. There is no applicable definition to extend the scope of the word "employed" in that clause. Putting to one side the case of members of a State Parliament, the effect of the clause is that the provisions of Div. 2 of Pt VI are applicable in respect of employees (in the traditional sense) of a State or of an authority of a State to the extent that they are covered by an arrangement between the Governor-General and the Governor in Council of a State "providing for the carrying out by the State of the obligations imposed by [the] Division on employers": see Income Tax Assessment Act, s. 221B. Plainly, the inclusion of the employees of, or of an authority of, a State in the definition of "employee" for the purposes of Div. 2 could not be seen as relevantly discriminating against the States or their employees. To the contrary, the effect of cl. (b) is to exempt the States (and their employees) from the obligation to make (and the burden of) P.A.Y.E. deductions unless the Governor in Council of a State voluntarily agrees to an arrangement for the making of such deductions. It is unnecessary, for present purposes, to consider whether the special inclusion of a member of a State Parliament as an employee constitutes discrimination against the relevant State notwithstanding that such inclusion for the purposes of the Division (i.e. P.A.Y.E. deductions) is made subject to the agreement of the Governor in Council of the relevant State. It may be assumed, for present purposes, that it does not.

It follows from what has been said above that the reference in the definition of current employee in s. 136 of the Assessment Act to "an employee within the meaning of Division 2 of Part VI of the Income Tax Assessment Act 1936 " does not comprehend State office holders, other than members of Parliament, who are not employees in the ordinary sense. It comprehends State members of Parliament only if the Governor in Council has agreed to arrangements for the deduction of P.A.Y.E. instalments from their remuneration. It is in that context that the effect of the additional words of the definition of current employee in s. 136 must be assessed. Those additional words provide that, "whether or not the Governor-General has entered into an arrangement with the Governor in Council of the State concerned", "current employee" includes "a member of the Parliament of a State and a person employed by a State or by an authority of a State".

If the word "employed" in the reference, in those additional words of the definition of current employee in s. 136, to "a person employed by a State or by an authority of a State" is given its ordinary meaning, the inclusion of such a person as an "employee" is not discriminatory, in any relevant sense, against the States. The reason for that is that, if the word "employed" is so construed, the effect of the inclusion of such persons is merely to impose upon the States a liability to pay fringe benefits tax in respect of payments made of a kind which corresponds with that imposed upon other employers: see, generally, the Pay-roll Tax Case [55] . The question arises whether the definition of employment in s. 136 applies to give a wider meaning to the word "employed" with the consequence that the liability which the additional words effectively impose upon the States is of a kind which is not imposed upon other "employers". I turn to consider that question.

It was submitted by Mr. Davies Q.C., who appeared for the State of Queensland, that the "purpose" and "result" of the definition of employment in s. 136 of the Assessment Act are not to widen the content of the definition of "employee" in that Act. In my view, that submission should be accepted at least in so far as the "result" of the definition is concerned. There is no use of the word "employment" in any of the four definitions (i.e. those of "employee", "future employee", "former employee" and "current employee") which, in combination, determine the meaning of "employee" for the purposes of that Act. As has been said, the definition of "employment" in the Assessment Act plainly does not operate to extend the scope of the definition of employee in s. 221A(1) of the Income Tax Assessment Act. The only arguable way in which the definition of "employment" could be used to widen the class of persons who are "employees" for the purposes of the Assessment Act would be by the application of the definition to extend the ordinary meaning of the word "employed" in the one place where that word is used (in any tense) in any of those four definitions, namely, in the reference to "a person employed by a State or by an authority of a State" in the additional words of the definition of "current employee". There are, however, two reasons why the definition of "employment" should not be applied in that way. The first is that the Assessment Act contains no provision to the effect that the verb "employ" is to bear a corresponding meaning to the expanded meaning of the noun "employment". The second, and more substantial, reason is that, if the word "employed" in the additional words of the definition of "current employee" were to be given such an extended meaning, the effect would be, when the Assessment Act is read with the Fringe Benefits Tax Act 1986 Cth ("the Tax Act"), to impose upon the States a liability of a different kind to that imposed upon other employers in that the States would be required to pay fringe benefits tax in respect of relevant payments to persons who do not stand in a relationship of a kind which attracts liability to such tax in the case of other employers. In other words, the effect of giving such an extended meaning to the word "employed" in the reference to persons "employed by a State or by an authority of a State" would be to single out the States to make them "the objects of special burdens or disabilities": cf. Melbourne Corporation v. The Commonwealth [56] . That being so, the effect of the application of the definition of "employment" to give an extended meaning to the word "employed" in that special reference to State employees would be to discriminate against the States in a manner that is inconsistent with a fundamental implication of the Commonwealth Constitution: see, generally, Queensland Electricity Commission v. The Commonwealth [57] . In these circumstances, the word "employed" in the definition of "current employee" should, as a matter of construction, be given its ordinary meaning. Even if that were not so and the definition of "employment" would otherwise be applicable to give it an extended meaning, that definition of employment would need to be read down to validity by precluding its application in that regard. On either approach, the result is that, putting to one side a member of a State Parliament, an office holder of a State, who is not "employed" by the State in the ordinary sense of that word, is not an "employee" or "current employee" for the purposes of the Assessment Act. Such an office holder is not an "employee" for the purposes of Div. 2 of Pt VI of the Income Tax Assessment Act: he or she does not come within the general words of the definition of employee in s. 221A(1) since he or she does not receive payments "paid to an employee as such"; he or she does not come within the special provisions of cl. (b) of that definition since he or she is not "employed". Nor, not being "employed", is such an office holder within the additional words in the definition of current employee in s. 136 of the Assessment Act.

