Federal Balance

Two basic observations can be made about the respective roles of the Commonwealth and the States in the federation:

The Commonwealth is generally regarded as the more powerful partner.
Despite this, very large and important areas of law-making and administrative competence remain with the States.

Important factors giving rise to the current balance are:

the relatively broad interpretation which the High Court has given to Commonwealth powers
the difficulties the States have experienced in raising sufficient revenue to perform their governmental functions, and
the practical need for cooperative action by the Commonwealth and State governments to address national problems.

Judicial interpretation of the Commonwealth’s powers

The Constitution is in virtually the same form as it was when enacted in 1901. Yet, in its actual working, the Constitution has changed remarkably. One principal reason for this change is the interpretation of the Constitution by the High Court.

The Constitution divides law-making power between the Commonwealth and the States. It does so principally in section 51 (which is discussed at [6.65]–[6.81]). Section 51 confers on the Commonwealth Parliament the power to make laws 'with respect to' 40 specified subject matters numbered from (i) to (xxxix), with (xxiiiA) bringing the number to 40.

An important function of the High Court in interpreting the Constitution is to determine where the division of law-making power lies. When evaluating the significance of the High Court’s role, it should be remembered that, because of the supremacy which section 109 of the Constitution confers on Commonwealth laws over State laws, for practical purposes a wide interpretation of the Commonwealth Parliament’s legislative powers diminishes the powers of the States. The wide interpretation of section 109 itself has had a similar effect.

Early developments

The view which the High Court has taken as to the law-making powers of the Commonwealth and the States has gone through several stages. The first approach, which the Court adopted in 1904, was based on 2 doctrines, known to lawyers as the 'implied intergovernmental immunity' doctrine and the 'reserved powers' doctrine. Both these doctrines were based on implications which the Court drew from the federal structure of the Constitution.

Implied intergovernmental immunity

Under the 'implied intergovernmental immunity' doctrine the Commonwealth and State governments were prevented from interfering with each other. For example, in D’Emden v Pedder (1904), the Court held that a State parliament could not tax the income of a Commonwealth government employee.

Reserved powers

The 'reserved powers' doctrine was based on the view that the Constitution was intended to 'reserve' to the States all powers not expressly conferred on the Commonwealth and that, further, the Commonwealth Parliament could not use its specific law-making powers to intrude into any of this residual area 'reserved' to the States.

The application of the doctrine is illustrated by Barger (1908). A Commonwealth Act imposed a tax on goods produced by low-paid workers. The object of the Act was to encourage producers of goods to pay their workers adequately. The Commonwealth Parliament has power to impose taxes under section 51(ii) of the Constitution. Despite this, a majority of the High Court decided that the Act was invalid because it was, in substance, a law about wage rates in industry – a matter then thought to be 'reserved' to the States – and not a law about taxation.

Rejection of reserved powers

In 1920, in a landmark decision known as the Engineers case, the High Court in effect repudiated the reserved powers doctrine. The case arose from a log of claims by the Amalgamated Society of Engineers against a wide range of employers. It considered whether the Commonwealth could regulate industrial disputes in relation to State government undertakings under section 51(xxxv) of the Constitution. In considering this issue, the Court was understood to have decided that a broad construction of Commonwealth power should be favoured, with no assumptions made about the size of the residual power left to the States. This approach has been followed by the Court ever since, and its application has significantly increased the powers of the Commonwealth relative to the States.

Broad interpretation of powers

This broad interpretation of Commonwealth powers may be illustrated by the following example. Say the Commonwealth Parliament passed a law which prohibited the exporting of woodchips unless the person harvesting the timber had complied with environmental guidelines set by a Commonwealth authority. Under the reserved powers doctrine, it would have been possible to argue that the Commonwealth Parliament could not validly pass this law because it was, in substance, concerned with environmental protection – a matter over which the Commonwealth has no specific power and, accordingly, a matter 'reserved' to the States. Following the Engineers case, this argument was no longer open. A law prohibiting the export of woodchips is clearly a law with respect to overseas trade and commerce – a matter for the Commonwealth under section 51(i) of the Constitution – and that is enough. The fact that it can also be viewed as a law about environmental protection is constitutionally irrelevant.

In 1965, the High Court decided in Fairfax that the Commonwealth’s power to impose taxation under section 51(ii) of the Constitution can be used not merely to raise money but also as an indirect means of controlling conduct. This decision effectively overruled Barger (1908), referred to at [5.9]. It allows the Commonwealth to in effect coerce people by taxation to do things which the Commonwealth could not directly require them to do. For example, the Commonwealth Parliament does not have power under the Constitution to pass a law requiring all employers to provide superannuation benefits to their employees. However, the Parliament can impose a tax on all employers who do not provide those benefits, thus indirectly compelling their provision. This was the purpose and effect of the tax imposed by the Superannuation Guarantee Charge Act 1992.

The High Court has also generally interpreted the subject matters of Commonwealth powers broadly. This issue focuses not on whether a law is 'with respect to' a specific Commonwealth head of power but on what that head of power means as a subject matter. For example, in Brislan (1935), the Court held that the head of power under section 51(v) of the Constitution, 'postal, telegraphic, telephonic and other like services', included radio broadcasting. The Court decided that radio broadcasting was a service 'like' postal, telegraphic and telephonic services. In Jones (1965), the Court reached the same conclusion in relation to television services. So the Commonwealth has been able to rely on section 51(v) to make laws about (or 'with respect to') radio and television. More recently, in the Marriage Equality case (2013), the High Court determined that the subject matter of 'marriage' in section 51(xxi) of the Constitution was not confined to a relationship between a man and a woman but extended to 'a consensual union formed between natural persons in accordance with legally prescribed requirements which is not only a union the law recognises as intended to endure and be terminable only in accordance with law but also a union to which the law accords a status affecting and defining mutual rights and obligations'.

