On Wednesday 18 October 2023, the High Court of Australia handed down its decision in Vanderstock & Anor v State of Victoria [2023] HCA 30. It ruled that Victoria’s charge on the use of Zero and Low Emission Vehicles (“ZLEVs”) was invalid because the charge imposes a duty of excise within the meaning of section 90 of the Constitution. Under that section, imposing duties of excise is a power vested exclusively in the Commonwealth Parliament.
The decision has significant and potentially wide-ranging consequences for:
- States and Territories that were considering implementing taxes or charges that may now fall within the Commonwealth’s exclusive taxing powers and potentially for existing taxes and charges that were not previously thought to fall within the Commonwealth’s exclusive taxing powers;
- taxpayers who have contractually passed taxes that may be affected by this decision on to third parties; and
- the Commonwealth, State and Territory governments as they continue to implement policies concerning climate change and the energy transition.
Key Takeaways
- A 4:3 majority of the High Court held that s.7(1) of the Zero and Low Emission Vehicle Distance-based Charge Act 2021 (“ZLEV Charge Act”) is invalid on the basis that it imposes a duty of excise within the meaning of s.90 of the Constitution.
- The Court held that the charge imposed under the ZLEV Charge Act (“the ZLEV Charge”) was a duty of excise because it satisfies two elements:
- it bears a sufficiently close relation to the production or manufacture, sale, distribution, or consumption of goods (importantly, the Court in this case extended the concept of an excise to include an inland tax on the consumption of goods); and
- the tax is of such a nature as to sufficiently affect the goods as the subjects of manufacture or production or as articles of commerce.
- In reaching its decision, the Court reopened and overruled its previous decision in Dickenson's Arcade Pty Ltd v Tasmania (1974) 130 CLR 177. Other decisions of the Court remain authoritative and continue to provide a “stable foundation” upon which current revenue raising and sharing arrangements are based (e.g., the GST system).
- As of the date of this publication, VicRoads has announced that customers are no longer required to pay an upcoming ZLEV related invoice or provide a vehicle odometer reading and that ZLEV customers are being contacted to explain next steps.
- Looking ahead:
- the case obviously raises questions as to the efficacy of State and Territory laws which seek to impose a tax on the consumption of goods in their jurisdiction;
- to the extent that taxpayers are entitled to a refund of this tax (and other state taxes that may be affected by this decision), existing commercial arrangements should be considered where the taxpayer has passed on that tax in its pricing model to a counterparty;
- States and Territories will be prohibited from implementing taxes similar to the ZLEV Charge; and
- in the context of rapidly developing Commonwealth and State policies on climate change, the Court’s decision could result in a significant shift in the fiscal balance, with some taxing powers moving away from the States and Territories, and towards the Commonwealth. This is particularly relevant in circumstances where the Commonwealth is fulfilling its international responsibilities under the Paris Agreement.
Background
Material facts
From 1 July 2021, Victorian electric vehicle drivers were required to pay an annual charge to the State of Victoria based on the number of kilometres driven in the preceding 12 months. Specifically, s.7(1) of the ZLEV Charge Act required the registered operator of a ZLEV to pay a charge for "use of the ZLEV on specified roads" (the ZLEV charge). "Specified road" was defined to include, in effect, all public roads in Australia. The ZLEV charge was determined annually at a prescribed rate for each kilometre travelled by the ZLEV on specified roads during a financial year. The ZLEV charge was a debt due to the State of Victoria.
The plaintiffs, Christopher Vanderstock and Kathleen Davies, were registered operators of ZLEVs residing in Victoria. They had been issued with invoices for, and had paid, the ZLEV charge.
In September 2021, the plaintiffs commenced proceedings against the State of Victoria in the original jurisdiction of the High Court. The case was heard by a full bench of the High Court from 14 to 16 February 2023. The Commonwealth Attorney-General and the Australian Trucking Association intervened in support of the plaintiffs. The Attorneys-General of each other State and of the Australian Capital Territory and the Northern Territory intervened in support of the defendant.
Issues
The primary issue in dispute was whether s.7(1) of the ZLEV Act was invalid on the basis that it imposed a “duty of excise” within the meaning of s.90 of the Constitution and was therefore beyond the power of the Victorian Parliament.
Under s.90 of the Constitution, the power of the Commonwealth Parliament "to impose duties of customs and of excise" is "exclusive" of the powers of the States and self-governing Territories.
The meaning of “duty of excise” under s.90 was previously accepted as referring to an inland tax “on production, manufacture, sale or distribution of goods”. The High Court’s decision in Dickenson’s Arcade had held that a tax on goods imposed at the stage of consumption did not constitute a duty of excise.