1. (1947) 74 C.L.R. 31, at p. 81. 2. (1985) 159 C.L.R. 192, at pp. 245-249.

There remains for consideration, in relation to this aspect of the case, the validity of the specific inclusion, in the definition of current employee in s. 136 of the Assessment Act, of "a member of the Parliament of a State". The effect of those additional words (when the Assessment Act is read with the Tax Act) is that, regardless of whether or not the State consents, relevant payments by a State to its members of Parliament will attract liability to fringe benefits tax notwithstanding the fact that the relationship between the State and its members of Parliament is quite different from the relationship of employer and employee which ordinarily must exist before liability to pay the tax is incurred. In that context, the specific reference to a member of a State Parliament constitutes discrimination for the reason that its effect is to single out the States for a special burden of a kind which is not imposed upon other employers, namely, liability to pay fringe benefits tax in respect of relevant payments to persons who are not within a relationship of a kind which would attract liability to pay fringe benefits tax in the case of other "employers". Indeed, in those circumstances, the vice of the specific inclusion of "a member of the Parliament of a State" goes beyond the express limitation to members of " a State " Parliament. As I commented in Queensland Electricity Commission v. The Commonwealth [1] :

To be caught by the reservation, the law must, as has been indicated above, discriminate in the sense that its operation involves a singling out of the States to make them "the objects of special burdens or disabilities": cf. Melbourne Corporation. That is not to say that a law cannot discriminate against the States in the relevant sense if it is cast in general terms and is of apparently general application. Quite apart from the case where such a general law applies to the States in a way which would prevent them from performing their essential functions or which would impede them in so doing (cf. per Rich J., Melbourne Corporation; per Walsh J., the Pay-roll Tax Case), a general law may operate in the context of particular circumstances to single out the States for discriminatory treatment. The character of a law as a law of general application is ordinarily a factor, and sometimes a conclusive factor, militating against the conclusion that it discriminates against the States or a State in the relevant sense. The question whether a law does so discriminate against the States or a particular State is however, for the purposes of the law of the Constitution, a question of substance which is not susceptible of being resolved by the mere inquiry whether, as a matter of form, the law is a general or a special one. The point may be conveniently illustrated by reference to the Pay-roll Tax Case. The decision in that case was that Commonwealth legislation imposing a general pay-roll tax to be paid by employers on wages paid to their employees validly applied to the States and their agencies. The fact that the States' pay-rolls were particularly large no doubt meant that the effect of the legislation was particularly onerous in its application to them in the sense that they paid more tax than all or most other employers. That did not, however, mean that the legislation was discriminatory against the States in the sense that it singled them out to be made objects of special burdens or disabilities. On the other hand, if the legislation had been confined to the imposition upon all employers other than the Crown in right of the Commonwealth of liability to pay-roll tax upon wages paid to "public servants", it might still properly have been seen, as a matter of form, as a law of general application. Such confined legislation would, nonetheless, have discriminated against the States in the relevant sense for the reason that, as a matter of substance, its operation would have been, in circumstances where the States and State instrumentalities were the only non-Commonwealth employers of "public servants", to single out the States for the imposition of a special burden. 1. (1985) 189 C.L.R., at pp. 248-249.

