HIGH COURT OF AUSTRALIA

                                                        Victoria

                                                           Vs.

                                                   Commonwealth

  (Barwick C.J.(1), McTiernan(2), Menzies(3), Windeyer(4) Owen(5), Walsh(6) and Gibbs(7) JJ.)

                                                     14 May 1971

BARWICK C.J.

1. The Pay-roll Tax Act 1941 (Cth) (the tax Act) and the Pay-roll means of providing revenue to
finance the provision of child endowment under the Child Endowment Act 1941 (Cth). Though the
child endowment under the latter Act was to be universal, it was conceived primarily as a
supplement to the salary or wages of persons in employment. Consequently, the burden of the
endowment was cast on employers, the taxing Act imposing a tax upon all wages paid by an
employer. The Crown in right of a State was in each State a considerable employer of labour and at
least in some States of industrial labour. All its employees had the benefit of the child endowment
along with employees generally. Consequently the Crown in right of a State was included in the
definition of "employer" for the purposes of the Act. See.s. 3 of the Act. (at p362)

2. In the intervening years considerable modifications have been made to the Act principally by way
of increasing the ambit and extent of exemption from the operation of its provisions. These changes
no doubt have been dictated by policies unconnected with the basic policy prompting the passing of
the tax Act and the Act in 1941. Notable in this connexion is the use of the Act as an instrument of
policy in the promotion of the export trade of the country. See Div. 2 of Pt III of the Act as inserted
by the Pay-roll Tax Assessment Act 1968 (Cth). (at p362)

3. But though I have thus briefly stated the origin and history of the Act in point of policy as known
in historical fact, these circumstances, though illustrative of a situation in which the Crown in right
of a State may stand in a like situation to the citizen vis-a-vis the Parliament, are in truth irrelevant
to the resolution of the question raised in the proceeding now before the Court. That question is
whether the Parliament has under the Constitution legislative power to include the Crown in right of
a State in the operation of an Act which imposes a tax or provides for the assessment of a tax.
Expressed in its narrowest form, the question is whether the inclusion of the Crown in right of a
State in the definition of "employer" in s. 3 (1) of the Act is a valid exercise of legislative power of
the Commonwealth under s. 51(ii) of the Constitution : stated in its broadest form it is whether the
Commonwealth may by a law of taxation not confined in its operation to States, impose a tax upon a
State. The question is a legal question. It is to be resolved by legal considerations alone, that is to
say, by the construction of the Constitution according to legal principle. The principles of legal
construction applicable to the Constitution will exclusively provide the answer to the problem posed
by this suit. (at p363)
4. The State of Victoria has commenced a suit in this Court against the Commonwealth in which its
statement of claim as amended seeks :

       "A. A declaration that it is beyond the power of the
       parliament
       of the Commonwealth of Australia to enact that
       the tax imposed by the Pay-roll Tax Act 1941 shall be
       levied on any of the wages referred to in paragraph 4
       of the statement of claim paid or payable by the Crown
       in the right of the State of Victoria or that the Crown
       in the right of the State of Victoria shall pay the said
       tax to the Commonwealth in respect of any such wages.
       B. A declaration that in so far as the Pay-roll Tax
       Assessment
       Act 1941-1969 purports to enact that the tax
       imposed by the Pay-roll Tax Act 1941 shall be levied on
       any of the wages referred to in paragraph 4 of the
       statement
       of claim paid or payable by the Crown in the
       right of the State of Victoria and that the Crown in the
       right of the State of Victoria shall pay the said tax to
       the Commonwealth in respect of any such wages it is
       invalid and of no effect."

The wages referred to in par. 4 of the statement of claim are wages paid to officers and employees in
the Premier's Department, the Audit Office, the Chief Secretary's Department, the Office of the
Government Statist, the Social Welfare Department, the Victoria Police, the State Library of
Victoria, the National Gallery of Victoria, the Department of Labour and Industry, the Education
Department, the Crown Law Department, the Treasury, the Ministry of Transport, the State Taxation
Office, the Stamps Office, the Government Printer, the Department of Crown Lands and Survey, the
Public Works Department, the Mines Department, the Agriculture Department, the Department of
Health, the Local Government Department, the Hospitals and Charities Commission, the Liquor
Control Commission, the Workers' Compensation Board and the Council of Adult Education. (at
p364)

5. The Commonwealth has demurred to the statement of claim generally as disclosing no cause of
action. This raises for decision the constitutional validity of the Act in so far as it purports to impose
upon the State of Victoria an obligation to pay "pay-roll tax" rated to the amount of salaries and
wages paid to its public servants employed in the departments of State nominated in the statement of
claim as amended. (at p364)

6. The basic principles of construction of the Constitution were definitively enunciated by the Court
in Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd. [1920] HCA 54; (1920) 28
CLR 129 (the Engineers' Case). Lord Selborne's language in R. v. Burah (1878) 3 App Cas 378, at
pp 904-905 was accepted and applied as was that of Earl Loreburn in Attorney-General (Ontario) v.
Attorney-General (Canada) (1912) AC 571, at p 583 . The former said :

       "The established courts of justice, when a question arises
       whether the prescribed limits have been exceeded, must of
       necessity determine that question ; and the only way in which
       they can properly do so, is by looking to the terms of the
       instrument by which, affirmatively, the legislative powers
       were created, and by which, negatively, they are restricted.
       If what has been done is legislation, within the general scope
       of the affirmative words which give the power, and if it
       violates no express condition or restriction by which that
       power is limited (in which category would, of course, be
       included any Act of the Imperial Parliament at variance
       with it), it is not for any court of justice to inquire further,
       or to enlarge constructively those conditions and restrictions."

And the latter :

"In the interpretation of a completely self-governing
Constitution
founded upon a written organic instrument, such as
the British North America Act, 1867, if the text is explicit the
text is conclusive, alike in what it directs and what it forbids.
When the text is ambiguous, as, for example, when the words
establishing two mutually exclusive jurisdictions are wide
enough to bring a particular power within either, recourse
must be had to the context and scheme of the Act." (at p364)

7. The Court unequivocally rejected the doctrine that there was an "implied prohibition" in the
Constitution against the exercise in relation to a State of a legislative power of the Commonwealth
once ascertained in accordance with the ordinary rules of construction, a doctrine which had
theretofore been entertained and sought to be founded upon some supposed necessity of
"protection", as it were, "against the aggression of some outside and possibly hostile body". The
Court emphasized that if protection against an abuse of power were needed, it must be provided by
the electorate and not by the judiciary.

       "The one clear line of judicial inquiry as to the meaning
       of the Constitution must be to read it naturally in the light of
       the circumstances in which it was made, with knowledge of
       the combined fabric of the common law, and the statute law
       which preceeded it, and then lucet ipsa per se " :
       (1920) 28 CLR, at p 152
       . (at p365)

8. The Act is referable to s. 51 (ii.) of the Constitution as its source of legislative power. The
question therefore is whether the Act is a law within the ambit of the power given by that paragraph,
that is to say, is it a law on the topic of taxation within the meaning of the Constitution.
Consequently it becomes necessary to construe that paragraph of s. 51 in accordance with the
principles to which I have referred. Clearly the Act is an Act with respect to taxation. It does not
offend any limitation upon the legislative power expressed in the Constitution unless it is a tax upon
the property of a State within the meaning and operation of s. 114, a matter to which I will advert a
little later. (at p365)

9. The plaintiff State however asserts that s. 3 (1) of the Act is outside the ambit of the
Commonwealth legislative power in so far as it purports to include the Crown in right of a State in
the category of employers liable to assessment for pay-roll tax. The principal ground taken by the
plaintiff is that the granted power, "Taxation : but so as not to discriminate between States or parts
of States", does not authorize the imposition of any tax upon the Crown in right of a State, because
there is an implied constitutional limitation upon that Commonwealth power operating universally,
that is to say, as to all activities of a State. Therefore it is said the Act may not validly operate with
respect to the Crown in right of the State, no matter what the nature of the relevant activity of the
State in which it has employees to whom it pays wages or salaries. A secondary ground, but the
ground mostly pressed by the plaintiff, is that the legislative power with respect to taxation does not
extend to authorize the imposition of any tax upon any essentially " governmental" activity of a
State. Therefore at the least, the power granted by s. 51 (ii.) does not authorize the imposition of a
tax upon the Crown in right of a State in respect of the wages paid to its civil servants and that s. 3
(1) is pro tanto invalid. Though the legal propositions submitted by the plaintiff would extend
beyond these, the plaintiff in this suit limits its claim to invalidity of the Act in relation to wages
paid by it to its employees in the named departments of government. The suggested limitation upon
the legislative power of the Commonwealth, whether of universal or of limited operation, is said to
be derived by implication from the "federal" nature of the Constitution. In this connexion it is said
that to levy a tax upon a State at all, but in any case to levy a tax rated to the wages paid to its
servants employed in departments of government, so trenches upon the governmental functions of
the State as to burden, impair and threaten the independent exercise of those functions. It is also
sought to reach the same result by construction of the legislative power itself. It is said that because
of its particular, indeed unique nature, the legislative power with respect to taxation does not extend
to authorize the levy of a tax upon a State ; and again, either at all, or at any rate, with respect to its
"governmental" activities. (at p366)

10. It is as well that I should first express my view of the decision of the Court in the Engineers'
Case [1920] HCA 54; (1920) 28 CLR 129 . The precise question there decided was that the
Parliament of the Commonwealth has power to make laws binding on a State with respect to
conciliation and arbitration for the prevention and settlement of industrial disputes extending
beyond the limits of one State. This meant that the definitions of "employer" and of "industrial
dispute" in s. 4 of the Conciliation and Arbitration Act 1904-1918 (Cth) were valid as enacted and
not subject to an exception in favour of a State. (at p366)

11. The Court reached this conclusion by applying the ordinary rules of statutory construction as
appropriate to an organic instrument to which the Crown was a party.

