Taking stock of Vanderstock

Strong positions taken and uncertainty remains: High Court divergence of views on excise case could have major consequences for State and Territory taxing powers.

The High Court of Australia in Vanderstock v Victoria [2023] HCA 30 (Vanderstock) by a 4:3 majority determined that Victorian legislation imposing a fee on the use of electric or hydrogen zero or low-emission vehicles (ZLEV) is an excise and therefore contrary to section 90 of the Commonwealth Constitution (section 90).

This landmark decision extends the meaning of what is considered to be an excise. The majority has held that:

• the ultimate question of whether a tax is held to be a tax on goods, so as to be characterised as a duty of excise, turns on whether the tax bears a close relation to the production or manufacture, sale, distribution or consumption of goods; and
• the second element of whether the charge is a duty of excise is that the tax must be of such a nature to affect the goods as the subjects of manufacture or production or as articles of commerce.

Implications of the decision

The effect of the decision is that now any charges or imposts on goods at any point prior to or at consumption (use) are considered to be an excise and only within the domain of the Commonwealth Government to legislate. This means that to the extent a state law proposes to tax these steps it could be invalid. The types of taxes expressly identified by the High Court that have now been brought into question include:

• duties: motor vehicle duties, duties on the conveyance of goods as part of a dutiable transaction^[1]
• levies: commercial passenger vehicle levies, gaming machine levies, waste disposal levies; and
• taxes: betting taxes (at the point of consumption), sale of land and industrial land taxes (imposed on a producer of goods or relating to goods), payroll taxes (in relation to the production of goods), taxes in relation to licences to carry on a business, and inheritance taxes.

The parties in Vanderstock only asked the High Court to look at the question of whether the ZLEV charge was an excise, and not at the meaning of what constitutes a tax more broadly. Although the immediate question in Vanderstock related to excise, the Court commented more broadly on what constitutes a tax, as well as the purpose of section 90. This could have an impact on positions regarding other state-based imposts such as royalties.

Previously, the position was that where the payment can be characterised as a payment for services rendered, for the acquisition of property or rights in property, or a fee for a privilege and there is a discernible relationship between the charge and the services or rights obtained, this may not be a tax. Given the broad approach articulated by the majority, to the extent the payment is able to be dually characterised as both a fee for services or a privilege and a tax, then there may be an argument that to the extent to which it is characterised as a tax, the payment is contrary to section 90.

Reasons for the findings in Vanderstock

In 2021, the Victorian Government enacted the Zero and Low Emission Vehicle Distance-based Charge Act 2021 (Vic) (ZLEV Act). Section 7 of the ZLEV Act requires the registered operator of a ZLEV to pay a charge for the use of the ZLEV on public roads (a ZLEV charge).

The Plaintiffs’ case was that the ZLEV charge is invalid on the ground that it imposes a “duty of excise” within the meaning of section 90, and it is therefore beyond the power of the Victorian Parliament. It was argued that the ZLEV charge was a tax on the “consumption” of goods (namely the ZLEVs) and that such a tax is a duty of excise.

Section 90 provides the Commonwealth with the exclusive power to impose excise and customs duties. Previously, an excise was held by the High Court to be a tax on a step on the production, manufacture, sale or distribution of goods (but did not include consumption by use or destruction).

The majority views

The key reasons supporting the majority’s view that it is appropriate to extend section 90 to include state imposts which bear a close relation to the consumption of the goods included:

• the purpose of section 90 was to provide exclusive control to the Commonwealth Parliament to make laws for the taxation of goods in Australia so that it can execute policy through uniform national laws;
• taking into account the purpose of section 90, and the context of other Constitutional provisions such as section 92 (requiring free trade amongst the states), the people of Australia should be guaranteed equality in taxes they are required to bear as consumers;
• there should be no distinction between duties of customs and duties of excise;
• the characterisation of a tax as a tax on goods turns not only on the legal form (the criteria of operation) but on its substance or practical operation;
• a tax will be of a nature to sufficiently affect goods as articles of commerce if the tendency of the tax is to depress demand for those goods. While economic analysis may be helpful to inform this, it is not always necessary.

In arriving at this decision, the majority has overturned the previous High Court authority of Dickenson’s Arcade Pty Ltd v Tasmania (1974) 130 CLR 177 (Dickenson’s Arcade).

Strong dissent

The decision of the majority has caused great controversy among the High Court bench, with the dissenters noting:

• “The new rule marks a departure from long established and fundamental principle and authority” and “the constitutional validity of a law impugned under s 90 will now change, or wax and wane, according to its potential economic consequences. That would pose significant difficulties for fundamental constitutional principle.” – Justice Gordon
• It was not appropriate to reject Dickenson’s Arcade as it had been affirmed (or not overruled) in nine subsequent decisions of the High Court. – Justice Steward (Justice Edelman concurring)
• The effect of the majority’s decision would be to create “widespread practical ramifications and generate extraordinary confusion”. – Justice Gordon
• “Against a background of a century of conflict, the desire for an apparently simple test for an excise is immediately understandable” however, his Honour concluded “[b]ut the siren call of simplicity comes at a high price…”. – Justice Edelman

Other considerations to work through

While at first blush this decision may seem like the sky is falling in on the ability of the States and Territories to retain revenue already collected and to raise their own future revenue, it should be noted that any right to refund or future imposition by the Commonwealth will be subject to the respective State/Territory limitation of actions provisions and any mirror tax that the Commonwealth Government may seek to introduce.

A mirror tax would likely charge a tax on any taxpayer who sought a refund from a State/Territory on the basis that a particular tax they had already paid was invalidly charged. Whether this occurs and how this is implemented in practice will depend on several factors including:

1. the Commonwealth’s appetite to impose a mirror tax to prevent refunds of invalidly collected taxes or introduce a new Commonwealth equivalent tax; and
2. the constitutional restriction^[2] that it may not discriminate between States or parts of States.

In any event, what Vanderstock has done is sew a seed of doubt as to the validity of a significant number of state and local government imposts.

It has been over 26 years since the last High Court decision on section 90 was delivered.^[3]  However, Vanderstock and also the recent decision of Hornsby Shire Council v Commonwealth of Australia [2023] HCA 19 – where a local council challenged the validity of the imposition of notional GST pursuant to section 114 of the Commonwealth Constitution – both highlight a recent trend in the willingness of taxpayers to challenge the constitutional validity of state or local government imposts.

Given one of the majority judges in Vanderstock (Her Honour Chief Justice Kiefel) will shortly retire from the High Court, we expect that it won’t take another 26 years for a new constitutional challenge on section 90 to come before the High Court. 

^[1] Which could also include goods that are deemed to be land.

^[2] Section 99 of the Commonwealth Constitution.

^[3] See, Ha v New South Wales (1997) 189 CLR 465.