Some other examples of the High Court’s broad approach to the scope of Commonwealth legislative power, in defining the subject matter or in determining whether a law is about that subject matter, can be noted:

The defence power (section 51(vi)) is in wartime limited only by constitutional prohibitions (Gratwick v Johnson (1945)), and war controls remain valid through postwar reconstruction (Dawson (1946)).
The trading, financial and foreign corporations power (section 51(xx)) includes any corporation which has trading as a significant part of its activities (State Superannuation Board case (1982)). Further, in Work Choices (2006), the High Court held that the power enabled the regulation of employment by those corporations. That allowed the Commonwealth to bypass the interstate conciliation and arbitration power (s 51(xxxv)) and its significant limitations to more directly and comprehensively regulate workplace relations.
The external affairs power (section 51(xxix)) includes power to make laws for carrying out international agreements, even though the topic would not otherwise come within Commonwealth power (Franklin Dam case (1983)). This issue is discussed further at [5.23]–[5.33].

Broad approach in context

This picture of interpretation favouring a wide construction of Commonwealth power has to be modified to some extent. The High Court does not always resolve disputed questions as to what a power means and includes, called 'characterisation', in the Commonwealth’s favour. In other words, the Court does not always give the Commonwealth the benefit of the doubt. For example, in the Incorporation case (1990) the Court decided that the corporations' power (section 51(xx)) did not allow the Commonwealth to regulate the incorporation of 'trading or financial corporations' primarily because that power referred to such corporations 'formed within the limits of the Commonwealth' and on that basis should be confined to allowing regulation of already existing corporations. More recently, in Spence (2019), the Court held that the Commonwealth’s power to regulate matters relating to Commonwealth parliamentary elections did not extend to overriding State laws that applied to donations that could be applied for Commonwealth electoral purposes as opposed to donations that had to be applied for those purposes.

Further, the attitude of the High Court majority in the cases referred to above at [5.13]–[5.14] was liberal only if compared with minority High Court views, or earlier High Court views, which involved a much narrower reading of Commonwealth powers. For example, the views of Sir Samuel Griffith (Chief Justice 1903–1919) and Sir Edmund Barton (Justice 1903–1920) on the interstate industrial arbitration power (section 51(xxxv)) would have restricted it to a much narrower range of industries, disputes and disputants and made federal awards subject to being overridden by State industrial laws.

However, if we compare predominant High Court views with those arrived at in relation to similar powers by the Supreme Court of the United States then the Australian decisions seem relatively cautious and on some matters narrow. For example, the United States Supreme Court has given such a wide meaning to the Congress’s interstate commerce power that it has made the power cover practically the whole of trade and industry. The Australian High Court has restricted section 51(i) to trade which in a direct sense crosses State boundaries. It has specifically excluded production from the scope of the power (Shipping Board case (1926)).

Rejection of intergovernmental immunity

In the Engineers case (1920), the High Court also rejected the doctrine of intergovernmental immunity. The Court thought that there was no reason why, generally speaking, the Commonwealth could not pass Acts which applied to the State governments and vice versa. On this view, for example, the Commonwealth Parliament could tax the salaries of State government employees and the State parliaments could tax the salaries of Commonwealth public servants.

Subsequently, the Court modified its approach in a number of ways. It decided that the States could not pass laws which bound the Commonwealth, thus partially reinstating in the Commonwealth’s favour the concept of intergovernmental immunity (Bogle (1953), Cigamatic (1962)). But in Henderson (1997) a majority of the High Court overruled Bogle and held that, while a State law cannot restrict or modify the executive capacities of the Commonwealth, a State law can regulate the activities which the Commonwealth chooses to undertake, such as entering into a contract. In that case, the Court held that the Commonwealth’s Defence Housing Authority, in entering into lease agreements as part of its statutory functions, was subject to a New South Wales Act which regulated residential tenancies. More recently in Spence (2019), a majority of the High Court seemed to suggest that the Commonwealth might not enjoy any greater implied constitutional immunity from State laws than the States enjoy from Commonwealth laws (see [5.21]–[5.22]).

The practical importance of this esoteric issue has been significantly reduced by a number of factors. First, to arise, State legislation needs to intend to bind the Commonwealth; much State legislation does not seek to do so. Secondly, some Commonwealth legislation in effect voluntarily subjects the Commonwealth and its agencies to many aspects of State law (section 64 of the Judiciary Act 1903; see also section 79 of that Act). Further, in this area, as in other areas, the Commonwealth enjoys the immense advantage conferred by section 109 of the Constitution (see [4.53]–[4.55]). Therefore, even if a doctrine of implied immunity does not prevent State law from applying to the Commonwealth, the Commonwealth can use legislation which is within its constitutional power to exclude itself from the application of any State law.

The High Court has also made clear that, although the Commonwealth can ordinarily pass laws applying to State governments, such laws cannot curtail the continued existence of the States or their capacity to function as governments. A Commonwealth law will not often infringe this implied limitation, and it is sometimes difficult to determine when it will. One significant factor is whether the Commonwealth law discriminates against or singles out State governments (State Banking case (1947), Queensland Electricity Commission (1985)) by imposing a special burden on them. On this basis, a Commonwealth law which imposed a tax solely on commercial activities carried on by State governments would likely be unconstitutional. Even if the Commonwealth law is non-discriminatory – that is, it purports to apply equally to State governments and other entities and persons – it will be invalid in its application to State governments if it regulates a matter that a State must control for it to continue to exist and operate as a separate component of the federal structure mandated by the Constitution. For example, the Commonwealth cannot use its legislative power to control the staffing levels of State government departments (Australian Education Union (1995)) or the terms and conditions of State judges (Austin (2003)) or parliamentarians (Clarke (2009)).