       "The first step in the examination of the Constitution is to
       emphasize the primary legal axiom that the Crown is ubiquitous
       and indivisible in the King's dominions. Though the Crown
       is one and indivisible throughout the Empire, its legislative,
       executive and judicial power is exercisable by different agents
       in different localities, or in respect of different purposes in the
       same locality, in accordance with the common law, or the
       statute law there binding the Crown (Williams v. Howarth
       (1905) AC 551
       ;
       Municipalities' Case
       (1919) 26 CLR 508, at p 533
       ; Theodore v. Duncan
       (1919) AC 696, at p 706 [1919] UKPCHCA 3; ; 26 CLR 276, at p 282
       ; The
       Commonwealth v. Zachariassen and Blom
       [1920] HCA 85; (1920) 27 CLR 552
       . The Act 63 & 64
       Vict. c. 12, establishing the Federal Constitution of Australia,
       being passed by the Imperial Parliament for the express
       purpose of regulating the royal exercise of legislative, executive
       and judicial power throughout Australia, is by its own inherent
       force binding on the Crown to the extent of its operation. It
       may be that even if s. V. of the Act 63 & 64 Vict. c. 12 had not
       been enacted, the force of s. 51 of the Constitution itself would
       have bound the Crown in right of a State so far as any law
       validly made under it purported to affect the Crown in that
       right ; but, however that may be, it is clear to us that in
       presence of both s. V. of the Act and s. 51 of the Constitution
       that result must follow. The Commonwealth Constitution as
       it exists for the time being, dealing expressly with sovereign
       functions of the Crown in its relation to Commonwealth and
       to States, necessarily so far binds the Crown, and laws validly
       made by authority of the Constitution, bind, so far as they
       purport to do so, the people of every State considered as
       individuals or as political organisms called States - in other
       words, bind both Crown and subjects."
       (1920) 28 CLR, at pp 152, 153 (at p367)

12. In answer to the suggestion that there was an implied limitation upon Commonwealth legislative
power excepting the Crown in right of a State from its control, the Court said:

       " 'The nature and principles of legislation' (to employ the
       words of Lord Selborne in Burah's Case
       (1878) 3 App Cas 378, at p 904
       ), the nature of
       dominion self-government and the decisions just cited entirely
       preclude, in our opinion, an a priori contention that the grant
       of legislative power to the Commonwealth Parliament as
       representing the will of the whole of the people of all the
       States of Australia should not bind within the geographical
       area of the Commonwealth and within the limits of the
       enumerated powers, ascertained by the ordinary process of
       construction, the States and their agencies as representing
       separate sections of the territory. These considerations
       establish that the extent to which the Crown, considered in
       relation to the Empire or to the Commonwealth or to the
       States, is bound by any law within the granted authority of
       the Parliament, depends on the indication which the law gives
       of intention to bind the Crown."
       (1920) 28 CLR, at pp 153, 154

These principles were not only stated in universal terms but, in my opinion, are by their very nature
of universal validity. According to these principles, the grant to the Parliament of legislative power
with respect to each subject matter enumerated in the Constitution enables laws to be made within
the ambit of the subject matter which, if so intended, will bind the Crown in right of a State in like
manner that they bind individuals and corporations. (at p367)

13. It may be, of course, that the description of the subject matter properly construed excludes the
Crown in right of a State either completely or to a defined extent from the ambit of the subject
matter. Section 51 (xiii.) is an obvious example of such an express limitation of subject matter. But
if there be no such express limitation, the legislative power to bind the Crown in right of a State by
a valid law with respect to a subject matter within s. 51 (ii.) is, in my opinion unqualified. (at p368)

14. Sir Owen Dixon expressed his view of the principle of the Engineers' Case [1920] HCA 54;
(1920) 28 CLR 129 in Australian Railways Union v. Victorian Railways Commissioners [1930]
HCA 52; (1930) 44 CLR 319, at p 390 and in West v. Commissioner of Taxation (N.S.W.) [1937]
HCA 26; (1937) 56 CLR 657, at p 682 . He said :

       ". . . the principle is that whenever the Constitution confers
       a power to make laws in respect of a specific subject matter
       prima facie it is to be understood as enabling the Parliament
       to make laws affecting the operations of the States and their
       agencies. The prima facie meaning may be displaced by
       considerations based on the nature or the subject matter of
       the power or the language in which it is conferred or on some
       other provision in the Constitution."

I do not regard this expression of the principle of the Engineers' Case [1920] HCA 54; (1920) 28
CLR 129 as differing in substance from my own expression of it. The erection of a prima facie
meaning of a constitutional provision with provision for displacing considerations, though not an
approach to construction which I would myself prefer, is after all but a form of expression and, as I
understand it, not intended to depart from ordinary methods of construing constitutional provisions.
Once construed the power extends to authorize legislation binding the Crown in right of a State. His
Honour in the passages to which I have referred made two reservations to his statement of the basic
principle of constitutional construction. To these I shall make reference later. However, I should
mention at this point that Attorney-General (N.S.W.) v. Collector of Customs (N.S.W.) (the Steel
Rails Case) [1908] HCA 28; (1908) 5 CLR 818 was upheld by the Court in the Engineers' Case
[1920] HCA 54; (1920) 28 CLR 129 "upon the principles we have enunciated". In my opinion,
though the exclusive nature of the power to impose duties of customs and excise is derived from s.
90 and the duty to impose uniform duties of customs and excise is derived from s. 88, the power
which supported the exaction of the tax, the customs duty, in the Steel Rails Case, was s. 51 (ii.).
"The principles we have enunciated" were that the Crown in right of a State was within the ambit of
a law of the Commonwealth passed in pursuance of the power granted by s. 51 (ii.). The Steel Rails
Case as so approved, in my opinion, is certainly fatal to the plaintiff's larger proposition ; and,
depending on what precision can be given to the definition of "governmental" functions, also to its
lesser submission. (at p369)
15. I find no need to refer to other cases decided before the Engineers' Case [1920] HCA 54; (1920)
28 CLR 129 . They are sufficiently discussed for present purposes in that case and in West v.
Commissioner of Taxation (N.S.W.) [1937] HCA 26; (1937) 56 CLR 657 . (at p369)

16. Section 114 of the Constitution is in the following terms :

       "114. A State shall not, without the consent of the
       Parliament
       of the Commonwealth, raise or maintain any naval or
       military force, or impose any tax on property of any kind
       belonging to the Commonwealth, nor shall the Commonwealth
       impose any tax on property of any kind belonging to a State."

