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Thursday, 26 September 1907


Mr GROOM (Darling Downs) (AttorneyGeneral) . - I now move -

That this Bill be now read a second time. The object of this measure is to enable the allowances and salaries of officers of the Commonwealth and of members of Parliament, earned in a State, to be subject to taxation, in common with the ordinary salaries of the citizens of the State. The question of the liability of Federal officials and Federal members of Parliament has been the subject of discussion for some time in the Commonwealth of Australia. The question, as I stated yesterday, and as honorable members we'll know, arose in the case of Deakin v. Webb and Lyne v. Webb, in which it was held that Federal Ministers were exempt from State taxation. ' That was the effect of the ruling; and the matter of the taxation by the State of Federal officials was taken to the Privy Council in the later case of Outtrim v. Webb, whereupon the Privy Council decided that Commonwealth officials were subject to the State taxation. The matter came up again before the High Court inBaxter's case.; and the High Court reaffirmedits previous decision that Federal officials were not liable to State taxation by way of income tax. The position is that we have two conflicting decisions, one by the Australian Court and the other by the Privy Council. Inasmuch as the Federal High Court has reaffirmed its decision, the Government feel that, while that decision must be acepted, some effort should be made to obviate its effects, because, as a matter of principle, it is not right that there should be a class in the community. who receive the benefits of State protection, but who do not contribute their fair proportion of taxation in common with the other residents of the State.


Mr Hutchison - In some States, Federal officials will not contribute under the Bill.


Mr GROOM - The Bill will apply to all States where income tax laws exist.


Mr DUGALD THOMSON (NORTH SYDNEY, NEW SOUTH WALES) - This Bill only applies, I understand, to Federal salaries?


Mr GROOM - That is all we have power to deal with ; and it is only Federal salaries that have been held to be exempt. If" we remove this exemption of Federal officials and ourselves, we shall be placed in nearly the same position as are the citizens of the State.


Mr Hutchison - Under this Bill some Federal officials will be taxed, while others will escape, because there is no income tax in some of the States.


Mr Page - Is this Bill of more urgency than the Tariff?


Mr GROOM - All I know is that, not only the members of the Government, but also the leader of the Opposition have felt this to be anurgent measure.


Mr Reid - That is so, but -it is not so urgent as the Tariff.


Mr GROOM - On the 9th July of this year the leader of the Opposition, speaking in the House, said -

I want to say a word or two about the Bill relating to the High Court and the Privy Council. On matters affecting the rights of the States and the Commonwealth, there is no doubt that the Constitution was intended to make the High Court the 'final arbiter, with liberty to the High Court, if it pleased, to allow of an appeal. I shall support the Government in any Bill they introduce to make that more clear. I hope the Government will bring in the Bill relating to income tax on Federal salaries as soon as possible. I feel that the present state of things is a hardship on the States, and that we should ourselves clear the path without waiting for the prospective ruinous litigation.


Mr Reid - I repeat that the measure is urgent, but not so urgent as the Tariff.


Mr GROOM - It is urgent that, all citizens should be placed on a uniform basis. The matter came up for discussion at the Premiers' Conference in 1906, and the Prime Minister then promised the Premiers that this Bill would be . introduced.


Mr Crouch - But the Premiers would not accept that promise, and went on with the litigation.


Mr GROOM - Quite so; but the Prime Minister said that he would wait until the litigation had ceased.


Mr Crouch - It has not ceased.


Mr GROOM - We believed it to have ceased at the time, and other questions are at issue now. As I say, the position isthat Federal officials are exempt from taxation, and it is desired that the exemption shall be removed. I have not heard any objection raised to this measure. I have not heard it contended that Federal officials, who enjoy the benefits of the free edufcjational systems of the States and' who have the protection of the States laws in regard to person and property, ought not to paiy their proportion of taxation as doother citizens.


Mr DUGALD THOMSON (NORTH SYDNEY, NEW SOUTH WALES) - The Bill applies only to income tax on salaries; and, therefore, in the case of Tasmania, for instance, it would not apply to the abilitytax or the per capita tax.

Sirphilip Fysh. - In Tasmania, thecitizens do not pay a tax on salaries, but according to their abilitv to rent a house.