As noted at [5.19] in Spence (2019), the High Court has suggested that the principle of intergovernmental immunity works in the same way for the States and the Commonwealth. That is, neither the Commonwealth nor State parliament can make laws which may destroy another government or curtail in any substantial manner the exercise of another government’s powers or 'obviously interfere with one another's operations’. The principle applies 'reciprocally' for the benefit of the States and the Commonwealth, and neither has absolute immunity from the other.

External affairs power

In Australia, international agreements are entered into by the Commonwealth government under the executive power conferred by section 61 of the Constitution. However, for most purposes an international agreement does not become part of the law of Australia unless the Commonwealth Parliament has passed an Act giving the agreement the force of law (Teoh (1995)). When giving legislative effect to an international agreement, the Parliament acts under the external affairs power in section 51(xxix) of the Constitution.

For a number of years, of all the legislative powers conferred on the Commonwealth by the Constitution, it was the external affairs power which aroused the most controversy. Since federation, the importance of the external affairs power increased dramatically due to Australia’s emergence as an independent nation and the steady proliferation of matters regulated by international agreements (see [3.49]–[3.55]).

Burgess

The High Court first looked at the external affairs power in 1936, when in Burgess it decided that section 51(xxix) allowed the Commonwealth Parliament to pass a law giving effect to an international convention on air navigation. However, Burgess did not conclusively resolve the critical issue of whether section 51(xxix) allows the Commonwealth Parliament to pass legislation implementing any treaty, regardless of its subject matter.

Koowarta

Nearly 50 years passed before the High Court considered that issue fully in Koowarta (1982). In that case, the Queensland government challenged the validity of the Commonwealth’s Racial Discrimination Act 1975. That Act gave effect to an international agreement on eliminating racial discrimination. Before the High Court, Queensland argued that section 51(xxix) did not allow the Commonwealth to pass laws to implement all international agreements which the Commonwealth government might sign. Rather, the subject matter of the agreement must have some international element before the Commonwealth Parliament could rely on its external affairs power. The 7 justices of the High Court split on this issue.

Three justices (Chief Justice Gibbs and Justices Aickin and Wilson) adopted a narrow view of section 51(xxix) and decided that the relevant treaty’s subject matter must itself be international (for example, international air travel). Three justices (Justices Mason, Murphy and Brennan) adopted a broad view of section 51(xxix) and decided that any treaty that the Commonwealth government entered into in good faith can be implemented by legislation. Justice Stephen plotted a middle course between these 2 views by deciding that the treaty must be about a matter of 'international concern' before it can be implemented under section 51(xxix). Justice Stephen felt that racial discrimination was a matter of 'international concern'. Therefore, the Court held the Racial Discrimination Act to be a valid law of the Commonwealth by a majority of 4 judges to 3.

Franklin Dam case

The same constitutional issue arose a year later in the Franklin Dam case (1983). The Commonwealth Parliament had enacted laws to stop the building of a dam by the Tasmanian Hydro-Electric Commission. The Commonwealth legislation which effectively prohibited the construction of the dam was based in part on an international agreement, to which Australia was a party, that was intended to protect wilderness areas that were of special environmental significance. The then Tasmanian government challenged the validity of the Commonwealth laws before the High Court.

A majority of the Court (Justices Mason, Murphy, Brennan and Deane) upheld the validity of the legislation and endorsed the 'wide view' of the external affairs power. Since then the Commonwealth Parliament has acted on the basis that it may legislate to implement any international agreement that the Commonwealth government has entered into in good faith. The 3 dissenting justices in the Franklin Dam case (Chief Justice Gibbs and Justices Wilson and Dawson) sharply disagreed with the majority justices, arguing that the majority’s approach would fundamentally upset the federal balance established by the Constitution. They stated that, if the Commonwealth was allowed to implement any treaty regardless of its subject matter, the Commonwealth could pass laws on an unlimited range of subjects. This would destroy the careful division of powers which the Constitution effects between the Commonwealth and the States. The minority justices (reluctantly adopting Justice Stephen’s approach in Koowarta) argued that only international agreements relating to matters of significant international concern should be capable of implementation by the Commonwealth under section 51(xxix).

In response, the majority justices regarded this test of 'significant international concern' as unworkable. They felt that the Court was not well placed to apply the test, involving, as it did, a political judgment, and that its application would restrict Australia’s capacity to participate in the international community. In any event, the majority’s view was that the very fact that countries had entered into an agreement on a particular subject was clear evidence that that subject was one of international concern. The majority felt that much of the minority justices’ reasoning was based on the discredited 'reserved powers' doctrine (see [5.8]–[5.10]). Specifically, the minority view was, they felt, inconsistent with the established principle that Commonwealth powers should be construed liberally and without regard to the effect that a liberal construction will have on the residual power of the States.

Even on the broad view that the majority justices adopted in the Franklin Dam case, the scope of the external affairs power is not unlimited. First, the power, like all other Commonwealth powers, is subject to express and implied prohibitions in the Constitution. For example, the Commonwealth could not give effect to a treaty which required religious discrimination contrary to section 116.

Secondly, just because the Commonwealth government enters into an international agreement does not mean that the Commonwealth Parliament can legislate on the subject matter of the agreement as if it were a new and independent head of power. Rather, the legislation must be capable of being seen as an appropriate way of giving effect to the object of the international agreement.