Its very presence in the Constitution or at any rate the inclusion in it of the provision as to the
property of a State might well be thought to militate against the plaintiff's submissions. But though
weighty, for my part, I find no need to rely on any such consideration. It seems to me quite clear
that a law requiring the payment of a tax rated to the amount of wages paid is not a tax upon
property. It is neither a tax upon any property of the employers nor upon any property of a State. It
is not, as submitted, a tax upon those "revenues" of the State out of which the State may choose to
pay the amount of the tax any more than it is a tax upon that income or capital of an employer out of
which he may pay the tax. In my opinion, s. 114 is not infringed by the imposition upon the State of
the pay-roll tax. The Act therefore is not in breach of any express provision of the Constitution : to
use Lord Selborne's words "it violates no express condition or restriction by which" the legislative
power is limited. The Act is "within the general scope of the affirmative words which give the
power", unless the plaintiff's submissions, directed to the construction of those words, are
acceptable. (at p369)

17. It is necessary now to discuss the basis on which the plaintiff State sought to limit the scope of
the legislative power granted by s. 51 (ii.). The plaintiff was bound to concede that the legislative
power granted by some other paragraphs of s. 51 could extend to the making of laws binding upon
the Crown in right of a State. But the plaintiff sought to distinguish the power granted by s. 51 (ii.).
(at p369)

18. The ground of distinction was sought to be found in what was said to be the unique character of
a power to tax and the supposed incongruity of one government being able by means of taxation to
determine the use to be made by another government of its revenues. It was further said and as an
independent point, though at times used cumulatively with the submission as to the unique nature of
the power of taxation, that the federal structure of the Constitution required an implication that
Commonwealth legislative power whatever its constitutional source might not be exerted so as to
threaten the continued existence of a State as an independent element in the federation. The tax in
the present case was said to constitute such a threat. (at p370)

19. In aid of its submission distinguishing the power to make laws with respect to taxation from the
power to make laws on the other topics enumerated in s. 51 the plaintiff called attention to a passage
in the judgment of four justices in the Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 and to
certain observations of Sir Owen Dixon in subsequent cases, namely in Australian Railways Union
v. Victorian Railways Commissioner (1930) 44 CLR 319 and in West v. Commissioner of Taxation
(N.S.W.) [1937] HCA 26; (1937) 56 CLR 657 . I shall need later on to set out this passage and these
observations to facilitate my discussion of them. But meantime, I address myself to the submission
that a limitation upon the power of legislation granted to the Parliament by s. 51 is to be derived
from the "federal" nature of the Constitution. In this connexion I shall need to make particular
reference to the decision of the Court in Melbourne Corporation v. The Commonwealth [1947]
HCA 26; (1947) 74 CLR 31 . (at p370)

20. I have observed elsewhere that the Constitution does not represent a treaty or union between
sovereign and independent States. It was the result of the will and desire of the people of all the
colonies expressed both through their representative institutions and directly through referenda to be
united in one Commonwealth with an agreed distribution of governmental power. The whole
"agreement" or as it is sometimes called "the compact" of the people of the colonies was to be and
was expressed in an Act of the Imperial Parliament not in any sense as a treaty or an agreement of
union, or as a confederation of States but as a statutory Constitution under the Crown.

       "The Constitution was established by the Imperial Act 63
       & 64 Vict. c. 12. The Act recited the agreement of the people
       of the various colonies, as they then were, 'to unite in one
       indissoluble Federal Commonwealth under the Crown of the
       United Kingdom of Great Britain and Ireland, and under
       the Constitution hereby established'. 'The Crown', as that
       recital recognizes, is one and indivisible throughout the
       Empire. Elementary as that statement appears, it is essential
       to recall it, because its truth and its force have been
       overlooked,
       not merely during the argument of this case, but
       also on previous occasions."
       (1920) 28 CLR, at p 152 (at p371)

21. The Constitution granted by the Imperial Act was "federal", not in the sense of a union of
previously existing States surrendering powers to that union but in the sense that the powers of
government were distributed, some by nomination of subject matter and others as residues.
Therefore analogies drawn from situations in the United States of America and from judicial
conclusions and observations upon the Constitution of that country must, in my opinion, be used, if
at all, only with a clear realization of the basic distinction between the constitutional position of the
two countries. Thus, though by their union in one Commonwealth, the colonists became
Australians, the territorial boundaries of the former colonies were retained for purposes of the
distribution of governmental power and function. The constitutional arrangements of the colonies
were retained by, and subject to, the Constitution as the constitutional arrangements for the
government of those portions of the Commonwealth to be known as States. These, though
coterminous in geographical area with the former colonies, derived their existence as States from
the Constitution itself : and being parts of the Commonwealth became constituent States. This
background must be in mind in considering whether any implication of a limitation upon
Commonwealth power may be drawn from the terms of the Constitution itself. Whatever the
antecedent history of the passing by the Imperial Parliament of the Constitution Act (63 & 64 Vict.
c. 12) it and it alone expresses the will of the Imperial Parliament which alone had legislative power
to alter the colonial status. Of course, that Act must be construed in the light of its antecedent
history or as it was said in the Engineers' Case [1920] HCA 54; (1920) 28 CLR 129, at p 152 , "it
must be read naturally in the light of the circumstances in which it was made . . .". But the
outstanding fact that the Act created the Commonwealth as the embodiment of the people of
Australia and gave it, amongst other things, legislative power over the enumerated subject matters
cannot be gainsaid. The extent to which the former colonial constitutions and powers of government
were transmuted into and continued by the Constitution as the constitutional and governmental
powers of the States is fully expressed in s. 106 and s. 107 which are both subject to the
Constitution. There is no room, in my opinion, for an implication of a kind which might be
appropriate in the construction of a treaty of union between States, some unexpressed contractual
term of a fundamental nature. Indeed, in my opinion, the approach of the Court in the Engineers'
Case [1920] HCA 54[1920] HCA 54; ; (1920) 28 CLR 129 to the construction of the Constitution as
an Act of the Imperial legislature in reality denies the possibility of any such implication. (at p372)

22. However, it is to my mind clear that the Constitution in providing for the States did not give the
Commonwealth legislative power over them, or their powers and functions of government, as
subject matters of legislation. That the Government cannot "aim" its legislation against a State, its
powers or functions of government is both true and fundamental to our constitutional arrangements.
But, in my opinion, this does not derive from any implied limitation upon any legislative power
granted to the Commonwealth. It is true simply because the topics of legislation allotted to the
Commonwealth by the Constitution do not include the States themselves nor their governmental
powers or functions as a subject matter of legislative power. As will appear from my understanding
of the judgments in Melbourne Corporation v. The Commonwealth (2), a law of the Commonwealth
which in substance takes a State or its powers or functions of government as its subject matter is
invalid because it cannot be supported upon any granted legislative power. If the subject matter of
the law is in substance the States or their powers or functions of government, there is no room, in
my opinion, for holding it to be at the same time and in the same respects a law upon one of the
enumerated topics in s. 51. Sir Owen Dixon in Melbourne Corporation v. The Commonwealth
[1947] HCA 26; (1947) 74 CLR 31 , having concluded that s. 48 of the Banking Act "singled out
and taxed the States in respect of some exercise of their functions", and that it was "effective to deny
to the States the use of the banks", said that "this . . . is not justified by the power to make laws with
respect to banking". That followed, in my opinion, because such a law was not in substance a law
with respect to banking: but on the contrary, had the States and the banking of their funds as its
subject. Of course, a law may be at the same time thought to be a law with respect to either of two
of the topics enumerated in s. 51 and it may be satisfactory in such a case not to trouble to say with
respect to which of the two subject matters the law should preferably be referred. But when a law
may possibly be regarded as having either of two subjects as its substance, one of which is within
Commonwealth power and the other is not, a decision must be made as to that which is in truth the
subject matter of the law. Although usually not an appropriate course in determining whether a law
is a law on an enumerated topic, in such a case, the decision of what is the subject matter of the law
may be approached somewhat in the manner the validity of a law claimed to be within one of the
two mutually exclusive lists in the Canadian Constitution is determined. The law must be upon one
or other of the subjects. It cannot be on both. Thus, in my opinion, to decide that the law in question
is a law having the States or their powers or functions of government for its subject matter, is to
decide that it cannot be a law "justified by the power to make laws with respect to" one of the topics
enumerated in s. 51. In other words, it seems to me to follow necessarily from the decision of the
Court in the Engineers' Case [1920] HCA 54[1920] HCA 54; ; (1920) 28 CLR 129 , and from the
reasons given for that decision, that the validity of a Commonwealth law will be determined by its
relation to a granted subject matter of legislative power construed as a provision of an act of the
Imperial Parliament, "read naturally in the light of the circumstances in which it was made". By that
direct approach no warrant will, in my opinion, be found in the Constitution for a law of which the
powers or functions of a State is or are in truth the subject matter. It is for lack of an appropriate
subject matter rather than the presence of an implied limitation upon some granted power that such
a law, in my opinion, would fail. That, in my opinion, is the real ground of and, in any case, the
only acceptable ground for, the decision in Melbourne Corporation v. The Commonwealth [1947]
HCA 26; (1947) 74 CLR 31 . (at p373)

23. The reason for the inability of a State to make a law binding on the Commonwealth is a
completely unrelated circumstance. It derives from the fact that the Crown has not by the
Constitution submitted itself to the legislatures of the States. The endeavour to found the inability of
a State to bind the Commonwealth upon a doctrine of mutual immunity derived from necessity was
clearly and convincingly exploded by the Court in the Engineers' Case (1). (at p373)

