The South Australian Government has announced its intention to legislate to impose a levy on the major banks, only weeks after the Commonwealth Government did the same. This may raise questions in the minds of some as to whether it is within the power of the South Australian Parliament to enact a law imposing a levy on banks, given that banking is largely regulated by Commonwealth law today. Whether or not the State major bank levy is ever enacted (this is a political issue of no concern to the authors), its announcement provides a welcome opportunity to discuss the constitutional issues posed by a tax on banks or banking activities.
Overview of the proposed levy
The proposed State major bank levy is set out in the Budget Measures Bill 2017 (SA), which at the time of writing is before the House of Assembly. Somewhat surprisingly, the State major bank levy is defined in terms of the Commonwealth major bank levy. In brief, the State major bank levy requires any authorised deposit-taking institution (ADI) that is liable to pay Commonwealth major bank levy to pay an amount equal to 0.015% of its “applicable liabilities amount” that is attributable to South Australia.
“Applicable liabilities amount” is defined in the Budget Measures Bill to have exactly the same meaning as for the Commonwealth major bank levy. The State major bank levy does not involve the attribution of any specific liabilities to South Australia; rather, approximate attribution is done simply by multiplying an ADI’s total applicable liabilities amount by the “GSP percentage” – South Australia’s gross state product as a percentage of total Australian gross domestic product, with a two-year lag in statistics. The result is that the State major bank levy taxes an identical base to the Commonwealth major bank levy.
Section 109 of the Commonwealth Constitution provides that “[w]hen a law of a State is inconsistent with a law of the Commonwealth, the latter shall prevail, and the former shall, to the extent of the inconsistency, be invalid”.
Broadly speaking, two types of inconsistency appear in High Court jurisprudence on this issue:
- direct inconsistency – the State law would alter, impair or detract from the operation of the Commonwealth law, which includes cases where the laws are incapable of simultaneous obedience or where a State law denies a right granted by a Commonwealth law, and
- indirect inconsistency – the Commonwealth law intends to ‘cover the field’ occupied by the State law.
Admittedly, there is a conceptual overlap between the two types of inconsistency, as in both cases inconsistency is the result of a legislative intention on the part of the Commonwealth to exclude the operation of State laws in a particular field (however narrowly or widely defined), but the authors consider that there is practical value in distinguishing between direct and indirect or ‘covering the field’ inconsistency.
In the case of the Major Bank Levy Act and the Budget Measures Bill, no question of direct inconsistency arises. It is possible to comply with both laws simultaneously, by paying 0.015% of the applicable liabilities amount to the Federal Commissioner of Taxation in respect of a quarter and a further 0.015% of the GSP percentage of the applicable liabilities amount to the South Australian Commissioner of State Taxation in respect of that same quarter. The Major Bank Levy Act does not confer any right that the Budget Measures Bill purports to deny, or impose any obligation that the Budget Measures Bill purports to lessen. Therefore, if there is any inconsistency between the two laws, it must be of the ‘cover the field’ type.
Can the Commonwealth validly cover the field with respect to taxation?
The Major Bank Levy Act contains no express statement of intention as to its effect on State laws. If it contained an express statement that it was not intended to affect the operation of any State law, that would be the end of the matter; there would be no inconsistency. Before considering whether the Major Bank Levy Act does in fact show an intention to cover any field in which the Budget Measures Bill operates, it is necessary to consider whether a Commonwealth law can validly cover the field with respect to taxation, or a particular type of taxation.
It is a precondition to the operation of s 109 of the Constitution that the Commonwealth law in question be a valid Commonwealth law, that is, within the constitutional power of the Commonwealth Parliament to make. Clearly, the Major Bank Levy Act is a law imposing a tax – a compulsory exaction of money by a public authority for public purposes, enforceable by law and not being a penalty or payment for a service – and therefore ostensibly within the power conferred by s 51(ii) of the Constitution. However, section 51 of the Constitution provides that ‘the [Commonwealth] Parliament shall, subject to this Constitution, have power to make laws… with respect to [the enumerated matters]’. It does not grant an unqualified power to legislate with respect to the enumerated matters; the legislative power granted is subject to the other provisions of the Constitution, including the implied rights and prohibitions.
