High Court overturns status quo of federal-state taxation rights 11 min read
In its recent decision of Vanderstock v Victoria  HCA 30 (18 October 2023) (Vanderstock), the High Court has ruled by a 4:3 majority that the Victorian electric vehicle road user charge (EV charge) is unconstitutional.
The Court held that section 7(1) of the Zero and Low Emission Vehicle Distance-Based Charge Act 2021 (Vic) (the ZLEV Act) is invalid as it imposed a duty of excise as prohibited by section 90 of the Constitution. As noted in our previous Insight, s90 of the Constitution makes exclusive the power of the Federal Parliament to impose taxes that are duties of customs and excise. Any duty of custom or excise imposed by a state is therefore invalid.
The Court's decision in Vanderstock has expanded the range of taxes that can only be levied by the Federal Parliament, to the exclusion of the states. The majority of the High Court justices are of the view that the Federal Parliament has exclusive legislative power to impose taxes that are properly characterised as a 'tax on goods'.
The impact of the Vanderstock decision, then, is that any state tax which is properly characterised as a 'tax on goods', under the tests laid down by the Court, is unconstitutional and therefore invalid. This decision is likely to have broad repercussions for the tax base of the states and the federal-state distribution of taxation powers (ie it will increase the so-called 'vertical fiscal imbalance').
- The High Court has ruled Victoria's EV charge invalid for being unconstitutional under s90 of the Constitution.
- The decision suggests that any state tax which is properly characterised as a 'tax on goods' under the relevant tests is unconstitutional and therefore invalid.
- The decision has significant implications for taxpayers who pay, and state governments that collect, state taxes imposed on the consumption or use of goods, including potentially stamp duty on the transfer of goods, motor vehicle registration and transfer duty, gaming machine taxes and other fees and levies imposed at the point of consumption.
- It remains to be seen if the Government will step in to implement federal taxes that mirror unconstitutional state taxes in order to protect the states' tax bases going forward, and to effectively deny refunds of tax already paid.
High Court's decision
The High Court has held that s7(1) of the ZLEV Act is invalid for imposing a duty of excise in breach of s90 of the Constitution. In coming to this decision, the Court reopened and overruled its earlier decision in Dickenson's Arcade Pty Ltd v Tasmania (1974) 130 CLR 177, which held that a tax on the consumption of goods does not constitute a duty of excise.1
The EV charge was held to be a tax within the scope of this expanded definition of excise. Following the decision in Vanderstock, the definition of an excise is no longer limited to taxes imposed before a good reaches a consumer, but can now include taxes on the consumption, ownership, use, resale, reuse or destruction of a good in Australia.2
A new test introduced
The expanded scope of the term 'excise' for the purpose of s90 was supported by a majority, including a single judgment of Chief Justice Kiefel, Justices Gleeson and Gageler, and a concurring judgment written by Justice Jagot.3 The plurality diverged from existing authority significantly in holding that a tax is a 'tax on goods', and thus a duty of excise, if:4
- it bears a close relation to the production or manufacture, sale, distribution or consumption of goods; and
- it is of such a nature as to affect the goods as subjects of manufacture or production or as articles of commerce. As was the case in Vanderstock, a tax will be of a nature that sufficiently affects goods as articles of commerce if the tendency of the tax is to depress demand for those goods5, though the majority did not limit the scope of their decision to only such cases.
In evaluating whether a tax satisfies these two 'elements', the plurality emphasised that one should look to both the legal form and substance (or practical operation) of the law. A court will consider economic analysis informed by observed market behaviour, including elasticities and cross-elasticities of supply and demand, to identify the precise incidence of a given tax.6
The plurality suggests that:
|What is in each case required is the formation of a practical judgment. That is the stuff of constitutional adjudication.7
It is worth noting that the High Court bench unanimously refused Victoria leave to re-open the High Court's decisions in Capital Duplicators [No 2]8 and Ha,9 on the basis that these authorities are critical to federal-state financial relations and the goods and services tax; therefore 'they are not to be judicially disturbed'.10 This emphasis on federal-state financial relations reflects the High Court's recent reasoning upholding the validity of notional GST in Hornsby Shire Council v Commonwealth  HCA 19 (14 June 2023), which we explored in an earlier Insight.
