Why the High Court?

The High Court is just that – the highest court in the land, and it comprises a Chief Justice and six justices. Its business is all about court cases, isn’t it? It’s got nothing to say about the levels of taxation, right? Wrong! Just ask the States that have suddenly lost their ability to levy up to $5 billion in taxes. And it was all over a challenge to the NSW tobacco franchise fee, believe it or not.

Two tobacco wholesalers, Tony Awad and Mahamoud El Chami, together with seven associates, had been charged with avoiding about $20m. in NSW tobacco licence fees. Their defence was that the license fees were unconstitutional, and this meant the case ended up in the High Court. This is because the High Court is the guardian of the Constitution – it alone is able to interpret the meaning of the Constitution, and this was the key issue in this case. Then the States came along and asked the High Court to broaden their powers to levy taxes on goods – if they had won, they might have been able to bring in their own goods and services tax.

Why is the Constitution relevant?

The Constitution is the document that divides the responsibilities of the courts, the parliament and the executive (the Governor-General). It also establishes the relationship between the Commonwealth and the States. As part of this process, the colonial States gave up their ability to impose excise taxes – that is, a tax that is levied on goods that raises their price – and gave it to the Commonwealth.

Mr Awad and Mr Chami appealed to the High Court, alleging the State tobacco licence fee was unconstitutional because it is in reality an excise tax and therefore can only be imposed the Commonwealth. The States have, however, always levied fees against tobacco sellers (and many other businesses) for the right to do business in their States – a licence fee – that they claim is not a tax on the tobacco that is being sold (which under the Constitution only the Commonwealth can charge). The tobacco wholesalers claimed the fee was really a tax, and therefore unconstitutionally imposed by the States. The question was what does section 90 of the Constitution mean:

"…the power of the Parliament to impose duties of customs and of excise…shall become exclusive…"

It’s only about tobacco, right?

Sorry, wrong again. This was a "test case". That means it is a case that establishes a principle that flows into other areas. One of the results of this High Court case is that it also affects fees and taxes levied by the States for alcohol and petrol – a total of about $1.5b for petrol, $2.6b for tobacco, and $750m for alcohol. And what about the taxes that have been collected in the past by the States? Do they have to be refunded?

It might be necessary for the Commonwealth Parliament to pass "retrospective legislation"– that means the legislation takes effect before the date it is passed (which is unusual, since most legislation only affects events that happen after the date on which it is passed).

Why not other taxes?

Since this case was only about taxing goods, there is nothing to stop State taxes on services like electricity and hotel beds.

So why shouldn’t the States simply look for other types of taxes? Because they are not as easy to collect and are unpopular (for example, financial transaction taxes), and now that death duties are considered to be political suicide (get it?), the States are running out of viable options. And as we all know, whenever the States are looking for a quick fix for revenue shortfalls, they hit tobacco, petrol and alcohol consumers fair square in the hip pocket. Now that the High Court has spoken, that well has run dry. And remember, payroll tax (another possibility) is just as unpopular with businesses! Therefore it seems inevitable that gambling taxes will become even more important in the future.

What’s the result?

It doesn’t mean that tobacco, petrol and alcohol will be cheaper. From now on (unless the High Court changes its mind in the future – the decision was 4-3) the Commonwealth Government will have to collect these fees and taxes on behalf of the States. This is a direct challenge to the independence of the States. In fact, some brave souls might even say that it is time we looked at the whole structure of the Commonwealth as it was set down almost a century ago.

Read this: The legal information contained above is intended to be general information about the law. It is not a substitute for legal and other professional advice. Lawscape Communications P/L does not accept responsibility for loss to any person, who either acts or does not act because of this information.

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