24. But though the powers and functions of a State may not be the subject matter of a
Commonwealth law yet because laws of the Commonwealth, if so intended, bind the Crown in right
of a State, the exercise of those powers and functions may be affected and indeed controlled by a
valid Commonwealth law, the validity of the law depending solely upon its relationship to a granted
topic of legislation. This is not to deny that the extent of the impact upon, or control of, a State or
the exercise of its powers and functions by the Commonwealth Act may not induce the conclusion
that that Act is in substance a law with respect to the State, its powers or functions and so invalid for
want of a granted subject matter. (at p374)

25. The plaintiff's submissions did not in terms go so far as to say that the inroad made by the Act
upon the governmental functions of the State was so great that the State and those functions became
in substance the subject matter of the Act, that it became an Act with respect to the State rather than
an Act with respect to taxation. The submission was that, though an Act with respect to taxation, it
transgressed a limitation upon the legislative power because by imposing the tax upon the State it
impaired the exercise by the State of its governmental functions and thus impinged upon its
independence as a State. (at p374)

26. In the first place I am unable to see how this submission can be accepted consistently with the
decision of this Court in the Steel Rails Case [1908] HCA 28; (1908) 5 CLR 818 , bearing in mind
that it was accepted in the Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 upon the basis of
the principles there laid down. But in any case, in my opinion, the statement that the imposition of
this tax threatens or impairs the independence of the State is, as a statement of a legal conclusion,
unwarranted. In some ways, though of course significantly different, it is reminiscent of the earlier
view that the taxation of the personal income of a public servant, albeit, including his salary as such,
compromised the independence of the government which employed him. No doubt to the extent that
the State pays the amount of the tax, it may have less money at its disposal for the pursuit of its own
policies. But that, in my opinion, does not mean either that the law is a law with respect to a State or
its functions, or that its independence as a State is threatened. So far as the submission depends on
the alleged distinction between governmental and other functions of a State, as I point out later, in
my opinion, this supposed distinction cannot afford any criterion of validity. (at p374)

27. It will be convenient at this point to notice an argument founded on the statement to be found in
the reported cases that the Commonwealth may not by its law "discriminate" against a State. In the
case of a law made under s. 51 (ii.) there may be no discrimination between States or parts of States.
No case for invalidity based on this express provision was sought to be made. Nor could it be said
that the Act "singled out" the State for special or separate treatment. But it was said that the Act did
"discriminate" against the State in so far as it excluded the wages paid by a State to teachers and
staff employed in a school conducted by or on behalf of a State from the exempting provisions of s.
15 of the Act. That the Act treats such wages differently from the way it treats wages paid by a
denominational or independent school and in that sense discriminates may be accepted. But it is
almost of the nature of a law of taxation that it selects those who are to be subject to the tax it
imposes. Frequently there are exemptions of which only some may have the advantage. In this case,
a State is not given the benefit of an exemption. But does the presence in the statute of such
"discrimination" render the statute even pro tanto invalid? (at p375)

28. Although, as a convenient, though perhaps with great respect not always an exact form of
expression, it is said in various judgments of Justices of this Court that a law "discriminating"
against a State would be invalid, in my opinion, the discriminating nature of a legislative provision
will not itself be definitive of invalidity. If I might borrow what, with respect, seems to me, an apt
expression from the argument of Fullagar K.C., as Mr. Justice Fullagar then was, in Riverina
Transport Pty. Ltd. v. Victoria [1937] HCA 33; (1937) 57 CLR 327, at p 337 "discrimination is
merely a means to a conclusion", the conclusion being that the legislation is not upon the granted
subject matter but upon some other subject matter not within legislative competence. Sir John
Latham, who discussed discrimination as a basis of invalidity in Riverina Transport Pty. Ltd. v.
Victoria [1937] HCA 33; (1937) 57 CLR 327 and in West v. Commissioner of Taxation (N.S.W.)
[1937] HCA 26; (1937) 56 CLR 657 , said in Melbourne Corporation v. The Commonwealth [1947]
HCA 26; (1947) 74 CLR 31 as to legislation discriminating against a State :

       "In my opinion, the reason why such legislation is invalid
       is that what is called 'discrimination' shows that the
       legislation
       is really legislation by the Commonwealth with respect
       to a State or State function as such and not with respect to
       the subject in respect of which it is sought to bind the State.
       ..."

With due respect I agree with this analysis. To be definitive of validity the "discrimination" must be
of that kind which leads to a relevant conclusion as to the substantial subject matter of the law. (at
p375)

29. In the present case even if it be supposed that the provisions to which I have called attention are
truly discriminating, their presence in the legislation, in my opinion, does not afford any reason to
conclude that the Act is not upon a granted subject matter. The mere existence of the different
provisions in the Act affecting the State does not, in my opinion, invalidate the Act or any part of it.
(at p376)

30. I should now deal with the submission that the subject matter of taxation, because of the
extensive effect a law on that topic may have, has an inherent limitation which excludes a State
from its ambit. I am unable to accept such a submission. The argument offered in support of it
seems to me little, if anything, more than an attempt to construct a legal safeguard against an
apprehended abuse of a power to make a law of taxation binding the Crown in right of a State. But
the fallacy of attempting to erect such a limitation is clearly disposed of by the Court in the
Engineers' Case (1920) 28 CLR, at p 151 . The language of s. 51 (ii.) and its ascertained meaning by
construction, in my opinion, gives no warrant for any limitation upon the legislative topic of
taxation beyond those expressly made in s. 51 (ii.) itself and by s. 114 of the Constitution. (at p376)

31. From a passage in the judgment of the majority justices in the Engineers' Case [1920] HCA 54;
(1920) 28 CLR 129 the plaintiff sought to get some support for the proposition that there was
something so special about the power to tax that of necessity there was within the grant of the
legislative power a limitation excepting the Crown in right of the State from the ambit of the power.
So much weight was put upon this passage and such comments have been made upon it in
subsequent dicta that I think it worthwhile to set out the passage in full :

       "It is proper, at the outset, to observe that this case does
       not involve any prerogative 'in the sense of the word', to
       use the phrase employed by the Privy Council in Theodore v.
       Duncan
       (1919) AC 696, at p 706
       , 'in which it signifies the power of the Crown
       apart from statutory authority'. Though much of the argument
       addressed to us on behalf of the States rested on the prerogative,
       this distinction was not observed, but it exists, and, so far as
       concerns prerogative in the sense indicated, it is unnecessary
       to consider it. In several recent cases the Judicial Committee
       has had the broader question under consideration, as in
       Canadian Pacific Railway Co. v. Toronto Corporation
       (1911) AC 461
       and Bonanza Creek Gold Mining Co. v. The King
       (1916) 1 AC 566
       ,
       but in none of these was it found necessary to determine it.
       It is manifest that when such a question is involved in a
       decision, the nature of the prerogative, its relation to the
       Government concerned, and its connection with the power
       under which it is sought to be affected, may all have to be
       considered. In the Bonanza Creek Case
       (1916) 1 AC, at p 587
       Lord Haldane,
       speaking for the Privy Council, after favouring an
       interpretation
       of the British North America Act by which certain
       rights and privileges of the Crown would be reserved from
       Canadian legislative power, proceeded to say : - 'It is quite
       consistent with it' (that interpretation) 'to hold that executive
       power is in many situations which arise under the statutory
       Constitution of Canada conferred by implication in the grant
       of legislative power, so that where such situations arise the
       two kinds of authority are correlative. It follows that to this
       extent the Crown is bound and the prerogative affected.'
       In this case we have to consider the effect of certain statutory
       authority of the States, but in relation to pl. xxxv. only, and
       it is necessary to insert a word of caution. If in any future
       case concerning the prerogative in the broader sense, or arising
       under some other Commonwealth power - for instance,
       taxation,
       - the extent of that power should come under
       consideration
       so as to involve the effect of the principle stated in the
       passage just quoted from the Bonanza Creek Case, and its
       application to the prerogative or to the legislative or executive
       power of the States in relation to the specific Commonwealth
       power concerned, the special nature of the power may have
       to be taken into account. That this must be so is patent from
       the circumstance that the legislative powers given to the
       Commonwealth Parliament are all prefaced with one general
       express limitation, namely, 'subject to this Constitution',
       and consequently those words, which have to be applied
       seriatim to each placitum, require the Court to consider with
       respect to each separate placitum, over and beyond the general
       fundamental considerations applying to all the placita, whether
       there is anything in the Constitution which falls within the
       express limitation referred to in the governing words of s. 51.
       That inquiry, however, must proceed consistently with the
       principles upon which we determine this case, for they apply
       generally to all powers contained in that section."
       (1920) 28 CLR, at pp 143, 144

Two dicta of Sir Owen Dixon ought also to be quoted. In Australian Railways Union v. Victorian
Railways Commissioners (1930) 44 CLR, at p 390 , Sir Owen said :

"We ought not to examine the correctness of the rule
adopted by the majority of the Court in the Engineers' Case,
for the interpretation of the legislative powers of the
Parliament.
This rule I understand to be that, unless, and save in
so far as, the contrary appears from some other provision of
the Constitution or from the nature or the subject matter of
the power or from the terms in which it is conferred, every
grant of legislative power to the Commonwealth should be
interpreted as authorizing the Parliament to make laws
affecting
the operations of the States and their agencies, at any rate
if the State is not acting in the exercise of the Crown's
prerogative
and if the Parliament confines itself to laws which
do not discriminate against the States or their agencies."