In this case, the ZLEV charge was ostensibly a tax at the stage of consumption. Determination of the issue therefore required the Court to answer two separate questions:
- whether an inland tax imposed on the consumption of goods could constitute a duty of excise within the meaning of s.90 of the Constitution. Determination of this issue would require the Court to reopen and overrule its decision in Dickenson’s Arcade; and
- whether the ZLEV charge, as imposed under s.7(1) of the ZLEV Act, was properly characterised as a duty of excise (i.e., an inland tax imposed on the consumption of goods).
Summary of submissions
The plaintiffs argued that s.90 should be read to include a tax imposed on the consumption of goods. They submitted that, to the extent required, the Court should overrule any past authorities that may indicate the contrary, including by reopening and overruling Dickenson’s Arcade. The plaintiffs submitted that the ZLEV charge should properly be interpreted as an inland tax on the consumption or use of ZLEVs themselves.
The defendant’s primary submission was that the ZLEV charge was not an excise because, it was a tax on an activity, not a tax on a good. Alternatively, it argued that a tax on the consumption of goods was not a duty of excise and that the decision in Dickenson’s Arcade should be affirmed. Alternatively, it submitted that an “excise” under s.90 should be interpreted as a “tax that falls selectively upon locally produced goods” in accordance with the minority in Capital Duplicators [No 2] and Ha. All State and Territory interveners were in support of and consistent with the Defendant’s submissions.
Summary of reasoning
By majority (Kiefel CJ, Gageler and Gleeson JJ; Jagot J agreeing), the Court held that s.7(1) of the ZLEV Charge Act was invalid. The Court reopened and overruled its decision in Dickenson's Arcade, which held by majority that a tax on the consumption of goods does not constitute a duty of excise. The Court held that an excise within the meaning of s.90 is an inland tax on goods.
The new rule established by the majority is that in determining whether a tax is to be characterised as a tax on goods, and therefore a duty of excise, requires the tax to satisfy two elements:
- first, whether the tax bears a close relation to the production or manufacture, sale, distribution, or consumption of goods; and
- second, whether the tax is of such a nature as to affect the goods as the subjects of manufacture or production or as articles of commerce.
The majority held that the ZLEV charge satisfied both of these limbs: it was a tax on goods because there was a close relation between the tax and the use of ZLEVs, and the tax affected ZLEVs as articles of commerce, including because of its tendency to affect demand for ZLEVs.
The other judges published separate dissenting reasons, finding that the majority’s view inappropriately broadens the meaning of “excise”, which has significant implications not only for previous cases decided by the Court (e.g. Dickenson’s Arcade), but also for the fiscal balance, and any future state taxes on goods more generally.
Observations
Refunds of ZLEV charge
VicRoads has announced that customers are no longer required to pay an upcoming ZLEV related invoice or provide a vehicle odometer reading and that ZLEV customers are being contacted to explain next steps.
Contractual obligations
To the extent that this decision gives rise to an entitlement to a refund of this tax (and other state taxes that may be affected by this decision) to a taxpayer, the impact of such refunds on existing commercial arrangements should be considered in circumstances where the taxpayer has passed on that tax in its pricing model to a counterparty. How this plays out will depend on the refund entitlements of the taxpayer and the commercial terms of the arrangement between the taxpayer and the counterparty.
Potential for ongoing controversy concerning validity of State and Territory taxes
Moving forward, it remains an open question as to what other State taxes may be affected by the majority’s decision at a systemic level. The State and Territory Attorneys-General acknowledged in submissions that overruling Dickenson’s Arcade could open to challenge some categories of State and Territory taxation. The dissenting judgments provide some insight into what practical consequences and challenges may arise.
- Steward J, for example, acknowledged Victoria’s submissions which had relevantly identified potential threats to: “duties paid on the transfer of land which included goods, motor vehicle duties and vehicle registration charges, commercial passenger vehicle levies, gaming machine levies and ‘point of consumption’ betting taxes”, as well as waste disposal levies as imposed by the Environment Protection Act 2017 (Vic).
- Edelman J alluded specifically to certain taxes on gifts or inheritances, payroll taxes, land taxes, or other consumption-based taxes (e.g. taxes concerning the carriage, ownership, possession, use, or destruction of goods) as now being on uncertain constitutional ground.
- Gordon J stated that: “[i]n short, this new rule [as decided by the majority] will radically affect the scope of the States’ ability to raise taxation revenue” and cautions that “the legal and practical operation of any subsequent State law imposing a tax … is likely to be the subject of years of litigation as the courts seek to determine how the new rule is to operate … [w]e 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.”
Climate and energy
The outcome of this decision will also have significant impacts for Commonwealth, State and Territory governments who may begin developing and implementing climate and energy policies in parallel. This will particularly be the case given the use of taxes and incentives to “nudge” consumer behaviour as part of decarbonisation strategies.
This case also reflects an increasing trend that we have seen in the innovative use of different already existing causes of actions in the Australian legal landscape to pursue climate-related objectives.
The tax team at KWM would be happy to discuss the implications of this decision in further detail.
