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In a recent decision in Vanderstock v Victoria, the High Court by majority found that a Victorian levy on the use of zero and low-emission vehicles was an excise. This made it invalid, because states are prohibited by section 90 of the Australian Constitution from levying excise duties.

This article will outline the legislation the subject of the challenge, summarise the law as it was prior to this decision, explain the court’s decision, and suggest possible future applications of the Court’s decision.

Victoria’s zero and low-emission vehicle charge

Section 7 of the Zero and Low-Emission Vehicle Distance-Based Charge Act 2021 (Vic) required the registered operator of a zero or low-emission vehicle (ZLEV) to pay a levy based on the use of the vehicle on specified roads. These are essentially Victorian public roads. The rate was based on a cents per kilometre model. The registered operator would make a declaration each year of their use of the vehicle on specified roads, provide odometer evidence, and pay the required fee.

This is essentially a ‘true’ consumption tax. What is meant by this is that it is literally a tax imposed on an act of consumption. For present purposes, consumption was defined by Chief Justice Garfield Barwick in Dickenson’s Arcade Pty Ltd v Tasmania (1974) to mean use of goods or destroying them by use.

It is necessary to make this clear, because individuals can mean different things when they use the term ‘consumption tax’. For example, some would refer to a sales tax, imposed at the point of sale, as a consumption tax. The GST is a good example of a sales tax, and some would refer to it as a consumption tax.

The GST, as applied to the sale of goods, would clearly be an excise, and prohibited to the States. This is no doubt why the GST is a Commonwealth tax, levied by that level of government, before the proceeds are subsequently distributed to regional governments. This is clearly a valid exercise of Commonwealth power, supported by section 51(2) of the Constitution.

However, for the purposes of this article, the term ‘consumption tax’ does not include a sales tax. It means a tax on the act of consumption.

Consumption taxes and section 90

The question is whether a consumption tax is an excise, and prohibited to the States by section 90. The High Court had considered this question on two occasions before the Vanderstock case. There had been mixed results.

In Commonwealth v South Australia (1926), members of the High Court had suggested that a consumption tax could be an excise. However, in the 1974 Dickenson’s Arcade Pty Ltd decision, the High Court proceeded on the basis that a consumption tax was not an excise.

At a broader level, interpretation of section 90 had become progressively broader. For example, in the first decision in Peterswald v Bartley (1904), the High Court stated that an excise was a tax on the production or manufacture of goods.

This decision was rendered at a time when the High Court adopted reserved powers reasoning, specifically seeking to read down the words of the Constitution to have regard to the position of the States. The High Court rejected the reserved powers reasoning approach in Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920), and that decision has never been overturned.

In any event, the definition would over time later be broadened to include taxes on distribution or sale. A requirement that a tax directly relate to the quantity or value of goods produced or sold was applied less strictly; some relation would be necessary, so that the charge was not simply for the privilege of carrying on a business, but the relationship between the charge and the quantity or value of the relevant goods did not need to be precise.

The High Court accepted a broad purpose of the section – that it was designed to give the Commonwealth real control over the taxation of commodities, to ensure that the pursuit of its policies in this space would not be thwarted or hampered by inconsistent state action.

Potentially undermining federal policy

It is readily perceivable how the Commonwealth could seek to implement its political agenda through taxation. Simply, it taxes what it wishes to discourage; it gives subsidies to what it wishes to encourage.

In the present context, the federal government has signed up to various emissions targets at a global level. One way the federal government might seek to implement these targets is by taxing, or not taxing, particular goods. Zero and low-emission vehicles are relevant to this policy.

When a state taxes the use of such vehicles, it effectively potentially spoils or sabotages implementation of federal government policy, and Australia’s ability to meet commitments we have made internationally. I elaborate on this argument in a recently published journal article.

This is the sense in which section 90 can serve a high constitutional purpose of giving the Commonwealth real control over the taxation of commodities, as part of its role in managing the national economy.

Of course, just as state taxes on production, manufacture, distribution or sale can thwart the federal government’s control of taxation as a means of managing the national economy, state taxes on consumption can also do so.

In essence, this was the logic accepted by the majority of the High Court in the Vanderstock case:

Plainly, a tax on goods imposed on the consumption of those goods will increase the cost of these goods to consumers. Because consumers, acting rationally, will tend to factor the cost of consumption into the price they are prepared to pay for goods to be consumed, a tax on the consumption of goods can tend to depress demand for those goods no less surely than can a tax on the production or distribution of those goods which increases the price of those goods to consumers. Not only are these tendencies intuitively obvious; they have been observed since the time of (Adam) Smith. They are well documented in economic literature, and are referred to in economically literate legal texts.

Respectively, these comments are entirely correct. I had anticipated them in earlier writing. They bring a coherence to the law in this area that had been missing.

Dissenting opinions

The dissentients dispute that the purpose of the section is to give the Commonwealth real control over the taxation of commodities, though that position has been accepted by the High Court as orthodox since 1949.

There are claims the majority decision has ‘amended’ the Constitution. On another view, the Court merely did its job of interpreting it. There are, on one view, strains of long-discredited ‘federal balance’ arguments apparent in the judgments of Justice Michelle Gordon and Justice James Edelman, rejected by the High Court as an acceptable means of interpreting the Constitution since 1920.

One dissentient preferred the meaning of excise as a tax on the production or manufacture of goods established by the High Court in 1904, but not accepted by the Court since 1926. One of the dissentients admits the meaning of excise at the time of federation was elusive; another says the founding fathers had a clear idea of what it meant.

High Court’s position deserves utmost appreciation

Constitutional interpretation tends to evolve over time. The decision suggests the need for states to reconsider plans for usage-type taxes, including congestion charges. Taxes on the holding of livestock, and mining royalties, might also be constitutionally vulnerable.

However, the High Court should respectfully be applauded for this recent decision in removing an anomalous and indefensible glitch in our constitutional jurisprudence.

This article has 4 comments

  1. Not really. Why is a road user charge not a charge for using roads rather than a tax on the “consumption” of a car? What if the car is already depreciated down to nothing? Lawyers playing economists rarely impress. The 18th fiscal history going back to William and Mary make it clear what an excise tax is. Much as one might loathe the Victorian Government, for once they do not deserve to be hanged.

  2. A potential ‘fix’ to the risk created by Vanderstock for various state taxes, could be that the states and Commonwealth enter into an arrangement along lines similar to that implemented in relation to taxes with respect to Commonwealth Places (through a mechanism similar to that of the Commonwealth Places (Mirror Taxes) Act 1998 (Cth)), which practically addressed the states’ inability to tax with respect to s 52(i) of the Constitution. That is, they come to a similar (with careful drafting and the right deeming provisions) legal and financial arrangement in relation to state taxes that previously were ‘unproblematic’, but which are now at risk under s 90.

  3. A charge for use of a Crown resource such as a mining royalty or a land rent or charge is not a tax – and, of course, land is not a “good”.

  4. Just wondering is the state by state various rate Point of Consumption gambling tax (essentially a double dip GST) fitting this same constitutional invalidity as above?

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