In West v. Commissioner of Taxation (N.S.W.) (1937) 56 CLR, at p 682 , Sir Owen said:

"The principle" i.e. established by the Engineers' Case
[1920] HCA 54; (1920) 28 CLR 129
"is
that whenever the Constitution confers a power to make laws
in respect of a specific subject matter, prima facie it is to be
understood as enabling the Parliament to make laws affecting
the operations of the States and their agencies. The prima
facie meaning may be displaced by considerations based on
the nature or the subject matter of the power or the language
in which it is conferred or on some other provision in the
Constitution. But, unless the contrary thus appears, then,
subject to two reservations, the power must be construed as
extending to the States. The first reservation is that in the
Engineers' Case the question was left open whether the principle
would warrant legislation affecting the exercise of a prerogative
of the Crown in right of the States. The second is that the
decision does not appear to deal with or affect the question
whether the Parliament is authorized to enact legislation
discriminating against the States or their agencies." (at p378)

32. What is sought to be said by the plaintiff is that the Court in the passage quoted from the
Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 excepted the legislative power with respect to
taxation from the generality of its judgment as expressed in the other passages which I have already
quoted from that case. But, in my opinion, the submission is founded on a misconception of what
the Court there said. (at p378)

33. Perhaps in this connexion it is well to remind ourselves that we are not construing judgments.
Our task is to construe the Constitution which is always the text. However in so far as it is said that
the Court has established by decision a constitutional doctrine it is proper to examine closely the
decisions both to ascertain precisely what was decided and on appropriate occasions to determine
whether what was decided is currently acceptable. It is of course what the court as a court says and
not the opinion of single justices unless adopted by a majority of the justices of the court, which
establishes doctrine. Further, what Isaacs J. said in Australian Agricultural Company v. Federated
Engine Drivers and Firemen's Association [1913] HCA 41; (1913) 17 CLR 261, AT P 278 is, in my
respectful opinion, pre-eminently true in relation to the construction of the Constitution. (at p378)

34. In considering the passage from the Engineers' Case (1920) 28 CLR, at pp 143, 144 which I
have set out, the first observation that should be made is that in truth the justices did not single out
the power with respect to taxation as an exception but merely used it as an instance of those
legislative powers whose exercise might be thought likely to give rise to a conflict between the
prerogative of the Crown and legislation based on a granted power. Secondly, it is of paramount
importance to understand what was the reservation which their Honours were minded to make. This
is best understood, it seems to me, by examining the two cases to which reference is made in the
judgment from which I have quoted, namely Canadian Pacific Railway Co. v. Toronto Corporation
(1911) AC 461 and Bonanza Creek Gold Mining Co. v. The King (1916) 1 AC 566 . These cases
arose under the Canadian Constitution. In the case of Canada, Lieutenant Governors of the
Provinces as well as the Governor-General are viceroys of the Crown through whom the
prerogatives of the Crown in general may be exercised ; they are not as are the Governors of the
Australian States merely exercising local functions for the Crown including the prerogative in
relation to local matters. In the case of a Constitution such as that of Canada with a distribution of
legislative power between legislatures and the maintenance of the Crown's prerogative in more than
one representative, a question might arise whether a law made by the Canadian House of
Representatives is in conflict with an exercise of the prerogative of the Crown through the viceroy
Lieutenant Governor of the Province. However, Lord Haldane in the Bonanza Creek Gold Mining
Co. v. The King (1916) 1 AC 566 was at pains to point to the radical distinction in relation to the
prerogative of the Crown between the situation under the Canadian Constitution and that which
arises under the Australian Constitution. He said :

       "There is no provision in the British North America Act
       corresponding even to s. 61 of the Australian Commonwealth
       Act, which, subject to the declaration of the discretionary
       right of delegation by the Sovereign in ch. 1, s. 2, provides that
       the executive power, though declared to be in the Sovereign,
       is yet to be exercisable by the Governor-General."
       (1916) 1 AC, at pp 586, 587

This observation of his Lordship is very much in line with what I have called the basic reason for
the Court's decision in the Engineers' Case [1920] HCA 54[1920] HCA 54; ; (1920) 28 CLR 129 .
which was that the Crown had submitted itself to the legislative powers of the Commonwealth to the
full extent of each granted power and that therefore the extent to which the Crown in right of the
Commonwealth or in right of a State is bound by any law within the granted authority of the
Parliament depends solely on the indication which the law itself gives of an intention to bind the
Crown. The only question is one of statutory construction, the Crown being a party to the
Commonwealth law. (at p379)

35. In any case it is clear that their Honours did not examine in any depth the question of any
possible collision between Commonwealth law and an exercise of the Crown's prerogative because
as they said the case before them did not involve any question as to the prerogative. Having closely
studied the two cases on appeal from Canada the most it seems to me that can be taken from their
Honours' reservation is that the question whether a Commonwealth law made under a granted power
can affect an exercise of the Crown's prerogative might need some time to be examined. In my
opinion, however, on such examination it will be found that the possibility against which their
Honours thought fit to enter a caveat is really not one that can occur under the Australian
Constitution. That their Honours did not intend in the Engineers' Case [1920] HCA 54; (1920) 28
CLR 129 to depart from the generality of their decision can be seen in the last sentence of the
passage which I have quoted. They were at pains to point out that the inquiry as to whether there
was any limitation as to the prerogative "must be ascertained consistently with the principles upon
which we determine this case for they apply generally to all the powers contained in that section,
that is to say, s. 51". (at p380)

36. I have already touched upon portion of the quotations from the judgment of Sir Owen Dixon in
Australian Railways Union v. Victorian Railways Commissioners [1930] HCA 52; (1930) 44 CLR
319 and in West v. Commissioner of Taxation (N.S.W.) [1937] HCA 26; (1937) 56 CLR 657 . I
have also indicated my view as to the concept of a prima facie nature of the meaning of a granted
legislative power. I should now wish to observe that whereas in the passage firstly quoted by me, Sir
Owen referred to the "Crown's prerogative", in the passage quoted from West's Case (3) he refers to
"the exercise of a prerogative of the Crown in right of the States". In my most respectful opinion
this is an unwarranted extension of what was the subject of reservation in the Engineers' Case (1).
Indeed, it was the distinction between the prerogative of the Crown regarded as an indivisible entity
and the exercise of local functions by an agency of the Crown which was fundamental to the
decision of the Engineers' Case (1). I have already sufficiently expressed myself with respect to the
"reservation" in the Engineers' Case (1) to indicate why I am respectfully unable to accept the latter
statement of Sir Owen as to the extent of that reservation. (at p380)

37. I ought at this point to notice a submission that in some way the opening words of s. 51 "subject
to this Constitution" opened the way for an implication limiting the granted powers of the
Parliament. With every respect to the judicial source of this submission, I am unable to accept it.
See West v. Commissioner of Taxation (N.S.W.) [1937] HCA 26; (1937) 56 CLR 657 . It may be
granted that the quoted words import limitations upon the legislative power given by s. 51. For
example, they introduce the prohibition of s. 92 and s. 99 of the Constitution. But for reasons I have
already expressed, I find no warrant in the Constitution for an implication of the kind submitted by
the plaintiff. It would indeed be strange in my opinion that in so fundamental a matter as that to
which this case relates, a limitation upon Commonwealth power was to be extracted from such
prefatory words : or for that matter by implication at all. (at p381)

38. To restate my conclusions, the principle to be derived from the Engineers' Case [1920] HCA 54;
(1920) 28 CLR 129 is that the Commonwealth Parliament in exercising its legislative power as to
any of the enumerated topics is able by its law to bind the Crown in right of a State except in
relation to those topics which contain and express exception or limitation in that respect and except
in so far as s. 114 extends. Instances of subject matter with respect to which there could be no
occasion to bind the Crown in right of a State are obvious and do not need to be mentioned.
Whether or not a Commonwealth law purporting to bind the Crown in right of the State is a valid
law depends, in my opinion, entirely upon whether or not it is a law on a stated subject matter. If it
singles out a State for particular treatment (and such singling out is the form of discrimination
which in my opinion may be relevant), it may be concluded that the law is not a law on a stated
subject matter but is a law the subject matter of which is the State or a power or function of the
State. Again the nature of the provisions of the Act may lead to the conclusion that it is in substance
a law with respect to a State or its powers or functions. That subject matter is not vouchsafed to the
Commonwealth. (at p381)