Mr GROOM - We may possibly haveno power to deal with that taxation ; but we can pass uniform legislation in regard: to Federal salaries. All we know is that at present Federal officials are exempt from income tax, and, as we have control1 in that matter, we desire to place all our servants as far as we can on thesame footing as ordinary citizens whodraw similar salaries from other sources. As regards the expediency of the measure, I submit that the proposition has only tobe stated to demonstrate its justice. NoFederal official would, I think, care to feel that he is in a different positionfrom the rest of the community - that he belongs toa sort of privileged class.


Sir John Forrest - Has the AttorneyGeneral paid his income tax?


Mr GROOM - I have paid income tax in Queensland.


Mr Crouch - Has the Attorney- General paid the Victorian income tax?


Mr GROOM - I paid the Victorian income tax on one occasion under protest, agreeing to be bound by the decision in Deakin v. Webb; and by that decision I have abided. However, it is a question of principle with which I ask honorablemembers to deal.


Mr Crouch - Does the Attorney-Genet ral know that under this Bill only Vic-i torian members of Parliament will have to pay?


Mr GROOM - I shall go into details when I reach the clauses. The question naturally arises, assuming the judgment of the High Court to be right, what power have we to pass this legislation? That is a fundamental question, which honorable members are entitled to address to me. There are several authorities which I shall submit for the consideration of the House, and on which, I think, I can show that we have the right to pass this legislation. In the first place, I refer to a passage in the majority judgment in Baxter's case, which may be found in 4 C.L.R., on page 1133 of the authorized reports. The Chief Justice said -

We pass to the minor questions remaining for determination. The question whether a State tax upon the emoluments of Federal officers is within the prohibition is a minor question, for the Federal Parliament can make its grants subject to such a tax. Quilibet renuntiarepotest juripro se introducto.

The majority of the Court stated in that case that the Federal Parliament could make its grants of salaries subject to this tax. At a later stage, on the application for a certificate for leave to appeal, the Chief Justice, in referring to the two ways of putting an end to this conflict, said -

The other way in which the inconvenience can be remedied is one which was pointed out in the judgment of the majority of this Court delivered yesterday. The Federal Pailiament can, if it pleases, make its grants to its servants subject to the right of the States to tax them.

It is only fair to point out to the House that Mr, Justice Higgins dissented from that view, saying -

As to the other suggestion, that the Federal Parliament may make its grants of salary subject to the rights of the States to tax them, i merely refer to it, because i . do not at present want to be committed to any definite view on the subject. At present i cannot see how, if an income tax upon the salary of a Federal servant is made invalid by the Constitution, the Federal Parliament can alter the Constitution bv making the income tax payable. However, i do not wish to make any final pronouncement on the suggestion, which, as far as my memory serves me, has not been mentioned before in this Court. What he said, in effect, was " I shall make no final pronouncement upon this subject, since the matter has riot been argued:"


Mr Crouch - That was a case of one Justice against another.


Mr GROOM - No; there were four justices on the bench, and this was a majority decision. I would remind the House that the principle of the decision given in this income tax case was based upon the decision in McCulloch v. Maryland -

When a State attempts to give to its legislative or executive authority an operation, which, if valid, would fetter, control, or interfere with the free exercise of the legislative or executive power of the Commonwealth, the attempt, unless expressly authorized by the Constitution, is to that extent invalid and inoperative.

The Court held that Commonwealth servants are agents of the Commonwealth, and that it is impossible for the Commonwealth to carry on its functions unless those servants are free to carry out the complete work of the Commonwealth under the sole control of the Commonwealth itself. It held, as was held in the United States case of McCulloch v. Maryland, that if a State had power by its legislation to impede, fetter, hinder, or control Commonwealth agents in the performance of their duties, then it would really interfere with the sovereign functions of the Commonwealth itself.


Mr King O'Malley - When was the case of McCulloch v. Maryland decided?


Mr GROOM - In 1819.


Mr King O'Malley - Then the judgment was given! by Marshall?