In Melbourne Corporation v Commonwealth, a majority of the High Court held that a Commonwealth law may be invalid, notwithstanding that it is otherwise with respect to a head of power enumerated in section 51 of the Constitution, if it discriminates against a State or the States in a manner that prevents them from performing their governmental functions or it otherwise undermines that continued existence of the States or their capacity to function as governments. The Melbourne Corporation doctrine has its foundation in ‘the constitutional conception of the Commonwealth and the States as constituent entities of the federal compact’, as made clear in Chapter V of the Constitution, in particular ss 106 and 107 which provide for the continuation of the State Constitutions and the legislative powers of the State Parliaments post-Federation. Consequently, more recent decisions applying the Melbourne Corporation doctrine provide that the relevant inquiry is whether a Commonwealth law ‘restricts or burdens one or more of the States in the exercise of their constitutional powers’, with discrimination only relevant to the extent that it undermines the capacity of the States to function as governments.
On its face, it would appear that the ability to raise revenue by way of imposing taxes is essential to a State’s ability to function as a government, and therefore any Commonwealth law preventing a State from levying taxes, or levying a particular kind of tax, would be invalid under the Melbourne Corporation doctrine. In the First Uniform Tax Case, Latham CJ said in dicta that ‘the Commonwealth Parliament has no power to prohibit a State exercising its taxing power’. In the Second Uniform Tax Case, decided after Melbourne Corporation, Dixon CJ stated that the power to make laws with respect to taxation is not a power over the whole subject of taxation throughout Australia, but rather only taxation for Commonwealth purposes. Echoing the language in Melbourne Corporation, Dixon CJ further held that a measure excluding the States from a particular field of taxation (income tax in that case) would be an attempt to expand the power of the Commonwealth to an extent where it ‘reaches into the exercise of the constitutional powers of the States’. Therefore, notwithstanding some dicta to the contrary in Hematite Petroleum Pty Ltd v Victoria, it appears that the Commonwealth Parliament cannot legislate to cover the field with respect to taxation generally, or any particular kind of taxation.
The Major Bank Levy Act, though expressed in general terms and silent as to its effect on State laws, must therefore be construed to not evince an intention to cover the field in which it operates. The Budget Measures Bill, if it becomes enacted into law, will therefore not be inconsistent with the Major Bank Levy Act and operate to its full extent.
For completeness, it is worthwhile mentioning that there is no ‘cover the field’ type inconsistency between the Banking Act 1959 (Cth) and the State major bank levy. The Banking Act regulates the conduct of carrying on banking business but does not impose any taxes in respect of banking. The prohibition in ss 7-9 of the Banking Act on persons other than the Reserve Bank or body corporates authorised as ADIs by the Australian Prudential Regulation Authority carrying on banking business, together with the other provisions in the Act regulating the conduct of ADIs evidences an intention to cover the field with respect to the conduct of banking (other than State banking, of course). However, there is no express statement that it intends to exclusively govern the liability to taxation of persons carrying on banking business and it is difficult to infer such an intention in circumstances where the Act does not address the issue in its terms or its practical effect.
Section 90 of the Constitution grants the Commonwealth Parliament the exclusive power to impose duties of customs and excise. Although the State major bank levy is imposed with respect to the quantity of a particular item – certain liabilities owed by an ADI – for constitutional purposes an excise duty is an inland tax on any step in the production or distribution of goods. Notably, a tax on any other kind of property, or on the provision of services, has not been held to amount to an excise. As the provision of goods to customers does not constitute the essence or even a significant aspect of ADIs’ business, there is no ground for arguing that the State major bank levy taxing a service provided by ADIs is in substance a tax on a stage in the production or distribution of goods. The State major bank levy is therefore safe from attack under s 90 of the Constitution.
Freedom of interstate trade and commerce
Section 92 of the Constitution states that ‘trade, commerce, and intercourse among the States… shall be absolutely free’. This provision has been held to prohibit State laws that discriminate against interstate trade in a protectionist manner, subject to a limited exception for discrimination that is appropriate and adapted to the attainment of a legitimate, non-protectionist objective. Notably, the prohibition in s 92 operates in one direction only; it does not prohibit State laws that disadvantage local trade relative to interstate trade.
In any event, the manner in which the State major bank levy is imposed by the Budget Measures Bill means that it does not affect interstate trade or commerce. Liability for the levy is not defined in terms of liabilities in some way connected with South Australia, but as a proportion of an ADI’s total applicable liabilities amount corresponding to South Australia’s proportion of total Australian economic output. The ‘GSP percentage’ measure may be subjectively intended to provide an estimate of the amount of banking business carried on in South Australia, but it does not operate in that manner in form or in substance, given the substantial carve-outs from the definition of ‘applicable liabilities amount’. Further, the State major bank levy applies indifferently to liabilities owed by South Australian and interstate ADIs and there appears to be nothing to suggest that it will burden interstate ADIs more than South Australian ADIs.