External affairs power today

The view of the majority in the Franklin Dam case was confirmed by the High Court in Richardson (1988). In the years since then political controversy over the use of the external affairs power has significantly reduced. In part this is because the use of the power by the Commonwealth has usually related to matters which seem to require a national response (such as climate change) and has not generally resulted in the States being excluded from areas which they have traditionally regulated. Parliamentary and State scrutiny of treaty obligations

Parliamentary and State scrutiny of treaty obligations [WHY WAS THIS EXCLUDED?]

Following the 1996 elections, the Howard government agreed to a number of initiatives to address concerns about the growth of Australia’s international obligations. A joint parliamentary committee was established to scrutinise treaty obligations which the Commonwealth government proposes to assume on behalf of Australia. The Commonwealth has also agreed to consult the States before entering into a treaty of particular importance and sensitivity to the States.

Influence of events outside the Court

It would be a mistake to attribute the Commonwealth’s present predominant position in the federation primarily to the High Court’s interpretation of the Constitution. This has been an important factor, but equally important have been various political, social and economic developments. For example, the creation of the Commonwealth (see chapter 2), the development of Australian nationhood and Australia’s growing role in international affairs (see chapter 3) necessarily led to a national consciousness on the part of the Australian people and to Commonwealth authorities taking responsibility for matters ranging from citizenship to the national anthem.

National and international crises – in particular, the 2 world wars – also led to a significant increase in Commonwealth power, as Australia’s response to these demanded centralised and coordinated action. It was this consideration which led Sir Victor Windeyer (a Justice of the High Court from 1958 to 1972) to say that the Engineers case (1920) (see [5.10]), looked at as an event in legal and constitutional history, was a consequence of developments that had occurred outside the law courts as well as a cause of further developments there.

Public finance

Traditionally, the greatest problem which the States have experienced has been in raising sufficient revenue to perform their governmental functions. As a result, the States have become dependent on the Commonwealth for a significant proportion of their revenue. This dependence would have surprised many of those involved in drafting the Constitution. As we have seen, they had intended to create a coordinated federal system with the Commonwealth and the States acting independently of each other and with each level of government having access to enough tax revenue to fund its allotted activities.

However, there was at least one founder who saw that the financial imbalance between the Commonwealth and the States would alone be sufficient to falsify the expectations of coordinated federalism. Writing in 1902, Alfred Deakin, in a colourful and often-quoted passage, made this prediction about Commonwealth–State financial relations:

As the power of the purse in Great Britain established by degrees the authority of the Commons, it will ultimately establish in Australia the authority of the Commonwealth. The rights of self-government of the States have been fondly supposed to be safeguarded by the Constitution. It left them legally free, but financially bound to the chariot wheels of the central Government. Their need will be its opportunity. The less populous will first succumb; those smitten by drought or similar misfortune will follow; and, finally, even the greatest and most prosperous will, however reluctantly, be brought to heel. Our Constitution may remain unaltered, but a vital change will have taken place in relations between the States and the Commonwealth.

Financial relations to World War II

Financial relations between the Commonwealth and the States were governed by section 87 of the Constitution until 1910. Since then, they have been a matter for negotiation between the governments. Section 51(ii) allows the Commonwealth to impose all forms of taxation, and section 51(iv) gives it a power to borrow for any purpose. Section 90 excludes the States from imposing customs and excise duties; otherwise their taxing and borrowing powers are also without limit. Section 96 authorises Commonwealth grants, unconditional or conditional, to the States.

Until 1914, customs and excise provided the bulk of public revenue. The Commonwealth had a monopoly over customs and excise revenue by virtue of section 90. Therefore, section 87 required the Commonwealth to pay the States three-quarters of that revenue. In 1910, when that requirement ceased, the Commonwealth government negotiated in substitution the payment to States of an annual grant per head of population, and this continued until 1927.

In the meantime, World War I greatly extended the range of Commonwealth activities and expenditures. It also increased the industrialisation and revenue sources of Australia, and it accelerated a trend in public finance – the use of income taxation as a major source of revenue. After 1919, all States and the Commonwealth increasingly relied on income tax (first imposed in 1915 by the Commonwealth Parliament) and the per capita payments by the Commonwealth government to States became a decreasing proportion of State income.

Customs and excise revenue remained important, and the fact that the Commonwealth authorities had a monopoly of that source gave them a continued advantage. But the relative position of the States improved considerably through their imposition of income taxation (and to a lesser extent other direct taxes, notably succession and land taxation). From 1923 on, the Commonwealth and the States made arrangements for joint collection of income tax. This enabled them to save a great deal on administrative costs. However, principles of assessment and tax rates varied from State to State and between States and the Commonwealth.

The Commonwealth monopolises income tax

As at 1941 the States retained a high degree of autonomy in their budget strategy. They had adequate revenue sources under their own control, the largest and most flexible being income tax. The situation changed radically when in 1942 the Curtin Commonwealth government, under the pressure of wartime financial necessities, forced the States out of the income tax field and made it a Commonwealth monopoly.

This was done by 4 related Commonwealth Acts: one imposing a high rate of Commonwealth income tax; one acquiring the State income tax departments with their records and officers for Commonwealth use; one providing for Commonwealth priority over any State in the collection of income tax; and one authorising grants to the States of amounts roughly equivalent to lost income tax on condition that they imposed no further income tax.

First Uniform Tax case

Four States challenged the scheme in the First Uniform Tax case (1942). The High Court held all 4 Acts valid. The Act acquiring the States’ taxation departments was upheld by a majority of one judge only and solely under the wartime defence power. (The defence power in section 51(vi) of the Constitution 'expands' during wartime and allows the Commonwealth to do things it ordinarily could not do, such as acquire a State tax department.) Larger majorities upheld the other 3 Acts on grounds also applicable in peacetime, and by 1945 the new system had acquired a momentum and a political popularity which ensured its continuance after the war.

