10 Nov 2011

When is a tax not a tax? When it's an "internal financial arrangement"

by Jamie Doran, Emily Absolon

Fees and charges imposed by State or Territory governments on government-owned corporations are unlikely to fall foul of section 90 of the Constitution.

In Queanbeyan City Council v Actew Corporation Ltd [2011] HCA 40 the High Court held that fees imposed by a government on a government-owned corporation were not a tax but an "internal financial arrangement". The decision has implications not only for governments' fees and charges on their own corporations but also generally for the status of government-owned corporations.

The water supply from the ACT to Queanbeyan

Queanbeyan City Council (QCC) obtains water supplies from ACTEW Corporation Ltd, a territory-owned corporation.

The Australian Capital Territory imposed a "water licence fee" and "utilities networks tax" on ACTEW. These charges were passed on to QCC through arrangements that enabled ACTEW to recover its costs for supplying the water.

QCC challenged the constitutional validity of the charges that were being passed on to it on the basis that they constituted "duties of excise". Under section 90 of the Constitution, the Commonwealth Parliament has the exclusive power to impose duties of excise.

Neither a tax nor an excise

The High Court dismissed QCC's appeal and found that neither charge was a tax or excise.

The High Court reasoned that a "tax" was an exaction in the exercise of the power of the government lawfully to take from the governed. A charge imposed by a government entity on another government entity, being part of the internal financial arrangements of government would therefore not constitute a "tax" or "excise".

ACTEW was a territory-owned corporation. In accordance with the Territory-owned Corporations Act, ACTEW had the following features:

  • all shares in ACTEW were held on trust for the Territory;
  • all voting shares in ACTEW must be held by a Minister; and
  • the wishes of the voting shareholders (ie. the Minister) were to take precedence, even where the directors advised that it would not be in the best commercial interest of ACTEW to act as the voting shareholders wish.

On the basis of these features and the control exercised by the Territory over ACTEW, the High Court concluded that ACTEW and the Territory were indistinct entities. A charge imposed by the Territory on ACTEW was therefore not a "tax" or "excise" but rather an "internal financial arrangement".

The High Court reached this conclusion despite a provision of the Act which states that a territory-owned corporation is not "the Territory". The Court held that this provision could "not deny the consequences which flow from the substantive provisions of the Act".

Implications for government

The decision has two key implications for government.

The first is that fees and charges imposed by State or Territory governments on government-owned corporations are unlikely to fall foul of section 90 of the Constitution.

More generally however, the decision may have implications in determining the status of government-owned corporations. Statutory provisions which declare that government-owned corporations do not constitute "the State" or "the Territory" will not necessarily preclude such a finding. The issue will be determined by consideration of the statute as a whole.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.