Re-Writing Section 90: Vanderstock and the new meaning of excise
12.12.2023
An arresting opening line is essential if one is to entice readers into an intimidating tome. The High Court’s judgment in Vanderstock v Victoria [2023] HCA 30 (Vanderstock) is certainly a tome, concluding at paragraph [951] and page 384. But the arresting line does not appear until paragraph [8]. Journalists would call this ‘burying the lede’.
In paragraph [8], the joint judgment of Kiefel CJ, Gageler and Gleeson JJ explained that the cases of Capital Duplicators Pty Ltd v Australian Capital Territory (1993) 178 CLR 561 (Capital Duplicators [No 2]) and Ha v New South Wales (1997) 189 CLR 465 (Ha) should not be re-opened. This was because, they said, ‘the Court could not justify now taking the momentous step of unsettling the resultant constitutional doctrine’ set out in these cases and because the current federal-state financial arrangements are ‘not to be judicially disturbed’.
Why that is such an arresting, or perhaps more accurately breathtaking, statement is that the judgment proceeds to do precisely what it said it could not justify doing: establishing a new ‘high constitutional purpose’ for s 90; establishing a new test for an excise; extending excise to taxes related to the ownership, hiring or usage of goods, or indeed anything that affects the demand for goods, thereby creating high levels of uncertainty about the validity of State taxes; and up-ending existing Commonwealth-State financial relations.
Background
Section 90 of the Constitution confers exclusive power on the Commonwealth Parliament to impose duties of customs and of excise. The scope of the term ‘excise’ is therefore important, as the wider it extends, the less scope there is for the States to raise the money necessary to fulfil their functions in the federal system.
In 1901, Quick and Garran explained at p 837 of their Annotated Constitution of the Australian Commonwealth that the term ‘excise’ was used narrowly to mean taxes on articles produced or manufactured in a country. The intention was to ensure that if a customs duty was imposed upon the importation of goods such as alcohol or tobacco, then the Commonwealth could decide whether to impose an equivalent or reduced duty on similar items produced or manufactured in the country, maintaining its control over tariff policy. Quick and Garran were clear that there was no intention to take from the States sources of revenue such as taxes on the ownership of goods or on the privilege of dealing with goods.
This was reflected in the first High Court case on the subject, Peterswald v Bartley (1904) 1 CLR 497 (Peterswald), where Griffith CJ said at 509 that an ‘excise’ was ‘intended to mean a duty analogous to a customs duty imposed upon goods either in relation to quantity or value when produced or manufactured, and not in the sense of a direct or personal tax’.
In 1949, in Parton v Milk Board (Vic) (1949) 80 CLR 229, the High Court’s definition of excise was extended so that it applied to taxes on goods at any step from their production or manufacture, through to their distribution or sale, before they reach the consumer. This test applied from 1949 to 2023. Consistent with that approach, a tax on the consumption of goods after they had reached the hands of consumers was held not to be an excise in Dickenson’s Arcade Pty Ltd v Tasmania (1974) 130 CLR 177 (Dickenson’s Arcade).
Vanderstock v Victoria
The Vanderstock case concerned a tax on the usage of ZLEVs – zero or low emissions vehicles. All vehicles damage roads, even electric ones. This tax, which amounted to about half of the fuel excise paid by the owner of an equivalent petrol vehicle who travelled the same distance, was deliberately set low to encourage the take-up of ZLEVs. It was estimated that on average it would amount to $330 per year for electric vehicles and $260 per year for plug-in hybrid electric vehicles. The first plaintiff had been charged $148.68 and the second plaintiff had been charged $29.32 and $284.51 in annual ZLEV payments: [722]. (Unless otherwise specified, paragraph references are to Vanderstock.)
As a matter of equity, the tax ensured that the well-off ZLEV owners paid a small share of their responsibility for the damage their cars do to the roads, instead of placing the entire financial burden for road repair on the often less well-off owners of petrol vehicles. But for the first few years, the revenue was to be used to pay for electric vehicle charging infrastructure, removing a key barrier to the up-take of electric vehicles.
The tax was a road user charge. It applied annually when a car was registered and was calculated by reference to an amount per kilometre travelled by the ZLEV on specified roads. According to prior authority, it was not an excise. It was not applied at any point from production to distribution and sale of the ZLEV. It only applied once the ZLEV had reached the hands of the consumer. It applied in relation to the usage of the ZLEV – not in relation to any commodity it produced (unlike Logan Downs Pty Ltd v Queensland (1977) 137 CLR 59, where a tax on the ownership of stock was treated as really being a tax on the production of meat and wool). It was not calculated by reference to the quantity or value of the ZLEV and it was not passed on in the price to the consumer. Nonetheless, in a hard fought 4:3 judgment, the High Court in Vanderstock held the tax to be an excise.