Mr GROOM - Yes. It is regarded as one of the finest expositions of law that has ever emanated from a 'judiciary. It is the fundamental judgment on the interpretation of the Constitution of the United States of America. The reasoning in thalt judgment was as follows -

That the States have no power by taxation or otherwise to retard, impede, burden, or in any manner control, the operations of the constitutional laws enacted by Congress to carry into execution the powers vested in the general government.

This great principle is that the Constitution and the laws ' made in pursuance thereof are supreme ; that they control the Constitution and laws of the respective States, and cannot be controlled by them; From this, which may be almost termed an axiom, other propositions are deduced as corollaries, on the truth or error of which on their application to this case, the cause has been supposed to depend.

The learned Chief Justice Marshall then laid down three axioms -

(1)   That a power to create implies the power to preserve.

(2)   That a power to destroy, if wielded bv a different . hand, is hostile to, and incompatible with, these powers to create and preserve.

(3)   That where this repugnancy exists that authority . which is supreme must control, not yield, to, that over which it is supreme.

It was held, in this case of McCulloch v. Maryland, that the State Government had. no right to tax any of the constitutional means employed by the Government of the Union to execute its constitutional powers -

The States have no power, by taxation or otherwise, to Tetard, impede, burden, or in any manner control, the operations, of the constitu tional laws enacted by Congress to carry into . execution the powers vested in the general government. "Under the authority of the United States law a bank had been established, and the question in this particular case was as to whether or not the State had any power to tax that instrumentality of the Government of the Union.


Mr Glynn - There are several bank cases.


Mr GROOM - Quite so. I mention this because it is the starting point of all the American decisions on this subject. The principle is clearly laid down that the instrumentalities of the Commonwealth - or in the case of the United States, the instrumentalities of the Central Government - are free from any control or interference on the part of the' States. The Commonwealth is supreme within the ambit of its own authority, and the States are supreme within the ambit of their authority. It was held in a later case - Dobbins v. The Commissioners of Erie County - that the States Governments could not tax a revenue collector employed by the Federal Government ; or, in other words, that in the United States the salaries of Federal officials were exempt from State taxation. Later on, in the case of The Collector v. Day,- it was held that the converse rule applied, and that the Federal authority had no power to impose a tax upon the salary of a Judge of a State. This case grew out of an attempt of the Collector of the Internal Revenue of the United States to collect a tax on- the salary of a Judge of the State of Massachusetts, levied in accordance with certain Acts of Congress passed 'in the years 1864-5-6-7. In the judgment, the learned Judge showed very fully the necessity of preserving all the Commonwealth instrumentalities from taxation, pointing out that -

In Dobbins v. The Commissioners of Erie County, it was decided that it was not competent for the Legislature of a State to levy a tax upon the salary or emoluments of an officer of the United States. The decision was placed " mainly upon the ground that the officer was a means or instrumentality employed for carrying into effect some of the legitimate powers of the government, which could not be interfered' with by taxation or otherwise by the States, and that the salary or compensation for the service of the officer was inseparably connected with the office; that if the officer, as such was exempt, the salary assigned for his support or maintenance .while holding the office was also, for like reasons, equally exempt.

He said later on -

If the means, and instrumentalities employed by that Government- that "is, the Federal Government - to carry into operation the powers granted to it are, necessarily, and, for the sake of self-preservation, exempt from taxation by the States, why are not those of the States depending upon their reserved powers, for like reasons, equally exempt from Federal taxation ? Their unimpaired existence in the one case is as essential as in the other. It is admitted that there is no express provision in the Constitution that prohibits the general government from taxing the means and instrumentalities of the States, nor is there any prohibiting the States from taxing the means and instrumentalities of that government. In both cases the exemption rests upon necessary implication, and is upheld bv the great law of self-preservation; as any government, whose means employed in conducting its operations, if subject to the control of another and distinct government can exist only at the mercy of that government. Of what avail are these means if another power may tax them at discretion?