It follows, in the context of the provisions of the Tax Act, that the extension of the general provisions of the Act to apply to relevant payments made by a State to members of its Parliament which was purportedly effected by the inclusion in the definition of current employee in s. 136 of the Assessment Act of the words "a member of the Parliament of a State" was beyond the legislative authority of the Parliament of the Commonwealth. Those words are severable from the rest of the definition. The effect of their invalidity is not to strike down the Tax Act or other provisions of the Assessment Act. It is that the special reference to a member of a State Parliament must be ignored. The outcome is that the remaining additional words of the definition of current employee in s. 136 of the Assessment Act do no more than render a State or an authority of a State liable to fringe benefits tax in respect of relevant payments made to an employee in circumstances which would suffice to attract liability to that tax in the case of other employers. Such an outcome accords, as a matter of substance, with what was held to be valid by the Court in the Pay-roll Tax Case. It may be arguable that the specific inclusion of members of a State Parliament in cl. (b) of the definition of employee in s. 221A(1) of the Income Tax Assessment Act might, where arrangements under s. 221B of that Act are in force, validly operate to include a member of a State Parliament as an "employee" for the purposes of the Assessment Act. There seem to me to be formidable obstacles indeed in the path of acceptance of any such argument. That question was not, however, subjected to real examination in the course of argument of the case and I think it preferable that I refrain from forming any concluded view in relation to it.

Does the Legislation Infringe s. 55 of the Constitution?

The requirement of the second paragraph of s. 55, that laws imposing taxation shall deal with one subject of taxation only, is mandatory. A taxing law which deals with more than one subject of taxation will ordinarily be completely invalid since it is the law as a whole which will infringe the constitutional injunction. The relevant law imposing taxation in the present case is the Tax Act. That Act must, however, be read with the Assessment Act which, in accordance with the now traditional incantation, is "incorporated" in it: s. 3. The question is whether, when so read, it deals with more than one "subject of taxation". In my view, it does not.

As Dixon J. pointed out in Resch v. Federal Commissioner of Taxation [2] , the second paragraph of s. 55 "must be taken as contemplating broad distinctions between possible subjects of taxation based on common understanding and general conceptions, rather than on any analytical or logical classification". In that regard, it is essential to bear in mind that the "broad distinctions" to which his Honour referred are between possible "subjects" as distinct from "objects" of taxation. A taxing Act can properly be characterized as dealing with but one subject of taxation notwithstanding that its definition of that subject is selectively confined and that the burden of the tax falls discriminately on a variety of distinct objects or taxpayers. Thus, e.g., a taxing Act will properly be characterized as an Act dealing only with one subject of taxation if it deals only with a tax on "earnings" notwithstanding that it confines "earnings" to money or money's-worth arising from personal exertion and that it contains a multitude of separate provisions discriminating between classes of taxpayers who are and who are not required to pay the tax upon their individual earnings.

The subject of taxation with which the Tax Act, when read with the Assessment Act, ostensibly deals is "fringe benefits". That term lacks any precise technical meaning. As a matter of ordinary language in this country, it refers somewhat vaguely to rewards for personal exertion which are received in a form which does not attract income tax. Obviously, any proposed taxing law will offer scope for a variety of legislative choices in relation to both the identification of what will constitute a "fringe benefit" for the purposes of the legislation and in relation to the identity of the classes of persons who will bear the burden of the tax which the law will impose. The existence of those choices and the fact that they must be made by the Parliament will not preclude the resulting law from dealing only with one subject of taxation unless the effect of the choices which are made is that the law loses its unity of character as a law dealing with "fringe benefits" as a subject of taxation and becomes a law dealing with both that and some other distinct subject of taxation.

When the Tax Act and the Assessment Act are read together, it is apparent that the taxing Act does not infringe the constitutional injunction. It deals only with one subject of taxation, namely, "fringe benefits" in the broad sense defined by the interplay of the relevant legislative provisions. True it is that, in some respects, the net which the Parliament has cast may be thought to be arbitrarily wide. In other respects, it may be thought to be surprisingly narrow. None the less, the Act remains a law dealing with "fringe benefits" alone as a subject of taxation. It is also true that the legislation discriminates between the classes of persons (whether real or artificial) who are or are not included among the "employers" (in the defined sense) who are required to pay it. The result of that may be that the legislation burdens more than one class of object of taxation. It is not, however, that the legislation deals with some subject of taxation other than "fringe benefits". And that is so regardless of whether or not one construes the provisions of the legislation in a way which would confine fringe benefits to benefits received by "employees" in the sense of persons who are in a master-servant relationship or whether or not one construes those provisions as confining the liability to pay the tax to "employers" in that sense.

The answers given by the majority judgment to the questions asked in the stated case would not require to be modified by reason of my conclusion that State office holders, who are neither members of Parliament nor employed by, or by an authority of, the State, are not employees for the purposes of the Assessment Act. I would modify those answers to reflect my conclusion that the specific reference to a member of the Parliament of a State in the definition of current employee in s. 136 of the Assessment Act is invalid. Otherwise, I agree with them.