The majority judgments
The majority was comprised of a joint judgment by Kiefel CJ, Gageler and Gleeson JJ, with a separate judgment by Jagot J. They follow the same Commonwealth-led path of reasoning. For reasons of brevity, this post will focus primarily on the joint judgment.
Much of the joint judgment involved picking words and sentences out of previous authorities and reinterpreting them to fit a different narrative. This was done to create the appearance that the judgment was consistent with past authority, especially Capital Duplicators [No 2] and Ha. This meant that only Dickenson’s Arcade needed to be formally overruled. Yet, as the minority pointed out in forensic detail, the majority’s approach had the effect of creating a new test for an excise which is inconsistent with all previous authority. This included Capital Duplicators [No 2] and Ha, even though the Court had agreed at the hearing in Vanderstock that neither of these authorities should be re-opened (see eg Gordon J at [206]).
Prior to Vanderstock, an ‘excise’ was an inland tax upon a step in the production, manufacture, distribution or sale of the goods, prior to their entry into the hands of the consumer. Under the new test in Vanderstock, an ‘excise’ is any inland tax in relation to goods, including a tax on a person by reference to them being the owner, importer, exporter, manufacturer, producer, processor, seller, purchaser, hirer or consumer of the goods: [147]. The tax must affect the goods, such as by entering into their sale price ([148]), dampening demand for them ([150]) or affecting their supply ([893] and [925] (Jagot J)). One must look to the ‘nature and general tendency of the tax’, rather than its incidence in particular cases to determine its validity: [148] and [923].
The majority reached the conclusion that a tax on the consumption of goods after they have reached the consumer has a tendency to depress demand for those goods. This was justified as being ‘intuitively obvious’ and documented in ‘economically literate legal texts’ ([125]) or ‘capable of ascertainment by reference to the court’s “knowledge of the society of which it is a part”’ ([924]).
The majority claimed that this tendency of a State consumption tax to depress demand ‘can impact on the flow of trade in goods into and out of that State’: [125]. These cross-border effects may interfere with the Commonwealth’s ‘policy with respect to national and international trade in those or other goods’ ([126]; see also [929] (Jagot J)). This, in turn, is argued to be contrary to the ‘high constitutional purpose’ of s 90, of giving ‘the Commonwealth Parliament exclusive control of the taxation of goods so as to ensure that the execution of whatever policy the Commonwealth might choose to implement through the enactment of uniform laws of trade, commerce or taxation could not be hampered’ by the States: [80].
One might wonder why, if this was the ‘high constitutional purpose’ of s 90, the framers of the Constitution did not actually confer a power to make uniform laws of trade and commerce on the Commonwealth Parliament, rather than confining its grant of legislative power in s 51(i) to laws with respect to trade and commerce with other countries, and among the States. Indeed, this rather suggests that the purpose attributed to s 90 by Griffith CJ, Barton and O’Connor JJ in Peterswald (concerning Commonwealth control over the tariff), is the most consistent with the text of the Constitution.
The majority judgment hangs upon an economic assumption that the tax on the usage of ZLEVs will influence their price and suppress demand for them, because rational consumers will factor the tax into their decision to buy the vehicle. But this fails to consider the economic operation and effect of the impost in its context. What are the alternatives? A consumer may reject the alternative of relying on public transport for reasons of convenience and availability. The consumer will find the alternative of a petrol or diesel vehicle has a much higher level of usage tax, through the petrol excise, and higher ongoing maintenance costs. As Steward J observed at [726], there is no evidence that the existence of the ZLEV ‘has, in any way, affected the price of ZLEVs, or has influenced the quantity of sales made of such vehicles. Indeed, it is unlikely that such a small impost could have such an influence.’
The minority
Each of Gordon J, Edelman J and Steward J gave separate dissenting judgments, but there were some common themes. In addition to analysing, criticising and rejecting the new test posed by the majority, the minority expressed concern about the disregard of long-standing precedent, the method of constitutional interpretation, the use of an economic test for determining an excise, the effects of the decision upon the federal system and the uncertainty and risk it will produce.
The disregard and misuse of precedent
Gordon J said that the majority’s ‘new rule marks a departure from long established and fundamental principle and authority’: [202]. ‘No decision of this Court in the last 120 years has extended the term “duty of excise” to any tax on goods’: [300]. Her Honour referred to the ‘abandonment of past authority’ ([202]) and the ‘assignment of meanings and significance to passages of past reasons for judgment that those reasons read in context do not bear’ ([205]).