Second Uniform Tax case

Thus, the States again became dependent on the Commonwealth government for a substantial part of their income. State protests were made from time to time, and in 1953 the Menzies government studied the possibility of returning income tax powers to the States, but with no result.

In 1957, in the Second Uniform Tax case, another legal attack by the States failed. In that case, the High Court decided that there are no significant restrictions on the section 96 grants power – so long as a State is legally free to refuse a grant, the fact that in practice it cannot afford to do so is constitutionally irrelevant. The basis of the 'reimbursement' grants was changed from time to time, and special additions were negotiated almost yearly at premiers’ conferences.

In 1959 the condition that the States should not reimpose income tax was removed from the legislation. But the practical and political difficulties of their doing so proved insuperable, and from 1970 it became clear that the Commonwealth monopoly of income tax would be long-lasting.

Excise

Section 90 of the Constitution provides that the Commonwealth Parliament has exclusive power to impose duties of customs and of excise. The financial difficulties of the States were exacerbated by a succession of High Court decisions dating from 1938. This culminated in Chamberlain Industries (1970), in which it was held that 'excise' under section 90 includes not only taxes on production but also taxes on distribution and sale. This therefore invalidated many forms of State taxation which the earlier judges of the Court had thought valid. The Gorton Commonwealth government then made additional general purpose grants to States to compensate for this loss of revenue. The result was to confirm State dependence on Commonwealth grants.

This broad view of excise has been confirmed by the High Court several times since, most notably in Capital Duplicators (No 2) (1993) and in Ha (1997), where a majority of 4 justices to 3 held that New South Wales business franchise fees imposed on wholesalers and retailers of tobacco were duties of excise and therefore invalid.

Goods and services tax

The Howard government was re-elected in 1998 on a platform of tax reform – in particular, the introduction of a goods and services tax (GST). After the election, legislation was enacted which imposed a 10% tax on the supply of nearly all goods and services other than basic foods. All the revenue raised by the Commonwealth under this GST legislation is paid to the State and Territory governments. In return, the States and Territories agreed to repeal a whole range of taxes, such as debits tax and financial institutions duty. The GST legislation, passed by the Commonwealth Parliament in June 1999, marked an important change in the financial relationship between the Commonwealth and the States.

Under the legislation, the States got what they had sought for many years – a guaranteed and substantial share of the Commonwealth’s tax revenue with no conditions attached to how it may be spent. Controversy arose as to how the GST revenue should be divided between the States, the Australian Capital Territory and the Northern Territory. Some States – in particular, Western Australia – felt that they were receiving an inadequate amount of GST revenue when compared with the amount their residents had paid in GST. To address this controversy, the Federal Financial Relations Act 2009, which sets out the formula to determine the respective shares of GST revenue, was amended in 2018 to ensure that each State and Territory would receive at least 70 cents per person per dollar of GST revenue, rising to 75 cents per person per dollar of GST revenue in 2024–25. At the same time the notion of 'horizontal fiscal equalisation' was adjusted. 'Horizontal fiscal equalisation' has traditionally governed the distribution of Commonwealth financial assistance to the States and Territories. The adjustment moved away from 'full' equalisation, where the objective was for all jurisdictions to be 'equalised' in their capacity to provide services to the fiscal capacity of the strongest State, to a system of 'reasonable' equalisation, which was designed to ensure that the fiscal capacity of all States and Territories to provide services for its residents would be at least the equal of New South Wales or Victoria (whichever was assessed to be higher).

Loans

After 1919, government borrowing became an increasingly important aspect of public finance, largely because of State development schemes. The Bruce Commonwealth government initiated voluntary schemes for joint raising of loans. The 2 themes of federal revenue, grants to States and joint borrowing, were brought together in the financial agreement of 1927. This required an amendment of the Constitution which was approved by referendum in 1928 and carried into the Constitution as section 105A in 1929.

Under the agreement the Australian Loan Council was created. The Loan Council had the power to determine and supervise the loan-raising programs for all Australian governments, the allocation of the proceeds and the servicing of the debts. Because of the financial problems of the Great Depression (1929–1933) – in particular, the dangers of default on loan indebtedness and the dependence of government budgets on credit facilities – the Loan Council acquired a dominating position in Australian finance.

But the Loan Council has gradually become less important. The last major development was in 1995, when a new financial agreement came into effect between the Commonwealth, State, Northern Territory and Australian Capital Territory governments. This new agreement removed the requirement for Commonwealth, State, and Territory borrowings to be approved by the Loan Council and, in effect, placed responsibility on the States and Territories for controlling their own debt. The Loan Council retains a monitoring role and has the power to make recommendations to member governments.

Treatment of money raised

Money received by the Commonwealth needs to be dealt with in accordance with the Constitution and relevant legislation. Under section 81 of the Constitution, all money the Commonwealth government receives or raises forms one 'Consolidated Revenue Fund' (CRF) to be 'appropriated for the purposes of the Commonwealth'. The CRF is not an actual fund or bank account to which Commonwealth receipts are credited. It is an abstraction which embraces all Commonwealth receipts. The 'Treasury of the Commonwealth' in section 83 of the Constitution refers to the same amounts as those referred to in section 81, but it is a more concrete concept in that it comprises all the bank accounts and other repositories of Commonwealth money. Under section 83, no money may be drawn from the Treasury of the Commonwealth except under an appropriation made by the Parliament.

Put simply, all taxes, fees, penalties and even gifts of money raised or received by the Commonwealth form part of the CRF, and none of that money may be spent except under the authority of an Act of Parliament. Therefore, section 81 and section 83 together perform the critically important constitutional task of ensuring that parliamentary authority is necessary before the Commonwealth government may spend any amount it receives.