Application to the ZLEV Act
Section 7(1) of the ZLEV Act required the registered operator of a zero or low emissions vehicle (ZLEV) to pay a charge for 'use of the ZLEV on specified roads'. The tax applied where a ZLEV was used on public roads and was levied on the basis of kilometres travelled by the ZLEV.
Despite the legal form of the tax, which was levied on use of a ZLEV rather than on the ZLEV itself, the plurality held that the EV charge was a tax on goods:
- due to the close relation between the tax and the use of ZLEVs; and
- because the tax affects ZLEVs as articles of commerce, including because of its tendency to affect demand for ZLEVs.11
The majority rejected the characterisation of the EV charge as being nothing more than a tax on the activity of driving a ZLEV on a 'specified road'; that distinction was unsustainable having regard to the breadth of the definition of 'specified road', which extended to anywhere in Australia in which members of the public have a right of way.12
State taxes that are under a cloud following Vanderstock
It is very likely that other state taxes will be impacted by the decision in Vanderstock. First, it is likely that EV charges imposed by other states are invalid. Second, other state taxes that bear a close relation with goods and depress demand for such goods could also be invalid. The dissenting judgments point to the following taxes that could all come within the expanded scope of s90 based on the reasoning of the Vanderstock majority:
- duties paid on the transfer of goods where transferred with land or businesses (eg plant and equipment, or trading stock in the case of Queensland)
- motor vehicle duties and vehicle registration charges
- commercial passenger vehicle levies
- gaming machine levies and 'point of consumption' betting taxes
- waste disposal levies
- tobacco licensing fees.13
Justice Edelman, in dissent, also argued that, extending the majority's reasoning to its logical conclusion, it is no longer obvious that the following taxes do not breach s90:
- payroll tax
- industrial land tax
- licences to carry on a business where the business concerned the production or manufacture of goods
- a tax concerning the carriage of goods
- taxes on a gift of goods or an inheritance of goods.14
It seems unlikely that state land taxes in general breach s90, given that s114 of the Constitution expressly contemplates that states can impose taxes on property (which must be property other than goods, a category that clearly includes land). Licences to carry on a business might also be a fee for a statutory right to exploit a limited resource, which is not a tax and thus not a duty of excise.15 At first blush, state payroll taxes would not appear to be taxes on goods, but at least one taxpayer is currently seeking to argue as such in the Supreme Court of New South Wales.16
Impact on federal-state taxation powers
Vanderstock may mark a decisive change in the fiscal balance between the states and the Government. Indeed, the minority of Justices Gordon, Edelman and Steward heavily criticised the majority for undermining federalism and the financial interests of the states. As Justice Edelman put it, if s90 were to extend to any tax where a real and substantial economic effect in a market for the sale of goods was anticipated, then it would go further than even contemplated by the plurality, potentially undermining federalism itself.17
Justice Gordon's dissent indicates that future litigation in relation to s90 is likely as parties seek greater certainty regarding the distinctions between a tax and an excise:
|… the legal and practical operation of any subsequent state law imposing a tax that may have a potential effect on the demand or market for goods is likely to be the subject of years of litigation as the courts seek to determine how the new rule is to operate and, no less importantly, the manner of determining the legal and practical operation of a "tax on goods"… We just do not know whether there are limits and how any such limits are to be applied—uncertainty is the default and it is likely to remain the default for many years.
Implications for Australia's transition to clean energy
The decision is also likely to affect states' abilities to play a role in facilitating Australia's energy transition, given that imposition of taxes can be a powerful tool for adjusting market behaviour, and a number of states were considering equivalents to the Victorian EV charge before Vanderstock. Justice Gordon's dissent highlighted and criticised the impact of the majority's decision on the implementation of climate-related regulation:
|…The unstated assumption is that it is the Commonwealth, not the States, which has the responsibility to address climate change and to regulate ZLEVs. That unstated assumption is wrong. It is equally the responsibility of the States.18
That said, the decision in Vanderstock forms part of a broader trend in tax-related cases favouring taxpayers who invest in assets that facilitate Australia's energy transition.19
As a consequence of Vanderstock:
- the EV charge is invalid, with the effect that any annual charges levied on EV users under the ZLEV Act are invalid (and, subject to the enactment of any saving legislation, should be refunded)
- equivalent EV road user charges in other states (eg NSW) could also be invalid
- state-imposed taxes (such as those outlined above) relating to the use or consumption of goods may be invalid.