39. I turn now to Melbourne Corporation v. The Commonwealth [1947] HCA 26; (1947) 74 CLR
31 . Reliance was placed by the Solicitor-General for Victoria upon some of the opinions expressed
by the justices in that case. The section of the Commonwealth law there in question, namely s. 48 of
the Banking Act 1945 (Cth) though cast in the form of a direction to banks was in reality an
endeavour to compel the States and its authorities including their local government authorities to
bank with the Commonwealth Bank. Rich J. says :

       "In my opinion, the pith and substance of s. 48, however
       ingeniously expressed, is that a State or an authority of a
       State, including a local governing authority, must have the
       consent of the Treasurer in order to become the customer of
       a bank."
       (1947) 74 CLR, at p 67

The section only applied to States and their authorities. They were thus singled out and a legislative
provision made as to them and them alone. The legislative provision was as to the manner in which
they might hold their funds. That the subject matter of the section was the State in relation to the
custody of the funds could plainly be seen. That that subject matter was not granted to the
Commonwealth was plain enough. Of course, a reason why such a subject matter was not available
to the Commonwealth was that the continued integrity of the States was just not possible if laws
could be validly made by the Commonwealth on that subject matter. Consequently frequent
reference is to be found in the reasons of the participating justices to the undoubted truth that the
Constitution contemplates the continued existence of the States. This is expressed by saying that the
Commonwealth may not "aim" its legislation against the States ; or, that the States cannot be singled
out and taxed as States in respect of some exercise of their functions. But these in my respectful
opinion are merely forms of expressing the legal principle that legislation of the kind described is in
substance legislation upon or with respect to the States themselves and their functions as such. Such
a law is "not justified by the power to make laws with respect to banking". There is however no
ratio decidendi common to those justices who formed the majority of the participating justices in
Melbourne Corporation v. The Commonwealth [1947] HCA 26; (1947) 74 CLR 31 . It is not
permissible to construct such a ratio by the aggregation of various elements from separate reasons
given by their Honours (see Great Western Railway Company v. Owners of S.S. Mostyn per
Viscount Dunedin (1928) AC 57, at pp 73, 74 ). But, in my opinion, the real ground of the decision
and, in any case, the only acceptable ground, is that s. 48 of the Banking Act lacked an appropriate
subject matter. (at p382)

40. Any other view must, in my respectful opinion, involve concepts incapable of exact expression
and certainly of practical application. For example, the concept of an "undue" interference with
State functions attracting invalidity provides but a question begging formula. And to attempt to use
a distinction between governmental and other functions of a State in the modern world as a legal
criterion of validity is, in my opinion, without promise. New York v. United States [1946] USSC
13; (1946) 326 US 572 (90 Law Ed 326) , to my mind, illustrates the difficulties without affording
any sure guide to their resolution. In my opinion, the only satisfactory principle is that which the
Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 adopts, namely, that to be valid the
Commonwealth law must be on a granted subject matter. Being in substance on such a matter, it
may bind the Crown in right of a State. But States and their functions are not matters committed to
the Parliament. In my opinion, application of these principles, and the determination of the subject
matter of a law, as with all its difficulties, we are accustomed to do, will ensure the continuance of
States as such, according to the Constitution. I respectfully agree with Sir John Latham when he
says in Melbourne Corporation v. The Commonwealth (1947) 74 CLR, at p 61 that "the
Commonwealth Parliament has no power to make laws with respect to State governmental functions
as such. . . . It is upon this ground, in my opinion, that what is called 'discriminatory' legislation may
properly be held to be invalid". On the other hand, I am unable to agree that there is a separate
ground of invalidity namely "undue interference with the performance of what are clearly functions
of government". If, as I have already said, the provisions of an Act because of the nature and extent
of their application to the State or its functions can be said to be in substance a law with respect to
the State or its functions, the provisions will be beyond the competence of the Parliament. But such
"interference" with the exercise of the powers or functions by a Commonwealth Act which
otherwise would be within power will not invalidate that Act unless the nature and extent of such
interference requires the conclusion that those powers or functions are in reality the subject matter
of the Act. (at p383)

41. In my opinion, the power of the Parliament with respect to taxation is not in any wise excepted
from the basic principle that a valid law made by the Parliament may bind the Crown in right of a
State according to its terms. (at p383)

42. Therefore, the accepted principles of construction of the Constitution as expounded in
Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd. (2) clearly, in my opinion,
require the allowance of the demurrer to the statement of claim. (at p383)
McTIERNAN J. The State of Victoria claims, as the Crown in right of that State, a declaration that
it is not liable to pay pay-roll tax to the Commonwealth, notwithstanding that, according to the Pay-
roll Tax Assessment Act 1941-1969 (Cth), the Crown in right of a State is liable to pay such tax to
the Commonwealth. The claim is made particularly in respect of pay rolls of government
departments. Liability to pay the tax is laid on an employer who pays wages. The tax is levied on
the wages and is payable in respect of the wages. The long title of the Pay-roll Tax Act 1941 (Cth)
declares that the subject matter of the tax is the "payment of wages". This is repeated by the long
title of the Pay-roll Tax Assessment Act 1941-1969 (Cth). The taxpayers under the Acts are
employers. Some belong to the private sector of the economy, others to the part of the public sector
marked out by the statutory definition of "employer". A State is included under the name of the
Crown in the right of a State, in the definition. The term "wages" is also the subject of a statutory
definition. This applies generally to wages, salary etc. payable to any employee as such whether the
employer is a government or a private employer. (at p384)

2. The first question is whether the Act is beyond the power which s. 51 (ii.) of the Constitution
grants to the Commonwealth Parliament. The statement of claim alleges, as an example of the
unconstitutional operation of the Act, that it purports to make the Crown in right of the State of
Victoria liable to pay the tax, which the Pay-roll Tax Act 1941 (Cth) imposes, in respect of the
remuneration of the staff of the State departments concerned with governmental functions. (at p384)

3. A question, raised by the argument put forward on behalf of the State, is whether the Parliament
is able to make a law under s. 51 (ii.) binding on the Crown in the right of a State. Section 51 (ii.)
is, of course, the taxation power of the Commonwealth. The term "taxation" does not mean in the
Constitution only tax paid by a subject. The Commonwealth Constitution Act establishes the
supremacy throughout the Commonwealth of all laws validly made under the Constitution. The Act
obviously applies to any law validly made under s. 51 (ii.) of the Constitution. The Crown in right
of a State is subordinate to the Crown in right of the Commonwealth to the extent of legislative
power granted by the Constitution to the Commonwealth Parliament. The Crown is a single juristic
person but it has these two capacities respectively. It is clearly consistent with the federal system
under the Constitution that the Crown in right of a State should be bound by a law made pursuant to
s. 51 (ii.) of the Constitution to pay tax to the Crown in right of the Commonwealth (See the Steel
Rails Case [1908] HCA 28; (1908) 5 CLR 818 and Sutton's Case [1908] HCA 26[1908] HCA 26; ;
(1908) 5 CLR 789 ). The suggestion that the word "taxation" in s. 51 (ii.) means taxation of subjects
only and imposes a limitation on that basis upon the power granted by the placitum to the
Commonwealth Parliament, has no force. It is implicit in the judgment of the majority in the
Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 , that the Parliament has power to make a law
under s. 51 (ii.) which is binding on the several States. If not, the relevance of the reference in the
judgment to the taxation power is not apparent. That judgment contains the following passage[1920]
HCA 54; , (1920) 28 CLR 129, at p 144 "the legislative powers given to the Commonwealth
Parliament are all prefaced with one general express limitation, namely, 'subject to this
Constitution', and consequently those words, which have to be applied seriatim to each placitum,
require the Court to consider with respect to each separate placitum, over and beyond the general
fundamental considerations applying to all the placita, whether there is anything in the Constitution
which falls within the express limitation referred to in the governing words of s. 51. That inquiry,
however, must proceed consistently with the principles upon which we determine this case, for they
apply generally to all powers contained in that section". The powers are those granted by s. 51 of the
Constitution - and include the taxation power. The question which the Court had to consider in the
Engineers' Case was whether the States were bound by a law made under s. 51 (xxxv.). (at p385)
4. The pay of a person in the employment of a State government is not beyond the reach of s. 51
(ii.). The person who received the pay can be obliged by a law made under s. 51 (ii.) to pay to the
Commonwealth income tax levied on the pay. The present tax is not of the nature of income tax. In
my opinion a law of the Commonwealth levying pay-roll tax on the pay of persons in private
employment and in the employment of the Crown in right of a State, and providing that the tax be
paid by their employers to the Commonwealth, is wholly a law with respect to taxation. The
inclusion of the Crown in the right of a State, amongst others, in the definition of "employer" is not
contrary to any restriction or limitation imposed by the Constitution upon s. 51 (ii.). The payment
by the Crown in right of the State of the remuneration of its officers and employees who work in the
State departments of government ought not to be declared immune from the tax here in question.
The tax is not laid on the appropriation of revenue to pay for services. If it were, the question would
arise whether the tax, so far as it burdened that activity, was, in substance, a law with respect to the
States. The Constitution does not grant power to the Commonwealth Parliament to make a law of
that kind. Conceding that the functions of the departments mentioned in the statement of claim
pertain to affairs which are distinctive of government, the question which then arises is whether
upon the true construction of the Constitution there is a necessary implication by which the
Commonwealth is restrained from making a law under s. 51 (ii.) levying a tax on the pay of persons
employed in the departments and making the State liable to pay the tax. In considering this question
it should be borne in mind that the employment of a person to perform services, where the Crown is
the employer, is an ordinary transaction such as is engaged in between subject and subject and that
payment for services is an activity common to employment by governments and employers in the
private sector. It is not unconstitutional to tax equally payment of salaries or wages or other
remuneration by private employers and State governments as such. (at p386)