For many years, the Commonwealth government acted on the view that section 81 of the Constitution did more than simply control the receipt and appropriation of Commonwealth revenue. Section 81 was also viewed as providing a power of expenditure (for example, by granting money to entities and individuals). This so-called 'appropriations power' was thought to also allow the Commonwealth to impose conditions on the purposes for which the money could be spent. The major point of debate was whether the reference to the 'purposes of the Commonwealth' in section 81 meant that the Commonwealth could spend money for any purpose or whether it could do so only for purposes in respect of which it had legislative power.

Although there was no clear judicial authority on the point, the Commonwealth acted on the broad view of the 'appropriations power' and considered itself constitutionally able to pay money to anybody and for any purpose whatsoever. As indicated, it thought that power also extended to imposing detailed conditions on how and to what purpose the recipient applied the money. This approach allowed the Commonwealth to exert significant influence in matters over which it did not have a specific head of legislative power.

In Pape (2009), the High Court surprised almost everyone by deciding that there was no such thing as the 'appropriations power'. It held that the function of section 81 was confined to authorising appropriation legislation – legislation which performed the constitutionally critical but strictly confined function of providing the necessary parliamentary approval for money to be debited from the Treasury. On this view, the authority to expend the money, and enter into contracts and agreements in respect of that expenditure, needed to be found elsewhere in the Constitution.

Pape was an unusual and important case. It was unusual because Mr Pape was challenging the power of the Commonwealth to pay him money as part of the Commonwealth government’s stimulus package to address the Global Financial Crisis (GFC) of 2008–2009. It was important because not only did the Court’s decision displace the longstanding belief that section 81 conferred on the Commonwealth a power of expenditure; it also cast very significant doubt on whether the Commonwealth could spend on any matter it chose, as opposed to matters within its spheres of legislative responsibility.

In Williams (No 1) (2012) and Williams (No 2) (2014), Mr Williams challenged the validity of the Commonwealth program which funded and regulated the placement of chaplains in schools throughout Australia. Mr Williams, whose interest in the matter stemmed from having children in a Queensland primary school, was successful on both occasions. The decisions resolved conclusively that the Commonwealth may spend only in respect of matters over which it has legislative competence. They also established that legislative authority, in addition to an appropriation, is necessary to authorise many forms of Commonwealth expenditure, such as public spending programs.

Despite the success of Mr Williams in both his High Court challenges, the chaplaincy program continues. The Commonwealth responded to the Court’s decisions by entering into agreements under the Federal Financial Relations Act for the States and Territories to deliver the program with Commonwealth funding under section 96. The continued operation of the chaplaincy program should not disguise the fact that the Pape and Williams decisions were significant setbacks for the Commonwealth. But it also indicates the important role that conditional grants to the States play in allowing the Commonwealth to influence policy and outcomes in matters outside its direct legislative competence, a role we now consider.

Grants to the States

Commonwealth grants to the States are made under section 96 of the Constitution, a provision which has been of pivotal importance to Commonwealth–State financial arrangements. Section 96 allows the Commonwealth Parliament to 'grant financial assistance to any State on such terms and conditions as the Parliament thinks fit'.

General purpose grants

The first grants went to Western Australia (from 1910), Tasmania (1912) and South Australia (1929). In 1933 they were put on a permanent basis under the supervision of the Commonwealth Grants Commission – an expert body which devised criteria for ensuring that the 'claimant States' were able to maintain minimum social standards while exercising reasonable budgetary enterprise and administrative care. After 1950, the claimant States resorted increasingly to direct bargaining with the federal government, with only Tasmania adhering to the Grants Commission. Then even Tasmania opted out, while Queensland opted in. From 1978, the basis of the Grants Commission’s activities changed. It was given the task of determining the relative needs of all 6 States, and of the Northern Territory and the Australian Capital Territory, as a basis for making the regular annual grants from federal revenues. One of its most important functions is to recommend, at the request of the Commonwealth Treasurer, the GST revenue-sharing relativities between the States that the Treasurer determines under the Federal Financial Relations Act (see [5.52]).

Specific purpose grants

In 1926 yet another grant system began with the Federal Aid Roads Acts. These provided annual grants for State road building under specified conditions, supervised by the Commonwealth government. They were the first conditional grants in the fullest sense, 'specific purpose' grants, the acceptance of which by a State to some extent influenced its administrative and budget policy. In the Federal Roads case (1926), the High Court held that section 96 of the Constitution supported such grants. The use of specific purpose conditional grants increased only slowly to 1950, thereafter more quickly, and by the 1970s they had become a key feature of the system of cooperative federalism.

The Federal Financial Relations Act regulates the distribution of GST revenue to the States, the Australian Capital Territory and the Northern Territory. It is also the mechanism that the Commonwealth uses to provide most of its specific purpose grants to the States and those Territories in relation to such matters as health, housing and 'national partnership payments'. This last category allows the Commonwealth to grant financial assistance to both support the delivery of specified projects and facilitate and reward reforms by a State or Territory. Other significant categories of Commonwealth tied financial assistance to the States, such as those with respect to education and road funding, are largely provided for and regulated by specific legislative regimes – for example, the Australian Education Act 2013.

Grants as a mechanism of Commonwealth-State cooperation

The most important single instrument which the Commonwealth government has for inducing State cooperation in addressing policy issues is its financial strength and these grant mechanisms. Even its general purpose grants, in form unconditional, usually have a margin open for negotiation, so they can be used to secure cooperation or punish its refusal. Specific purpose grants can be used even more directly as a means of inducing State action in accordance with a Commonwealth determined policy and, if necessary, under Commonwealth supervision. We consider other mechanisms of cooperation at [5.83]–[5.95].