Attacks on the State major bank levy on the basis of s 92 therefore appear to be likely to fail.
In the authors’ opinion, for the reasons given above, the State major bank levy (as expressed in the Budget Measures Bill as at the time of writing) is not invalid on the constitutional grounds discussed above. Whatever its policy merits and whether or not it is ultimately enacted into law, the proposed levy provides an opportunity to consider some key principles of constitutional law.
Andrea Beatty and Gabor Papdi, Keypoint Law
 As it is called in the Bill seeking to enact it: see Budget Measures Bill 2017 (SA) s 4.
 See Major Bank Levy Act 2017 (Cth).
 Budget Measures Bill 2017 (SA) s 8.
 Ibid s 9(1).
 Ibid s 5.
 Victoria v Commonwealth (1937) 58 CLR 618 at 630 (‘The Kakiriki’).
 See, eg, R v Licensing Court of Brisbane; ex parte Daniell (1920) 28 CLR 23.
 See, eg, Clyde Engineering Co Ltd v Cowburn (1926) 37 CLR 466 at 477-478 (Knox CJ and Gavan Duffy J), 490 (Isaacs J) and 521-522 (Rich J).
 Ex parte McLean (1930) 43 CLR 472 at 483 (Dixon J); see also Clyde Engineering Co Ltd v Cowburn (1926) 37 CLR 466 at 489-490 (Isaacs J) and 523-524 (Starke J).
 Gary A Rumble, ‘Manufacturing and Avoiding Constitution Section 109 Inconsistency: Law and Practice’ (2010) 38 Federal Law Review 445 at 448-463.
 R v Credit Tribunal; ex parte General Motors Acceptance Corporation (1977) 137 CLR 545 at 563-4; see also discussion in Rumble, above n 10 at 457-459.
 Mathews v Chicory Marketing Board (Vic) (1938) 60 CLR 263 at 276 (Latham CJ).
 (1974) 74 CLR 31.
 Ibid at 61-62 (Latham CJ), 66 (Rich J), 70-75 (Starke J), 78-79, 81-85 (Dixon J) and 99-101 (Williams J).
 Queensland Electricity Commission v Commonwealth (1985) 159 CLR 192 at 218 (Mason J).
 Austin v Commonwealth (2003) 215 CLR 185 at 257-259 (Gaudron, Gummow and Hayne JJ).
 Ibid 247-249.
 South Australia v Commonwealth (1942) 65 CLR 373 at 413 (‘First Uniform Tax Case’).
 Victoria v Commonwealth (1957) 99 CLR 575 at 614 (‘Second Uniform Tax Case’); see also R v Winneke; ex parte Gallagher (1982) 152 CLR 211 at 221 (Mason J).
 (1983) 151 CLR 599 at 631-632 (Mason J) and 637 (Murphy J).
 As the State major bank levy is defined by direct reference to the concepts on which the Commonwealth major bank levy is based, it is arguably unnecessary to attempt to precisely identify the field in which the Major Bank Levy Act operates as the Budget Measures Bill operates in exactly the same field.
 Section 55 of the Constitution prevents it from doing so.
 Ha v New South Wales (1997) 189 CLR 465 at 490 (Brennan CJ, McHugh, Gummow and Kirby JJ).
 See, eg, Hematite Petroleum Pty Ltd v Victoria (1983) 151 CLR 599, in which large fixed and per kilometre levies imposed on oil and natural gas pipelines was held to be an excise duty, despite it not being calculated by reference to the quantity or value of oil or natural gas passing through the pipelines, as the levy would enter into the cost of the oil and natural gas and be reflected in its subsequent sale price. Query whether, if the State major bank levy were a tax on goods, s 13 of the Budget Measures Bill 2017 forbidding an ADI from recovering the levy from customers would be effective in avoiding characterisation of the levy as an excise duty.
 Cole v Whitfield (1988) 135 CLR 560 at 408.
 Castlemaine Tooheys Ltd v South Australia (1990) 169 CLR 436 at 471-473.
 Barley Marketing Board (NSW) v Norman (1990) 171 CLR 182 at 202-205.
 Budget Measures Bill 2017 (SA) s 9(1).
 Major Bank Levy Act 2017 (Cth) s 5(2).
 Cf Castlemaine Tooheys Ltd v South Australia (1990) 169 CLR 436.