Edelman J contended that the majority’s approach was contrary to that of Griffith CJ, Barton and O’Connor JJ, the first three Justices of the High Court ([452]), who were also framers of the Constitution. With ‘great respect, but great regret’, he pointed out that the majority’s position involves ‘the diminution, disregard or abolition of the three century-old constraints that were an integral part of the settlement of Capital Duplicators [No 2] and Ha’: [461]. He then listed in excruciating but compelling detail at [651] all the authorities effectively overruled and the judges who must have been wrong on excise for over a century. Steward J too was concerned at the departure from the original intent of the framers ([820]) and the inconsistency with, or misinterpretation of, settled authority ([793]).
The majority’s approach to constitutional interpretation
Gordon J was particularly critical of the approach by the majority to constitutional interpretation. She accused the majority of taking passages from prior judgments that were intended to limit excise and instead using them to support a new unbounded meaning of excise: [205]. Her Honour criticised instances of selective and misleading quotation from judgments to achieve an outcome they did not support (see eg [372]). But her most serious charge was that the majority was ‘not construing the text of the Constitution’ but instead amending it: [204]. She saw the majority’s expansion of the meaning of the term ‘excise’ as in effect removing the references to ‘duties of excise’ and ‘duties of customs’ in s 90 and replacing them with ‘duties on goods’: [393].
The use of an economic test for an excise
Gordon J noted that for the last 120 years, the test of an excise was a legal test, not an economic test: [404]. She considered that the majority had inverted the appropriate inquiry by treating the economic consequence of a tax as constituting its character: [245]. Her Honour pointed out that ‘it is neither possible nor appropriate to assume what the economic effect’ of a usage consumption tax will be ([272]); this will depend upon many other factors, which are not static. Hence, either the constitutional validity of a tax will become uncertain, waxing and waning according to changing economic consequences, or a court will seek stability by finding that a tax with ‘any assumed effect on demand for goods, however slight’ and over any period, short or long, ‘is beyond the legislative power of the States’: [412]-[413].
Edelman J was highly critical of the economic analysis of the majority, observing that the ‘danger with assertions about ordinary experience and tendencies, unsupported by any economic principles… is that they can conceal flawed economic reasons’: [636]. After providing graphs illustrating the difference between the effects of taxes on the supply-side and the demand-side at [637] and [639], his Honour expounded upon the various errors arising in the majority judgments arising from the neglect of economics: [643]-[649].
The impact on the federal system
Gordon J saw the outcome of Vanderstock as further entrenching the unbalanced federal relationship, exacerbating a bad system and making it worse: [400]. She was concerned that the decision would ‘radically affect the scope of the States’ ability to raise taxation revenue’ to respond to the needs of their people ([401]) and would push the States into imposing less economically efficient taxes instead ([403]).
Edelman J was also concerned about the threat to the proper functioning of the federal system: [441]. He stressed that the Constitution establishes a federal system, not one that gives exclusive taxing power to the Commonwealth if it has ‘any economic effect on any market involving goods’: [445]. He noted the effect upon the already severe vertical fiscal imbalance.
Steward J considered that the majority’s view distorted ‘the relationship between the States… and the Commonwealth in a way that was unintended by the founding fathers’ and would ‘render the States the constitutionally fiscal minions of the Commonwealth’: [712].
The risk for other taxes
Gordon J was critical of the widespread ramifications of Vanderstock, which would generate ‘extraordinary confusion’ ([415]) and unnecessary litigation ([416]). The taxes potentially at risk, as identified by Victoria, included duties on the transfer or conveyance of goods, motor vehicle duties, vehicle registration charges, gaming machine levies, certain betting taxes and waste disposal levies: [437].
Edelman J stressed the uncertainty and breadth of the majority’s judgment and its potential effects. If a tax can be an excise merely because it might indirectly affect a market for goods by decreasing demand for them, then all sorts of other taxes affecting different markets could be deemed to be an excise: [451]. He gave as examples payroll tax, industrial land taxes, inheritance taxes, taxes on the sale of a business, taxes on services and fees for licences: [451], [457] and [677]. All of these taxes and fees can affect and depress the demand for goods, but would never previously have been regarded as an excise.
Steward J recognised that the ‘new construction of s 90 favoured by the majority may well in the future lead to uncertain and unintended consequences’, in which case a ‘fresh start’ may be justified: [825].
Conclusion
There is no need for an academic assessment of the flaws in the reasoning of the majority, as the minority judgments have meticulously dissected and footnoted them. The evidence is laid bare for all to see.
The bigger question now, however, is what practical consequences will flow from this judicial misadventure. The one virtue of Ha was that it created stability and certainty, ending a string of challenges. But Vanderstock throws open the doors for speculative litigation with big potential pay-offs, at the expense of the public which relies on State revenue to provide services.
Anne Twomey is a Professor Emerita of the University of Sydney
Suggested citation: Anne Twomey, ‘Re-Writing Section 90: Vanderstock and the new meaning of excise’ (12 December 2023) <https://www.auspublaw.org/blog/2023/12/re-writing-section-90-vanderstock-and-the-new-meaning-of-excise>