5. In my judgment the demurrer should be allowed. (at p386)

MENZIES J. The State of Victoria has, by action in this Court, challenged the power of the
Parliament of the Commonwealth to require the State to pay pay-roll tax upon wages paid by it to its
Crown servants, claiming that the imposition is contrary to implications to be derived from the
federal nature of the Australian Constitution. The Commonwealth has demurred. (at p386)

2. That the Constitution is of a federal nature is beyond question. The Constitution not only
establishes the Commonwealth ; it continues the constitution of the federating colonies as States of
the Commonwealth : s. 106. The preamble to the Constitution Act recites that the people have
agreed "to unite in one indissoluble Federal Commonwealth under the Crown . . . and under the
Constitution". (at p386)

3. Does the fact that the Constitution is "federal" carry with it implications limiting the law-making
powers of the Parliament of the Commonwealth with regard to the States ? (at p386)

4. To this question I have no doubt, both on principle and on authority, that an affirmative answer
must be given. A constitution providing for an indissoluble Federal Commonwealth must protect
both Commonwealth and States. The States are not outside the Constitution. They are States of the
Commonwealth : s. 106. Accordingly, although the Constitution does, clearly enough, subject the
States to laws made by the Parliament, it does so with some limitation. (at p386)

5. Authority supports what principle dictates: Melbourne Corporation v. The Commonwealth [1947]
HCA 26; (1947) 74 CLR 31 . This decision, both accepting and taking into full account the
authority of the Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 - which both destroyed the
doctrine of the immunity of instrumentalities and established the ruling principles of constitutional
interpretation - leaves it in no doubt that implications limiting Commonwealth legislative power
over States do arise from the federal nature of the Constitution. There it was decided that a
Commonwealth law, i.e. s. 48 of the Banking Act 1945, prohibiting banks from conducting banking
business for a State and for any authority of the State, including a local government authority, was
invalid. It had been argued that the law in question was not a law within s. 51 (xiii.) because it was
not a law with respect to banking, and the extent to which this contention was accepted may be open
to argument notwithstanding its expressed rejection by Rich J. [1947] HCA 26; (1947) 74 CLR 31,
at p 64 and by Starke J. (1947) 74 CLR 31, at pp 69, 70 . It was, however, also argued that the grant
of power in s. 51 (xiii.) must be read subject to limitations in favour of the State because it appears
in a federal Constitution, so that, even if s. 48 could be treated as a law with respect to banking, it
was nevertheless invalid because its operation interfered with the States in the exercise of their
governmental functions. This second contention was clearly accepted by a majority of the court: see
Rich J. (1947) 74 CLR, at p 67 , Starke J. (1947) 74 CLR, at pp 74, 75 , and Dixon J. (1947) 74
CLR, at pp 83, 84 . It appears also to have been accepted by Latham C.J. (1947) 74 CLR, at pp 55,
56, 60 . Williams J. said (1947) 74 CLR, at pp 99, 100 :

       "Section 48 is legislation which clearly discriminates against
       the States and their agencies. We were not asked, and I would
       not be prepared to hold that legislation which conforms to the
       language of a placitum is necessarily invalid if it discriminate
       against a State or States. Many emergencies could arise which
       would justify the Commonwealth enacting legislation under
       the defence power during hostilities which would discriminate
       against a State or States. But the presence of discrimination
       points strongly to the law being aimed at the States, and if
       the law is in pith and substance a law which seeks to give
       directions to the States as to the manner in which they shall
       exercise their executive, legislative or judicial governmental
       functions it is not a law for the peace, order and good
       government
       of the Commonwealth, but an unlawful intervention in
       the constitutional affairs of the States."

This statement of the learned judge which, while not denying that the law was a law with respect to
banking, did virtually accept the second contention made on behalf of the Corporation asserting the
existence of some limitation upon Commonwealth legislative power arising from the federal nature
of the Constitution. (at p388)

6. That it was this second contention which prevailed, can, I think, be demonstrated by recalling the
issue as it arose in the case. The action was not an action by a State; it was an action by a
municipality - the Melbourne Corporation. If a law prohibiting a bank from conducting banking
business for specified persons was not in itself a law with respect to banking, then it would not have
been necessary to be concerned with the position of the States vis-a-vis the Commonwealth
Parliament. The whole thrust of the case for the Corporation depended, however, upon the
circumstance that it was governed by a section which prevented banks from conducting business for
States in circumstances where the prohibition against banking for municipalities could not be
severed from the prohibition against banking for States: see Starke J. (1947) 74 CLR, at p 70 . The
decision, however it may be explained, depended entirely upon the special position of the States
under the Constitution. (at p388)

7. Although I am not in doubt that a majority of the Court held the section invalid upon a more
fundamental ground than that s. 48 was not a law with respect to banking, it is difficult to state the
ratio decidendi of the Court's decision. Two bases appear and in the judgments they seem to
coalesce. They are first that s. 48 imposed a special burden on the States; secondly that the operation
of s. 48 was to interfere with the States carrying on their functions of government. (at p388)

8. It was, I think, part of the decision of Latham C.J. that the law was invalid because laws which
discriminate against States or which unduly interfere with States in the exercise of their functions of
government are not laws authorized by the Constitution, even if they are laws with respect to a
subject matter within the legislative power of the Parliament of the Commonwealth. After
discussing the American authorities, the learned Chief Justice said (1947) 74 CLR, at p 60 :

       "The relevant result which emerges is the same as that
       which is suggested by the more recent cases in this Court to
       which reference has been made - namely that federal laws
       expressed in general terms may apply to the States (as was
       shown in the Engineers' Case
       [1920] HCA 54; (1920) 28 CLR 129
       ) but that federal laws which
       'discriminate' against the States are not laws authorized by
       the Constitution. Laws 'discriminate' against the States if
       they single out the States for taxation or some other form
       of control and they will also be invalid if they 'unduly
       interfere'
       with the performance of what are clearly State functions
       of government."

Later in his judgment the Chief Justice explained that Commonwealth laws discriminating against
States fail because "the legislation is really legislation by the Commonwealth with respect to a State
or State functions as such and not with respect to the subject in respect of which it is sought to bind
the State". Similarly, the Chief Justice explained why it was, in his opinion, that laws unduly
interfering with the performance by the States of the functions of government were invalid. He said
(1947) 74 CLR, at p 62 :

"In my opinion the invalidity of a federal law which seeks
to control a State governmental function is brought about by
the fact that it is in substance a law with respect to a subject
as to which the Commonwealth Parliament has no power to
make laws."

Rich J. was more explicit. He said (1947) 74 CLR, at p 66 :

"There is no general implication in the framework of the
Commonwealth Constitution that the Commonwealth is
restricted from exercising its defined constitutional powers
to their fullest extent by a supposed reservation to the States
of an undefined field of reserved powers beyond the scope of
Commonwealth interference. But this is always subject to
the provisions of the Commonwealth Constitution itself.
That Constitution expressly provides for the continued existence
of the States. Any action on the part of the Commonwealth,
in purported exercise of its constitutional powers, which would
prevent a State from continuing to exist and function as such
is necessarily invalid because inconsistent with the express
provisions of the Constitution, and it is to be noted that all
the powers conferred by s. 51 are conferred 'subject to this
Constitution'. Such action on the part of the Commonwealth
may be invalid in two classes of case, one, where the
Commonwealth
singles out the States or agencies to which they have
delegated some of the normal and essential functions of
government,
and imposes on them restrictions which prevent them
from performing those functions or impede them in doing so ;
another, where, although the States or their essential agencies
are not singled out, they are subjected to some provision of
general application, which, in its application to them, would
so prevent or impede them. Action of the former type would
be invalid because there is nothing in the Commonwealth
Constitution to authorize such action by the Commonwealth.
A general income tax Act which purported to include within
its scope the general revenues of the States derived from
State taxation would be an instance of the latter."