Canada was also faced with the question of whether or not the Dominion officials were liable to taxation by provincial Governments. In .a series of cases, with which I do not wish to take up the time of the House, the Judiciary held that the Provinces had no power to tax the Dominion officials. There were one or two judgments in which doubt was cast upon the question, but it is clear that in Canada the Judges, as a whole,, were of opinion that the Dominion officials were not liable to provincial taxation. They followed the reasoning laid down in the case of McCulloch v. Maryland. When we consider the position in Australia, we must realize the value- of such a rule of interpretation as is laid down in that case. What is our position? We have in the Commonwealth and the States two distinct sovereign bodies with complete legislative power exercising an executive power, and carrying on their operations over the same territorial area. The States and the Commonwealth both work under the one written Constitution, and the principles of interpretation applied to its construction should be such as will allow the full exercise of their, sovereign powers within the same territorial area without conflict. The decision in the case of McCulloch v. Maryland, which was followed by the High Court, is one of eminent utility, preserving as it does, the complete sovereignty of the Federal power within the ambit of its authority, and the complete sovereignty of the State's within the ambit of their authorities. A clear and intelligent principle is laid down for dealing with all cases in which there is a conflict of powers, either by a State attempting to interfere with the exercise of the Commonwealth authority, or the Commonwealth with the exercise of a State authority, and that principle was accepted by the High Court in the case, of D' Emden v. Pedder, and followed in the case of Deakin v. Webb, in which it was held that the Commonwealth authority cannot be interfered with by a State, and again' in the case of The Federated Amalgamated Government Railway- and Tramway Service Association v. The New South Wales RailwayTrafficEmployes Association, in which it was held that the Commonmonwealth cannot interfere with the authority of a State by including its servants' within a Commonwealth Arbitration Act. The position of the Commonwealth in this matter is exactly the same as that of the Federal Government of the United States. To allow of the proper exercise of the Federal authority certain privileges or immunities are recognised, which protect the agencies and instrumentalities of the Commonwealth. The Commonwealth has the power to create, define, and control its agencies and instrumentalities, and the exemptions and privileges necessary for their protection. That view has been recognised .in the United States. But it has also been held that, although certain banks were protected by the rule in McCulloch v. Maryland, Congress could waive its right to the exemption of its agencies and instrumentalities from taxation, and allow them to be taxed by the State authorities. Several Statutes have been passed by Congress to enable the States to tax Federal instrumentalities or agencies, and the validity of these Statutes has been upheld by a series of decisions by the Supreme Court of the United States. It was decided in 1898, in the case of the Owensboro National Bank v. Owensboro, that two elements were involved in the determination of this question: That is, the extent of the power of the respective States to tax national banks, and the ascertainment of the scope and purport of the law by which the taxes complained of were levied-

Early in the history of this Government, in cases affecting the Bank of the United States, it was held that an agency, such as that bank was adjudged to .be, created for. carrying into effect national powers granted by the Constitution, was not in its capital-, franchises and operations subject to the taxing powers of a State. McCulloch v. Maryland, 4 Wheat. 316; Osborn v. Bank of the United States, 9 Wheat. 738.

The principles settled by the cases just referred to and subsequent decisions were thus stated bv this Court in Davis v. Elmira Savings Bank, 161 U.S. 283.

National banks are instrumentalities of the Federal Government, created for a public purpose, and as such necessarily subject to the paramount authority of the United States. It follows that an attempt, by a State, to define their duties or control the conduct of their affairs is absolutely void, wherever- such attempted exercise of authority expressly conflicts with the laws of the United States, and either frustrates the purpose of the national legislation or impairs the efficiency of these agencies of the Federal . Government to discharge the duties for the performance of which they were created. These principles are axiomatic, and are sanctioned by the repeated adjudications of - this Court.

It follows then necessarily from these conclusions that the respective States would be wholly without power to levy any tax, either direct or indirect, upon the national banks, their property, assets or franchises, were it not for the permissive ' legislation of Congress.

The States could not have taxed these Federal instrumentalities without permissive authority from Congress. Section 5219 of the revised Statutes was quoted in that judgment, and is as follows -

Nothing herein shall prevent all the shares in any association from being included in the valuation of the personal property of the owner or holder of such shares, in assessing taxes imposed by authority of the State within which the association is located; but the Legislature of each State may determine and direct the manner and place of taxing all the shares of national banking associations located within the State, subject only to the two restrictions, that the taxation shall not be at a greater rate than is assessed upon other moneyed capital in the hands of individual citizens of such Stale, and that the shares of any national banking association owned by non-residents of any State shall be taxed in the city or town where the bank is located, and not elsewhere. Nothing herein shall be construed to exempt the real property of associa-tions from either State, county, or municipal taxes, to the same extent, according to its value, as other real property is taxed.

