The South Australian State Government last week introduced a major bank levy in their 2017 budget. This new levy is expected to raise $370 million for the State Government over four years and comes on top of the bank tax introduced by the Federal Government in their May 2017 budget.

The banks are not happy and have flagged a possible constitutional challenge to the State based levy. This week we explore the relationship between the State and Federal Governments in regards to tax. First let’s have a look at the history of taxation in Australia.

Before Federation

The six Australian colonies operated as separate economies right up until federation. Most of the taxes levied were indirect customs and excise duties, with income only being taxed in the final years. In the decade before federation there was a split in the colonies outlook upon taxation, with some adopting a more free-trade approach and others remaining staunchly protectionist. The battle between the free-traders and the protectionists shaped some parts of our Constitution and it played out within the first decade of our Parliament. The first Government led by Edmund Barton was the Protectionist Party (who had to rely on Labour to pass legislation) and the first Opposition was led by George Reid from the Free Traders.

With such a difference in outlook between protectionists and free-traders, the Constitution stipulated what would occur in regards to trade between the States after Federation. Much of this is found in Chapter IV Finance and Trade. One section of the Constitution that has been flagged for challenge, in regards to the South Australian bank levy, is section 90. This section needs to be read in conjunction with section 86 and 91:

Section 86 [Customs, excise, and bounties]
On the establishment of the Commonwealth, the collection and control of duties of customs and of excise, and the control of the payment of bounties, shall pass to the Executive Government of the Commonwealth.

And:

Section 90 Exclusive power over customs, excise, and bounties
On the imposition of uniform duties of customs the power of the Parliament to impose duties of customs and of excise, and to grant bounties on the production or export of goods, shall become exclusive….

And:

Section 91 Exceptions as to bounties
Nothing in this Constitution prohibits a State from granting any aid to or bounty on mining for gold, silver, or other metals, nor from granting, with the consent of both Houses of the Parliament of the Commonwealth expressed by resolution, any aid to or bounty on the production or export of goods.

So, once Federation occurred the exclusive power over customs, excise and duties passed to the Commonwealth Government. However, the States still controlled aid and bounties on mining. And with the permission of the Federal Parliament the States can still levy taxes on the production and export of other goods.

If you’re interested and have time, you might like to flick through the rest of Chapter IV of the Constitution to examine how State and Federal relations work in regards to taxation and funding. To read this chapter click here. We’ve also written about Section 92 and you can click here to read. Plus Section 96 here, here and here.

Customs, excise and bounties

A series of High Court decisions have defined excise duties to be any levy imposed upon goods at any point in the production and distribution chain. Up until 1997 the States found ways to get around this by imposing license and franchise fees. A court decision in that year found these fees to be constitutionally invalid. In response to this the Federal Government increased their fees on the affected products and paid the proceeds to the States. This is federation working.

With the South Australian bank levy, the first question we need to ask is whether the levy is a custom, excise or bounty. If that is the case, then would banking come under the banner of goods? Section 90 stipulates that the Federal Government has exclusive power on taxes on the production or export of goods.

Goods versus services

Payroll tax, land tax, stamp duty. These are state taxes. Is adding a bank levy to this list just another transaction tax?

All States except Queensland had financial institution duties levied on deposits to bank accounts and term deposits up until the GST was introduced. The South Australian Government is claiming that taxing the banks a bit more is justified because GST is not levied on bank services.

But wait there’s more

The banks have also flagged a possible constitutional challenge on Section 109 of the Constitution:

Section 109 Inconsistency of laws
When 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.

On 23 June, the Treasury Laws Amendment (Major Bank Levy) Act 2017 was given the Royal Assent by the Governor-General. This Act amends a number of other Commonwealth Acts to impose a federal levy on the big four banks, plus Macquarie. This is expected to raise $1.5 billion a year ($6.2 Billion projected over four years) for the Federal Government and it’s now the law of the land.

The South Australian Government has also introduced legislation, the Budget Measures Bill 2017 to impose a levy on major banks operating in the State.

Can these two pieces of legislation work side by side? Or does the Federal legislation trump the State legislation? The answer to this will become clearer in the coming weeks and months. But in principle, State and Federal legislation can operate concurrently. In the past the High Court has pointed to two situations where inconsistency between Federal and State legislation might arise:

1.where a state law would alter, impair or detract from the operation of a law of the Commonwealth

2.where it appears from the terms, nature or subject matter of a federal law that it was intended as a complete statement of the law governing a particular matter (covering the field).

 It is to be expected that the State Government will have drafted the legislation so that it is not inconsistent with Federal legislation. But we can expect the legal team retained by the banks to be going through the legislation very carefully.

It has been reported that the banks are also looking at Section 92, which stipulates that trade within the Commonwealth must be free:

Section 92 Trade within the Commonwealth to be free
On the imposition of uniform duties of customs, trade, commerce, and intercourse among the States, whether by means of internal carriage or ocean navigation, shall be absolutely free….

Section 92 has been very contentious since federation. The courts have interpreted it in changing ways over the years. Since 2008 it has been accepted that legislation may be found invalid according to section 92 if it imposes discriminatory protectionist burdens.

Do you think a South Australian Bank Levy is discriminatory and protectionist? Will it restrict the free flow of banking industry services to the detriment of the national economy? Should the Commonwealth continue with its bank levy, which some commentators say is unfair?

The South Australian State Government

It was only a few short months ago that we witnessed a public barney between the South Australian Premier Jay Weatherill and the Federal Environment and Energy Minister Josh Frydenberg, live on TV. The South Australian Government does not seem to be in the mood to give the Federal Government any slack.

Some commenters are reporting that this is due to the 2016 GST stoush. The South Australian Labor Government came out in support of the Federal Liberal Government’s proposal to increase the GST. This was the South Australian Labor Government supporting a Federal Liberal Government to enhance a cooperative federation. Jay Weatherill did this without the support of Federal Labor or any of the other Labor States and was heavily criticised in the media.

The Commonwealth Government later dumped the GST increase idea. Perhaps Premier Jay Weatherill hasn’t forgotten wants to give them a poke in the eye whenever he can. At the time when the Federal Government canned the idea to increase the GST, Prime Minister Malcolm Turnbull stated that the States had to raise their own taxes:

They have got to be prepared I believe to go to their citizens and say, for example, ‘We want to — we need to raise money, more money to spend on our schools and our hospitals. And, we are going to increase this state tax, or that state tax’.

Well, now South Australia have increased their state taxes. We’ll have to wait and see if the legislation holds up to the bounds of the Australian Constitution.