Grants to others

In addition to grants to States and Territories, the Commonwealth makes conditional grants to a broad range of individuals and entities for a variety of purposes under a large number of grant programs. As noted, after the High Court’s decision in Williams (No 1) (2012), it became necessary for most Commonwealth grant programs to be supported by legislation. That legislative support is frequently provided by regulations made under the Financial Framework (Supplementary Powers) Act 1997. A perusal of schedules 1AA and 1AB of those regulations indicates the range of grants that the Commonwealth makes to non-State entities and individuals.

Summary of the Commonwealth budget

Revenue

In the 2019–20 Commonwealth budget, Commonwealth revenue was estimated to be $505 billion. Income tax (including company tax and fringe benefits tax) accounts for most of this – namely, $343 billion – with excise and customs duty about $46 billion and GST revenue about $67 billion.

Expenditure

Expenditure by the Commonwealth for 2019–20 was estimated to be $501 billion. This figure represents about 25% of Australia’s gross domestic product. The major areas of expenditure are social security and welfare ($180 billion), health ($82 billion) and education ($36 billion).

The $67 billion in GST revenue would be passed on to the States and Territories (that is, the Australian Capital Territory and Northern Territory). In addition, the Commonwealth was to make other general purpose payments to the States and Territories estimated at $2 billion.

The States and Territories would also receive specific purpose payments of $58 billion. The major purposes for which this money was to be provided to the States and Territories were health ($23 billion of the $82 billion referred to at [5.71]) and education ($21 billion of the $36 billion referred to at [5.71]).

Total payments to the States and Territories in 2019–20 were estimated to be 25.4% of the Commonwealth government’s expenditure and would account for about 44.6% of the total revenue of the States and Territories. Australian government payments effectively support about 46% of State and Territory expenditure.

The 2019–20 budget provides an example of typical sources of Commonwealth revenue and the allocation of expenditure. This budget was handed down on 2 April 2019. However, subsequent events, including a catastrophic bushfire season and the coronavirus COVID-19 pandemic, led to significant additional Commonwealth expenditure being provided beyond the initial budget estimates.

Joint action by the Commonwealth and the States

The critical importance of the States

Although in some respects the Commonwealth has assumed a predominant position in the federation, the States remain of critical importance to the governing of Australia. The Australian federal system actually provides a particularly strong case for cooperation between the Commonwealth and the States because of the distribution of financial strength and law-making powers.

We have seen that the Commonwealth government has exclusive access to the largest and most elastic sources of revenue – customs and excise duties; and income tax. However, despite the generally expansive interpretation of Commonwealth law-making powers by the High Court, it remains true that very large areas of law-making competence and accompanying administrative responsibility remain with the States. For example, the following general areas of law are mainly within State power:

the ownership and use of land and personal property
crime
most branches of commerce, and
civil wrongs or torts (which includes liability for accidents and defamation).

The following areas of social regulation and administration, currently of great political importance, in the main are under State control:

education
urban, regional and rural planning and development
housing, and
the environment.

It follows that for a comprehensive, frontal attack on a broad social problem the Commonwealth authorities will often need the assistance of State law and administration.

This need was demonstrated starkly in 2020, when Australia was confronted with the profound health and broader socio-economic consequences of the COVID-19 pandemic. Responsibility for responding to previous national crises had fallen primarily to the Commonwealth. The Great Depression (1929–1933) and the Global Financial Crisis (GFC) (2008–2009) were largely economic disasters. They, particularly the GFC, were mainly addressed through the use of the Commonwealth’s financial powers and resources. As for World War I and World War II, the Commonwealth relied on the broad reach of its defence power (section 51(vi)) during wartime to control a wide range of activities on the basis that that control could rationally be viewed as assisting the war effort.

By contrast, the response to the COVID-19 pandemic required significant action from both the Commonwealth and State governments. Commonwealth resources were used to address the larger economic consequences of the pandemic, but there were also many aspects of social and commercial activity which required regulation that could be comprehensively prescribed and enforced only by the States. Examples included the so-called 'social distancing' rules, significant restrictions on both travel and the operation of business outlets, and the regulation of commercial and residential tenancy agreements.

The establishment of a 'National Cabinet', comprising the Prime Minister, the State Premiers and the Chief Ministers of the Northern Territory and Australian Capital Territory, indicated the level of Commonwealth–State cooperation, with that body meeting regularly and assuming, in practice, primary responsibility for coordinating Australia’s response to the pandemic.

Cooperation

In addition to national emergencies, there are a range of other reasons for cooperation between the Commonwealth, States and Territories in addressing policy issues. The most common is a desire to obtain coordinated and consistent Australia-wide action on a particular matter. Those organisations regulated by a nationally consistent scheme, and their consumers, have the benefit that the same laws and same administration apply to them across Australia. However, this type of cooperation is open to the criticism that it reduces diversity, innovation and local accountability, in that it tends to bypass full parliamentary review of the relevant laws and administration and weakens political responsibility to the electorate at the State level.

Types of cooperative schemes

The cooperative activities that the Commonwealth and the States engage in vary greatly in their degree of formal structuring and duration. We mention the main types. First, the Commonwealth and States can simply agree to take similar approaches, without any new legislation. Secondly, the Commonwealth and States can pass legislation in their distinct but related areas of responsibility. Compulsory marketing systems, such as that for wheat, involve State legislation (which alone can impose direct obligations on growers), alongside Commonwealth laws and administrative arrangements (which alone can provide the interstate and overseas facilities and financial guarantees). The whole system is usually coordinated by an interstate board representing growers and governments. The response to the COVID-19 pandemic is another example of this approach (see [5.80]–[5.81]).