There is a large number of cases dealing with the constitutionality of such legislation, but it has been decided in America over and over again that it is constitutional. I shall not quote other decisions, because I do not wish to labour the matter. The Currency Act of 1894 was another measure passed by Congress to permit of the taxation of a Federal instrumentality by the States, and the preamble to that Act reads -

Be it enacted ... .that circulating notes of national banking associations and United States legal tender notes and other notes and certificates of the United _ States payable on demand and circulating or intended to circulate as currency, and gold, silver, or other coin shall be subject to taxation as money on hand or on deposit under the laws of any State or Territory: Provided that any such taxation shall be exercised in the same manner and at the same rate that any such State or Territory shall tax money or currency circulating as money within its jurisdiction.

I wish to refer to one other decision on the subject, that in the case of Austin v. The Alderman, reported in 7 Wallace, 699, a decision given in 1868 -

The right of taxation, where it exists, is necessarily unlimited in its nature. It carries with it inherently the power to embarrass and destroy.

It is well settled that the States cannot exercise this authority in respect to any of the instrumentalities which the general government may create for the performance of its constitutional functions. It is equally well settled, that this exemption may be waived wholly, or with such limitations and qualifications as may be deemed proper, by the law making power of the nation ; but the waiver must be clear, and every well-grounded doubt upon the subject should be resolved in favour of the exemption.

It has been decided by the High Court that the public servants are Commonwealth agencies, whom it is desirable to protect for the purpose of enabling the Commonwealth objects to be carried out without State interference. But the American cases show that this protection can be waived by the Commonwealth, and that we can allow our servants to be taxed by the States. The American decisions amply support that position. We have, therefore, provided in the Bill that-

The taxation by a State, in common with other salaries earned within the State, of -

(a)   the official salaries of officers of the Commonwealth residing in the State earned in the State after the commencement of this Act; and

(b)   the allowances and salaries, paid after the commencement of this Act, of members of the Parliament elected in the State and of Ministers of State for the Commonwealth, and the Presiding Officer and Chairman of Committees of each House of the Parliament, all being respectively members of the Parliament elected in the State, shall not, if the taxation is not at a higher rate or to a greater extent than is imposed on other salaries of the same amount earned in the State, be deemed -

(c)   to be an interference with the exercise of any power of the Commonwealth, or

(d)   to be inconsistent with any Act by or in pursuance of which the salary is fixed or made payable.

The present immunity of the public servants of the Commonwealth from taxation by the

States rests on the ground that for the States to tax them would be an interference with the powers of the Commonwealth ; but the American authorities show that we have the right to waivethat exemption, and we now ask Parliament to sanction its waiver, and to permit the salaries to be taxed. In the United States it was held that a State Act providing for the taxation of a Federal official was inconsistent with the Federal Appropriation Act,, and to the extent of its inconsistency invalid. It miay be argued that there is no such inconsistency here, the exemption of our public servants from State taxation being based on the ground that they are Commonwealth instrumentalities and agencies, and should be free from control by any other authority. But, as we have clearly the power to remove the exemption, we are proposing to do so and also declaring that State taxation shall not be deemed inconsistent with the Federal Statute. The Bill provides that the official salaries of officers residing in a State, earned in it, may be taxed in common with other salariesearned in it, the "officer being required topay his fair share towards the cost of the State Government which he enjoys, and that the allowance and salaries of members and Ministers of the Commonwealth earned in a State shall be taxable within the State for which they are elected, so long as the taxation is not at a higher rate or to a greater extent than is imposed on other salaries of the same amount earned in the State. The intention of the measure is toremove what is an anomaly, and recognising that the decision of the High Court wasa good one as a matter of law, to-, place the members of the Commonwealth Public Service and Parliament on. the same footing as other members of thecommunity. I trust that the . House will pass the measure in the form in which it has been introduced, with a slight modification, which I shall submit in Committee.







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