High Court GST challenge could lead to big funding changes

West Australian Opposition Leader Mike Nahan

Federal-state financial relations have been based on a 1926 six-line unargued High Court decision. But, as I explain below, the High Court has indicated it would like to reconsider the decision.

That has led West Australian Opposition Leader Mike Nahan to start the movement towards a constitutional challenge.

When former federal treasurer Peter Costello set up the GST legislation, he must have realised there was a constitutional danger.

He contrived a complex formula whereby the distribution amounts would be set by the Grants Commission and not by the federal government. But Costello could never have dreamt that under the formula, one state would end up being returned only 34 per cent of its GST collection.

The community anger in WA towards this discrimination starts with people in the low-income areas of the society and extends to the very top. They all believe with a passion that the Coalition government is treating them unfairly.

Bill Shorten understands the white-hot community anger and proposes a $1.6 billion grant to WA, but this goes nowhere close to covering the shortfall.

The apparent discrimination against WA in GST is a matter that unites the state’s government and opposition. Both parties would endorse the remarks yesterday by Nahan of the impact of the discrimination:

● Only 38c in every WA GST dollar raised will be returned to WA in 2016-17;

● Only 34.4c in every WA GST dollar raised will be returned in 2017-18;

● A total of $4.7bn will be lost to WA revenue in 2016-17 — three times the proposed Shorten grant;

● $17.8bn is the projected loss of revenue for the five years to 2019-20; and

● WA’s current net debt is $32bn. If WA had received its equal per-capita share of GST since the GST was introduced, WA’s debt would be about $5bn.

The Constitution clearly states that while the federal government could give grants to the states (s96), there should be no discrimination between states on taxation (s51 (ii)) and the federal government cannot give preference to one state over another (s99).

It all seemed very clear to the lay person in 1900

But in the 1926 Federal Roads High Court case, in a remarkably short six-line statement, the court allowed federal legislation and stated that: “It is plainly warranted by the provisions of sec. 96 of the Constitution, and not affected by those of sec. 99 or any other provisions of the Constitution, so that exposition is unnecessary.”

That’s all. No explanation. Those 33 words changed the whole basis of the Constitution from what the founding fathers had expected.

Elaborating, section 96 says that parliament can “grant financial assistance to any state on the terms and conditions that it sees fit, subject to acceptance by the state(s) concerned”.

The 1926 High Court believed that the grants flexibility stated in section 96 overrode the other clauses. The 1926 interpretation was endorsed in a 1939 case as part of the war effort.

But the tide is turning for that interpretation.

In a series of other non-related judgments, the High Court has stated that it can be wrong to look at one clause of an agreement but rather that the whole contract should be considered. Accordingly, the decision of Nahan to seek a legal opinion was promoted first by the injustice to WA and second by intriguing statements that have come out of the High Court, which I detail below.

First, judges French, Hayne, Kiefel and Nettle in 2015 stated:

“(To) read the (statute) section in isolation from the enactment of which it forms a part is to offend against the cardinal rule of statutory interpretation that requires the words of a statute to be read in their context.

Second, six years earlier Justices Kiefel (now chief justice) and Bell said specifically: “The debate about whether the reference in s96 is … about the critical question of how s96, when read in context of the Constitution as a whole, is to be understood.”

Those statements from the court seemed to indicate that the High Court was prepared to re­look at the remarkably short 1926 judgment. But it will not be easy. WA has entered into agreements with the federal government that may neuter any constitutional protection it has.

Three steps will be involved in the High Court challenge process:

Step 1: The status quo says that the federal government has unfettered grants power. This means it can distribute the GST as it sees fit.

The first proposition to the High Court would be that the unfettered power is not supportable and needs to be reconsidered.

Step 2: If the High Court agrees that the unfettered grants power can be reconsidered, then the High Court would be asked to rule that the federal government cannot favour one state over another and discriminate against states. That would constrain the federal government’s grants powers.

Step 3: If the High Court agreed that the grants powers were constrained then the High Court would be asked to rule that GST distribution discriminates against states and is therefore ­unconstitutional.

And from there we go to a much wider field and change the whole basis on federal-state ­financial relations.