There remains a possibility the Federal Parliament will impose 'saving' legislation to ensure that tax collected under impugned state legislation does not need to be refunded. Saving legislation was imposed, for example, after the successful challenge to the tobacco franchise levy in Ha,20 and after the successful challenge to the imposition of state taxes at Melbourne Airport in Allders International Pty Ltd v Commissioner of State Revenue (Vic) (1996) 186 CLR 630.21 However, outstanding tax liabilities that are not paid in the interim might not be captured by a relevant 'saving' provision.
It would also be necessary to consider state legislation that seeks to limit refunds. For example, the NSW Recovery of Imposts Act 1963 limits a taxpayer's ability to bring proceedings against the state for the recovery of tax on the grounds of the invalidity of tax legislation. Any such proceedings must be brought within 12 months of payment of the tax sought to be refunded.
Going forward, it is possible the Government may impose federal taxes designed to 'mirror' state taxes found to be invalid under s90, with a view to preserving the states' revenue base. We would speculate that this is most likely for motor vehicle transfer and registration duties, but in any case, would require cooperation between the Government and the states. Any such taxes would need to comply with the limitations on the taxing powers of the Commonwealth Parliament, including that such taxes cannot discriminate between states or give preference to any state.22 The High Court has previously held that mirror state taxes imposed by the Government in federal places, like Melbourne Airport, after the Allders decision, do not infringe these limitations.23
Any predictions regarding the future application of Vanderstock are also complicated by the recent changes to the High Court bench. As Chief Justice Kiefel steps down and the appointment of Justice Beech-Jones approaches, there is a chance that either the reconstitution of the High Court bench or the persuasive, strongly worded dissents inspire a watering-down or even a reversal of the High Court's reasoning in Vanderstock.
Vanderstock 48  (Kiefel CJ, Gageler and Gleeson JJ), 382  (Jagot J).
Vanderstock 69  (Kiefel CJ, Gageler and Gleeson JJ).
Vanderstock 48  (Kiefel CJ, Gageler and Gleeson JJ), 382  (Jagot J).
Vanderstock 69  (Kiefel CJ, Gageler and Gleeson JJ).
Vanderstock 337-384 (Jagot J).
Vanderstock 53  (Kiefel CJ, Gageler and Gleeson JJ).
Vanderstock 54  (Kiefel CJ, Gageler and Gleeson JJ).
(1993) 178 CLR 561.
(1997) 189 CLR 465.
Vanderstock 2-3  (Kiefel CJ, Gageler and Gleeson JJ), see also 180  (Gordon J), 254  (Edelman J); 330  (Steward J), 347  (Jagot J).
Vanderstock 66  (Kiefel CJ, Gageler and Gleeson JJ).
Vanderstock 66-67  (Kiefel CJ, Gageler and Gleeson JJ).
See Vanderstock 321  (Steward J); 175  (Gordon J).
See Vanderstock 280 , see more generally 279-281 - (Edelman J).
See, eg, Harper v Minister for Sea Fisheries (1989) 168 CLR 314, 325, 335-7.
Aymsheen Pty Ltd v Chief Commissioner of State Revenue  NSWSC 1237 (5 October 2023).
See Vanderstock 195-196  (Edelman J), see also 72  (Gordon J).
Vanderstock 176  (Gordon J).
See, eg, Chief Commissioner of State Revenue (NSW) v Shell Energy Operations No 2 Pty Ltd  NSWCA 113 (26 May 2023); Valuer-General Victoria v AWF Prop Co 2 Pty Ltd  VSCA 274 (1 October 2021).
See Franchise Fees Windfall Tax (Collection) Act 1997 (Cth) and Franchise Fees Windfall Tax (Imposition) Act 1997 (Cth).
Constitution ss51(ii), 99.
Permanent Trustee Australia Ltd v Commissioner of State Revenue (Vic) (2004) 220 CLR 388, 423-425.