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Turbocharging the Commonwealth’s fiscal powers: High Court expands excise power to include taxes on the consumption of goods

On Wednesday 18 October, the High Court of Australia handed down its long-awaited decision in Vanderstock v State of Victoria [2023] HCA 30 (Vanderstock). By a 4:3 majority, the Court ruled that the Victorian state government’s tax on zero and low-emission vehicles (ZLEVs) amounted to an ‘excise’ within the meaning of section 90 of the Constitution, which falls within the exclusive powers of the Commonwealth Parliament, and was therefore unconstitutional. In doing so, the Court also reopened and overruled its previous decision in Dickenson’s Arcade Pty Ltd v Tasmania (1974) 130 CLR 177 (Dickenson’s Arcade), which had held that a tax on the consumption of goods is not a duty of excise.

Background – The ZLEV Charge Act

In 2021, the Victorian government passed the Zero and Low Emission Vehicle Distance-based Charge Act 2021 (Vic) (ZLEV Charge Act). Section 7(1) required the registered operator of a ZLEV to pay a charge for the use of the ZLEV on ‘specified roads’ (ZLEV Charge) as a debt due to the State of Victoria, with the ZLEV Charge Act defining ‘specified road’ to effectively include all public roads in Australia, both within and outside of Victoria.

Section 3 of the ZLEV Charge Act defines a ZLEV to include ‘any electric vehicle, hydrogen vehicle or plug-in hybrid electric vehicle’ that is not an excluded vehicle. The ZLEV Charge was determined annually at a prescribed rate (indexed for inflation), which in the 2021-22 financial year was 2.5 cents per kilometre for electric or hydrogen vehicles and 2 cents for a plug-in hybrid electric vehicle.

The ZLEV Charge was designed to match the Commonwealth fuel excise paid by drivers of fuel-powered vehicles when paying for petrol. The fuel excise generates considerable revenue for the Commonwealth (approximately $16.8 billion in the 2020-2021 financial year, as noted by Kiefel CJ and Gageler and Gleeson JJ at [156]), some of which is then distributed to the states and territories as infrastructure grants to contribute to road maintenance.

In the second reading speech for the ZLEV Charge Act, the Treasurer noted that ‘ZLEV owners pay little or no fuel excise but they still use the roads’, and that the Act would ‘ensure all motorists contribute their fair share to the cost of funding Victorian roads and road-related infrastructure’ and ‘support the financial sustainability of Victoria’s road network and ensure we can continue to invest in our transport networks into the future’: see Vanderstock [164].

The facts

The plaintiffs, Christopher Vanderstock and Kathleen Davies, were registered operators of electric vehicles who were invoiced for and paid the ZLEV Charge. The plaintiffs commenced proceedings against the State of Victoria, challenging the validity of section 7(1) of the ZLEV Charge Act on the basis that it imposed a duty of excise within the meaning of section 90 of the Constitution. The Commonwealth intervened in support of the plaintiffs, with the Australian Trucking Association participating as amicus curiae limited to written submissions.

Victoria defended the challenge on the basis that the ZLEV Charge was a tax on the activity of driving a ZLEV on specified roads rather than a tax on goods, which it was entitled to impose. Each of the other States and Territories intervened in support of Victoria.

The majority decision

In a 4:3 decision, a majority of the Court ultimately held that the ZLEV Charge was an excise which fell within the exclusive power of the Commonwealth Parliament under section 90 of the Constitution, and therefore ruled section 7(1) of the ZLEV Charge Act constitutionally invalid.

In their joint reasons, Kiefel CJ, Gageler and Gleeson JJ held that a tax which is properly characterised as a tax on goods should not be excluded from the concept of an excise duty merely because it is imposed at the point of consumption of those goods, and that the previous High Court decision of Dickenson’s Arcade (which had held by majority that a tax on the consumption of goods does not constitute an excise duty) was ‘indefensible’ and should be overruled: [133]-[134].

