19 Oct 2009

Pape and government spending - no cause for alarm

by John Carroll, James Stellios

Government departments and agencies cannot assume that section 81 will authorise the spending of money on whatever activities or objectives the government likes. Agencies should take prudent steps when formulating spending programs to ensure that Commonwealth spending does not exceed the limits set out in the decision.

The decision of the High Court in Pape v Commissioner of Taxation [2009] HCA 23 has prompted concerns of apocalyptic consequences for Commonwealth spending. While the Court takes a narrower approach to Commonwealth appropriations than might have been thought to be the case on a generous reading of the previous case-law, prudent decision-making processes on government spending are unlikely to come undone by the decision in Pape.

Background to the litigation

In response to the global economic crisis, and as part of its economic stimulus package, the Commonwealth enacted the Tax Bonus for Working Australians Act (No 2) 2009 (Cth) ("the Bonus Act") giving certain taxpayers a bonus. Australian citizens who had a taxable income of less than $100,000 for the 2007-8 income year were entitled to a payment of up to $900. The plaintiff, a person entitled to a bonus payment, challenged the constitutional validity of the legislation.

Previous views on the scope of the appropriations power in section 81

Section 81 of the Constitution provides that "[a]ll revenues or moneys raised or received by the Executive Government of the Commonwealth shall form one Consolidated Revenue Fund, to be appropriated for the purposes of the Commonwealth in the manner and subject to the charges and liabilities imposed by this Constitution." Prior to Pape, there had been very few cases on Commonwealth appropriations and, unfortunately, those decisions had not produced clear principles. While it has been clear ever since the Pharmaceutical Benefits Case (Attorney-General (Victoria); ex rel Dale v Commonwealth (1945) 71 CLR 237) that section 81 is not a broad source of regulatory power, the potential scope for using section 81 to authorise appropriations for Commonwealth spending programs has been the subject of differing views.

On one view (often referred to as the broad view) of the appropriations power, it was thought that Parliament alone could determine what a "purpose of the Commonwealth" was. Once Parliament made that determination, then the appropriation, and the spending of the appropriated money, could not be challenged. On another view (often referred to as the narrow view), to be valid, an appropriation had to be for a purpose that could be found within the Constitution itself. That purpose might be found by reference to the heads of legislative, executive or judicial power and, on most accounts, included the power, whether legislative or executive, that derives from the establishment of the Commonwealth as a "nation". On both the wide and narrow views, the appropriation had consequences for the spending of the money: if an appropriation was valid, then the spending was consequently authorised.

On a third view, most clearly set out by Justice Mason in the AAP Case (Victoria v Commonwealth (1975) 134 CLR 338), the appropriation and payment out of the consolidated revenue fund was to be distinguished from the spending of the appropriated money by the executive government. On this view, an appropriation could be for any purpose that Parliament decided. Furthermore, if the appropriation involved nothing more than the payment of money to a third person outside the Commonwealth government, then the appropriation would authorise that payment. However, if the use of the appropriated money involved action to be taken by Commonwealth officers and agencies, then independent authority for the taking of that action had to be established. On a fourth view, suggested by Justices Jacobs and Stephen in the AAP Case, appropriations could not be challenged because they were internal matters between Parliament and the executive. As Justice Jacobs said, an appropriation is no more than an "earmarking" of money.

High Court's decision in Pape

Against this mix of views, the High Court considered the challenge in Pape. In four separate judgments (Chief Justice French; Justices Gummow, Crennan and Bell; Justices Hayne and Kiefel; Justice Heydon), the Court held that section 81 of the Constitution only provides parliamentary authority for the appropriation of money to the executive: it is not a spending power. In this respect, the Court referred with approval to the views of Justices Jacobs and Stephen in AAP. Consequently, section 81 could not provide support for the provisions of the Bonus Act creating an entitlement to the payment of the bonus - it could only support the appropriation of the money for that purpose.

Like Justice Mason in AAP, the majority differentiated between the appropriation and the spending of the money. However, Justice Mason seemed to have accepted that appropriated money could be paid to third persons without any further power required. The Court in Pape has rejected that view. The only executive involvement in the bonus scheme was the payment of the appropriated money to those entitled to a bonus payment. However, section 81 was insufficient to support the creation of the entitlement and the payment of the bonuses. The power had to be found elsewhere.

At this point the Court divided 4 to 3, with a majority of judges (Chief Justice French; Justices Gummow, Crennan and Bell) holding that the executive power in section 61, along with the express incidental power in section 51(xxxix), provided sufficient support for the provisions of the Bonus Act. For the majority, the executive power in section 61 was wide enough to take action peculiarly adapted to the government of a nation. On the facts, it extended to short-term fiscal measures to address economic conditions affecting the nation as a whole: this was a national financial crisis and only the Commonwealth had the resources to respond promptly. The express incidental power authorised the supporting legislation that created the entitlement to the bonus and authorised its payment.

The dissenting judges (Justices Hayne and Kiefel; Justice Heydon) were not convinced that a national economic emergency was sufficient to trigger the executive power in section 61. Although that power could extend to putting down subversive activities and endeavours, it could not cover the general topic of the national economy. Nor in their view could the spending be supported by the external affairs power (section 51(xxix)), the trade and commerce power (section 51(i)), or the taxation power (section 51(ii)).

Lessons from Pape for government departments and agencies

Pape is a reminder to government departments and agencies to think carefully about their spending programs. Programs cannot be formulated on the assumption that section 81 will authorise the spending of money on whatever activities or objectives the government likes. A valid appropriation will not authorise the spending of money - whether that spending involves activities on the part of Commonwealth officers or agencies or simply involves a payment to third parties. For many Commonwealth officers and agencies, Pape will not have much of an impact. For others, prudent steps should be taken when formulating spending programs to ensure that Commonwealth spending does not exceed the limits set out in the decision.

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