Mirror law schemes

Thirdly, the Commonwealth and States can pass the same, or at least similar, legislation. The participating governments develop model legislation and then pass it. These are sometimes referred to as 'mirror law' schemes. However, they can be a cumbersome mechanism, especially when amendments are necessary, as all those participating have to make the same amendments.

Applied law schemes

In light of this, a more modern fourth approach is for one of the Commonwealth, States and Territories to pass detailed legislation, leaving it for others to simply apply this legislation in simple terms without setting it out in detail. These are often called 'applied law' schemes. The host jurisdiction passes detailed legislation, and amendments to that legislation are made by agreement. These amendments then automatically flow through to the other participating jurisdictions that have applied the law. A number of significant schemes use this model – for example, the Australian Consumer Law, where the Commonwealth is the host; and the National Electricity Law and National Gas Law, where South Australia is the host.

Corporations regulation [MEANT TO BE H5?]

The regulation of commercial corporations is an important area where the Commonwealth and State authorities have cooperated. As already noted, in the Incorporation case(1990) (see [5.15]), the High Court decided that, under section 51(xx) of the Constitution, the Commonwealth Parliament could not regulate the incorporation of trading and financial corporations. This frustrated the Commonwealth’s attempts to single-handedly prescribe a comprehensive code for those corporations. Therefore, to secure a comprehensive and uniform Australian law, the Commonwealth was required to enlist the assistance of the States.

Uniformity was achieved for a period by the fourth model of cooperative scheme – an applied law scheme (see [5.86]). The Commonwealth Parliament passed the Corporations Law for the Australian Capital Territory, with the parliament of each State and the Northern Territory then adopting that law so as to automatically turn the Commonwealth Act into State and Northern Territory law. A Ministerial Council, including one minister from each of the participating governments, met regularly to monitor the working of the system and determine whether any amendments should be made to the scheme. The Commonwealth government pledged to enact amendments which had been adopted by the Ministerial Council. Any amendments which the Commonwealth Parliament made to the Corporations Law for the Australian Capital Territory were automatically picked up and applied by legislation in each State and the Northern Territory.

A number of legal challenges to various official actions taken under the Corporations Law cast doubt on the validity of key aspects of this Commonwealth and State cooperative scheme. In particular, the High Court’s decision in Hughes (2000) indicated that there were limits on the power of Commonwealth authorities, such as the Commonwealth Director of Public Prosecutions, to perform duties conferred by State law. Previously, in Wakim (1999), the High Court held that federal courts could not exercise State jurisdiction, thus stripping the Federal Court of most of its jurisdiction under the Corporations Law.

Referral of powers

To address these problems States agreed to implement a fifth type of cooperative scheme and refer power over corporations and related matters to the Commonwealth. This allowed the Commonwealth to enact, as a Commonwealth Act, the Corporations Act 2001 in essentially the same terms as the Corporations Law.

The States can refer some of their powers to the Commonwealth under section 51(xxxvii) of the Constitution. Section 51(xxxvii) allows the parliament of a State to confer powers on the Commonwealth Parliament. There is no provision in the Constitution which allows the Commonwealth to confer powers on the States. An earlier example of a State reference of powers was State legislation which conferred on the Commonwealth certain powers over ex-nuptial children to overcome limitations on the Commonwealth’s powers in relation to marriage and the custody and guardianship of infants (section 51(xxi) and (xxii)). Since then there have been a significant number of State referrals. They have included those in relation to terrorism, which help to underpin Chapter 5.3 of the Commonwealth’s Criminal Code Act 1995; and water, which help support the Commonwealth’s Water Act 2007.

Request of State parliaments

Commonwealth–State cooperation can also be facilitated by a sixth type of cooperative arrangement using section 51(xxxviii) of the Constitution. Under this section the Commonwealth Parliament, at the request or with the concurrence of the State parliaments, can exercise any powers which could have been exercised only by the United Kingdom Parliament or the Federal Council of Australasia (see [2.24]–[2.25]) at the time the Constitution was established in 1901. The High Court said in Port MacDonnell Professional Fishermen’s Association (1989) that section 51(xxxviii) is a constitutional provision 'with a national purpose of a fundamental kind' and that one of its main functions is 'the plugging of gaps which might otherwise exist in the overall plenitude of the legislative powers exercisable by the Commonwealth and State Parliaments under the Constitution'.

As noted at [3.29], the mechanism of State requests in section 51(xxxviii) was used to authorise the Commonwealth Parliament to enact the Australian version of the Australia Act. As a result of the Australia Act, the British Parliament no longer has any legislative authority over Australian affairs, and it is possible in light of this development that the mechanism in section 51(xxxviii) will be more commonly used in future to repeal or amend British legislation that continues to apply in Australia and affects both Commonwealth and State interests. One such matter, detailed at [3.35], is royal succession. It is important to note that, although section 51(xxxviii) allows for the repeal or amendment of British Acts, like all Commonwealth legislative powers it is expressed to be exercisable 'subject to this Constitution', with the result that it cannot be used to amend the Constitution.

List of cooperative schemes

A list of referrals is at Note 15 of the Constitution, and a list of current referrals and other forms of cooperative legislative schemes is kept by the Australasian Parliamentary Counsel’s Committee, which is made up of representatives of those offices, which draft legislation for the Commonwealth, States and Territories, and can be found at its website.

Ministerial councils

Members of the Commonwealth and State governments regularly meet to discuss matters of mutual importance. The most important of these was the Council of Australian Governments (COAG), which was established in 1992 to discuss matters of broad national significance. The Prime Minister, the Premiers of the 6 States and the Chief Ministers of the Northern Territory and the Australian Capital Territory were members. In May 2020, COAG was replaced by the National Federation Reform Council with the National Cabinet (see [5.82]) at its centre as the ultimate intergovernmental decision-making body.

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