Their Honours emphasised that the purpose of section 90 is to ensure that ‘execution of whatever policy the Commonwealth Parliament might choose to implement through the enactment of uniform laws of trade, commerce or taxation could not be hampered or defeated by State or Territory taxation of goods’: [124]. Kiefel CJ, Gageler and Gleeson JJ observed that a State or Territory tax on goods could depress demand for those goods (due to the increased cost to consumers), which could in turn interfere with Commonwealth policy with respect to trade in such goods as may be adopted in Commonwealth legislation to impose nationally uniform inland or border taxes: [125]-[126].

In determining whether tax amounts to a ‘tax on goods’, and therefore an excise, their Honours held that the tax must:

  1. bear a ‘close relation to the production or manufacture, sale, distribution or consumption’ of goods; and
  2. be of such a nature as to affect the goods as the subjects of manufacture or production, or as articles of commerce: [146]-[148].

Kiefel CJ, Gageler and Gleeson JJ considered that the ZLEV Charge had ‘real potential…to distort the intended practical operation of such uniform laws of trade or commerce or taxation as the Commonwealth Parliament might choose to enact for the purpose of influencing the supply of and demand for ZLEVs within Australia’: [155]. Their Honours found the distinction Victoria sought to draw between the use of a ZLEV and the activity of driving a ZLEV on specified roads ‘unsustainable’ given the broad meaning of ‘specified road’, and the fact that the ZLEV Charge was levied against the registered operator (that is, the owner or manager) of the ZLEV rather than the driver: [188]-[189]. Ultimately, their Honours were satisfied that the ZLEV Charge bore a ‘close relation’ to the use of ZLEVs and affected ZLEVs as articles of commerce, such that it was a ‘tax on ZLEVs’ and therefore an excise: [185], [195].

Jagot J, agreeing with the majority but writing separately, also favoured a broad reading of section 90 of the Constitution to ‘give effect to the “high constitutional purpose” of s 90 to ensure that the Commonwealth has real control over the taxing of goods by the creation of a free trade area throughout the Commonwealth’: [892]. In articulating eight ‘organising concepts’ for the interpretation of section 90, her Honour observed that ‘the battle for a narrow conception of the scope of s 90 has been fought, lost, re-fought, and lost again’: [886]. Jagot J similarly found the ZLEV Charge to amount to a tax on the use of ZLEVs, being a charge payable by the registered operator (regardless of whether any person could use the ZLEV) imposed by Victoria to raise revenue: [915]-[919], [930]-[932]. Her Honour noted that Victoria had been keen to mitigate the anticipated effect of depressing demand for ZLEVs in Victoria, indicating that Victoria ‘recognised and acted upon its knowledge of ordinary human experience’ that people may be dissuaded from buying a ZLEV due to the financial burden of the ZLEV Charge: [926]. Jagot J therefore found that ‘[t]he tendency of a tax on goods to decrease demand for the goods is one example of a possible distortion of the national unified free trade area throughout the Commonwealth which s 90 was intended to avoid’, and that in imposing the ZLEV Charge, the ZLEV Charge Act introduced ‘an obvious distortion into the Australian economic union and the national unified free trade area achieved by the constitutional compact’: [929].

The dissenting judgments

Gordon, Edelman and Steward JJ, each writing separately, dissented strongly. Gordon J referred to the new rule formulated by the majority as ‘a departure from long established and fundamental principle and authority’: [201]. Her Honour considered it legally, logically and constitutionally unjustified, including on the basis that the majority’s approach did not construe the Constitution, but rather amended it and ‘by that amendment arrogates to the Commonwealth an exclusive unbounded class of taxation’: [203]-[204]. Her Honour was ultimately not satisfied that the ZLEV Charge was a duty of excise: [214]. Gordon J also expressed concern that the majority’s approach would further entrench and exacerbate the unbalanced fiscal relationship between the States and the Commonwealth so as to ‘radically affect the scope of the States’ ability to raise taxation revenue’: [400]-[401].

Edelman J critiqued the majority’s approach, in concluding that the ZLEV Charge would have a real and substantial economic effect in the market for the sale of ZLEVs, as lacking ‘any empirical or economic evidence’: [447]. His Honour considered the majority’s approach in failing to apply the ‘supply-side constraint’ and ‘directness constraint’ as involving ‘a neglect of’ constitutional structure and text, contemporary understanding, history, political choice, economics, principle, precedent, authority and the future: [613]. In particular, in a paragraph which has since gained some notoriety, Edelman J described the extension of the essential meaning of an excise in the manner sought by the plaintiffs as involving ‘a neglect of precedent’, and cited every previous High Court judge whose decisions were now said to be wrong as a result: [651]. His Honour concluded that the majority’s decision represented ‘several large steps further’ in the ‘steady, but inexorable, movement towards the enfeeblement of the fiscal powers of the States’, and would remove reasonable certainty for the States as to the exclusion of various traditionally state-based taxes from the meaning of an excise: [701], [703].

Steward J considered that the plaintiffs’ proposed construction of section 90 would ‘distort the relationship between the States and Territories and the Commonwealth in a way that was unintended by the founding fathers…[and] render the States and Territories the constitutionally fiscal minions of the Commonwealth’: [712]. His Honour rejected the contention that a tax on any ongoing use of a good amounted to a tax ‘on’ goods, so as to constitute an excise, concluding that the ZLEV Charge was not a tax on goods: [714], [733]. His Honour also rejected the contention that a tax on the consumption of goods is an excise duty, considering that Dickenson’s Arcade was correctly decided in conformity with the settled jurisprudence of the Court with respect to section 90: [780]-[781], [789]. Steward J rejected the notion that section 90 conferred a monopoly on the taxation of all goods: [807]. His Honour also noted the importance of ensuring that ‘any recourse to “high constitutional purpose” does not become self-fulfilling, and result inexorably in the elimination of State legislative power in the pursuit of absolute federal control’: [800]. His Honour ultimately concluded that the majority’s construction of section 90 may well lead to uncertain and unintended consequences in future: [825].

Comment

The High Court has now confirmed that a tax on goods imposed at the point of consumption of those goods constitutes a duty of excise, overruling its previous decision to the contrary in Dickenson’s Arcade and resolving the question previously left unanswered by Capital Duplicators Pty Ltd v Australian Capital Territory [No 2] (1993) 178 CLR 561 and Ha v New South Wales (1997) 189 CLR 465. Vanderstock represents a further expansion of the Commonwealth’s customs, excise and taxation powers and, at least in the eyes of the minority, will have potential wide-ranging implications for the fiscal powers of the States.

In particular, the decision in Vanderstock is likely to have significant consequences for the ability of States and Territories to implement future taxes, duties or charges. It may also have implications for the constitutional validity of existing State-based levies, which were previously understood to fall outside of the Commonwealth’s exclusive powers to impose duties of excise, but may now be open for reconsideration on the basis that they impose a tax on the consumption of goods. The minority were particularly concerned about these potential implications: Edelman J and Steward J each noted potential categories of existing State-based taxes and imposts which may be adversely affected, such as taxes on gifts or inheritances, certain payroll and land taxes, consumption-based taxes, motor vehicle duties, vehicle registration charges, gaming machine levies and waste disposal levies: see [703] and [785]-[786], respectively. Gordon J, meanwhile, warned that the legal and practical operation of any future State laws imposing taxes which could affect the demand for goods was ‘likely to be the subject of years of litigation as the courts seek to determine how the new rule is to operate…uncertainty is the default and it is likely to remain the default for many years’: at [416].

Separately, there are almost certain to be significant policy considerations flowing from the decision relating to the uptake of electric vehicles. As the number of electric vehicles on Australian roads increases, so too will the revenue derived from fuel excise by the Commonwealth and distributed to the States and Territories decrease. The National Electric Vehicle Strategy published by the Commonwealth government in April 2023 has identified the expectation that increasing electric vehicle uptake will slow the growth of, and ultimately lead to a future decline in, fuel excise receipts: p 33.

Given that the decision in Vanderstock will likely prevent other State and Territory governments from seeking to introduce their own charges on ZLEVs, to supplement the revenue distributed to them through the Commonwealth fuel excise, it will be a matter for the Commonwealth to balance the competing considerations of continuing to derive revenue to maintain and improve road infrastructure, against the desire to incentivise greater uptake of electric vehicles as part of Australia’s renewable energy transition.

Thaw Thaw Htin

Principal

Aparna Jayasekera

Associate

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.

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