Starke J. was of a like opinion. He said (1947) 74 CLR, at p 70 :

"The federal character of the Australian Constitution
carries implications of its own. As I have said before, 'the
government of Australia is a dual system based upon a
separation
of organs and of powers. The maintenance of the States
and their powers is as much the object of the Constitution as
the maintenance of the Commonwealth and its powers.
Therefore
it is beyond the power of either to abolish or destroy the
other' (South Australia v. The Commonwealth
[1942] HCA 14; (1942) 65 CLR 373, at p 442
; R. v.
Commonwealth Court of Conciliation and Arbitration ; Ex
parte Victoria
[1942] HCA 39; (1942) 66 CLR 488, at p 515
). The same principle was applied to the
dual system of government under the Constitution of the
United States of America. 'Neither Gvoernment may destroy
the other nor curtail in any substantial manner the exercise of
its powers' (Metcalf v. Mitchell
[1926] USSC 17; (1926) 269 US 514, at p 523 (70 Law Ed 384, at p 392)
)."

Dixon J. took narrower ground and based his judgment upon the circumstance that the section
imposed a special burden on the States. After referring to the dual aspect of laws with respect to a
subject within the powers of the Parliament which affect the functions of the States, his Honour said
(1947) 74 CLR, at pp 79-81 :

"Conceivably that connexion (i.e. with the subject of
legislative power) may be made so insubstantial, tenuous or
distant by the character of the control or restriction the law
seeks to impose upon State action that it ought not to be
regarded as enacted with respect to the specified matter
falling within the Commonwealth power. If so, the law fails
simply because it cannot be described as made with respect
to the requisite subject matter. But, if in its second aspect
the law operates directly upon a matter forming an actual
part of a subject enumerated among the federal legislative
powers, its validity could hardly be denied on the simple
ground of irrelevance to a head of power.
....
In the case of most legislative powers assigned to the
Commonwealth
some ingenuity would be needed to base a law
squarely upon the subject matter of the power and at the
same time effect by it a restriction or control of the State in
respect of some exercise of its executive authority or for that
matter in respect of the working of the judiciary or of the
legislature of a State. The difficulty of using most federal
powers in that way arises from the character of the subjects
of the powers. It is, for instance, difficult to see how any law
based on the power with respect to lighthouses, astronomical
observations, fisheries, weights and measures, bills of exchange
or marriage could be aimed at controlling States in the
execution
of their functions. But to attempt to burden the exercise
of State functions by means of the power to tax needs no
ingenuity. . . .
....
What is important is the firm adherence to the principle
that the federal power of taxation will not support a law
which places a special burden upon the States. They cannot
be singled out and taxed as States in respect of some exercise
of their functions. Such a tax is aimed at the States and is an
attempt to use federal power to burden or, may be, to control
State action. The objection to the use of federal power to
single out States and place upon them special burdens or
disabilities does not spring from the nature of the power of
taxation. The character of the power lends point to the
objection but it does not give rise to it. The federal system
itself is the foundation of the restraint upon the use of the
power to control the States. The same constitutional objection
applies to other powers, if under them the States are made
the objects of special burdens or disabilities." (at p391)

9. The basis of the judgment of Williams J. has already been stated. (at p391)

10. McTiernan J. dissented. (at p391)

11. It is apparent that the decision in Melbourne Corporation v. The Commonwealth [1947] HCA
26; (1947) 74 CLR 31 , although of far-reaching effect, makes no inroad upon the rule established
by the Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 that a power to make laws with respect
to the subject matter prima facie enables the Parliament, by a general law, to bind the States, nor
does it require any reconsideration of the cases which establish that a Commonwealth law with
respect to taxation may validly extend to the States : R. v. Sutton (1908) 5 CLR 789 and Attorney-
General (N.S.W.) v. Collector of Customs (N.S.W.) [1908] HCA 28; (1908) 5 CLR 818 . (at p391)

12. It follows, therefore, that, if the Pay-roll Tax Assessment Act 1941-1969 (Cth) and the Pay-roll
Tax Act 1941-1969 (Cth) cannot, as they purport to do, bind the State of Victoria, it must be
because of some special consideration which puts the State beyond the exercise of the
Commonwealth taxation power which is to be found in the two Acts. (at p391)

13. With the possible exception, with regard to s. 15 (bb) of the Pay-roll Tax Assessment Act, it was
not contended that there was discrimination against the States in the sense that there were imposed
upon the States obligations which did not fall upon other taxpayers. Tax is levied on all wages paid
by any employer including the Crown in the right of the State, ss. 3 and 12, but no special
obligation is imposed upon an employer who is a State. It is apparent, therefore, that so much of the
decision in Melbourne Corporation v. The Commonwealth (1), which protects a State from
Commonwealth laws imposing special burdens, cannot assist the State here. It follows, therefore,
that, if the Acts now in question do not apply to the State of Victoria, it can only be upon the ground
that their operation does interfere with the performance by the State of its functions of government.
(at p392)

14. The difficult and important task of formulating a limitation of the kind for which the State here
contends is not, I think, to be undertaken except in a case where the law impugned does operate to
interfere with a State carrying out its constitutional functions of government. In Melbourne
Corporation v. The Commonwealth [1947] HCA 26; (1947) 74 CLR 31 the Court was dealing with
such a law and the justices said sufficient to dispose of that case. What was said, as has already
appeared, was not uniform and there is not to be found in that case an authoritative formulation by
the Court of a limitation that can be applied in all circumstances. I do not propose to offer an
exhaustive formulation here because I am satisfied that the requirement to pay pay-roll tax does not
constitute an interference with the States of the sort which could result in the invalidity of the laws
which impose it. Of course the payment of the tax by an employer upon wages paid is a burden,
whether or not the employer is a State. Every tax is a burden. This tax could not, however, be
described as an interference with the function of employers who are not States. Such employers
remain free to carry on their businesses as they choose. All that is required is that they pay the tax.
Similarly, the payment of the tax by a State does not interfere with the performance of its functions.
Crown servants may still be employed at the will of the State. It was argued that, because the State
needs Crown servants to carry out its functions of government, the payment of tax upon wages paid
to such servants interfered with the performance of those functions. This I do not accept. At this
point, I think, the argument for the State moved from the operation of the laws to their economic
consequence, an entirely different matter. The most that can be said is that, because the State pays
the tax to the Commonwealth, it has so much less money with which to carry out the functions of
government. Such a consequence does not spell invalidity. The same sort of consequence follows, if,
by reason of the imposition of a customs duty, a State has to pay the Commonwealth tax upon
imports which it needs to carry out its functions, or if, by reason of an award of the Commonwealth
Conciliation and Arbitration Commission, a State has to pay its railway employees higher salaries.
None of such laws operate to interfere with the performance by the State of its constitutional
functions. A Commonwealth tax upon State tax revenues would be an instance of a very different
kind. (at p393)

15. For the foregoing reasons I have found no circumstance to take the tax here imposed outside the
prima facie rule that a State may be bound by general laws made by the Commonwealth Parliament
under the taxation power (s. 51 (ii.)). (at p393)

16. I should add that I do not find in s. 15 (bb) sufficient to warrant any conclusion that the Act does
impose a special burden on the States. (at p393)

17. In the course of argument reference was made to s. 114 of the Constitution. In my opinion pay-
roll tax is not a tax on property belonging to a State and s. 114 is not an exhaustive statement of the
protection of the Commonwealth or of a State from the taxation laws of the other. (at p393)

18. In my opinion the demurrer should be allowed. (at p393)

WINDEYER J. The arguments in this case aroused questions that lie, ordinarily dormant, behind the
words of the Constitution. (at p393)

2. How is the scope of a power expressly granted to the Commonwealth Parliament to be measured
? Are the words of the grant to be qualified in any way by tacit assumptions ? Is the Parliament, in
its exercise of a power expressly given, controlled by any tacit limitations ? Varying judicial
decisions and dicta bearing on these questions can be assembled, and with them can be put criticism
and commentary, some of it distinctly polemic. As the questions are important in themselves, and
bear directly upon the arguments that were advanced in this case, I shall presume and venture to
state my own view of them, rather than merely repeat or adopt what has been said heretofore by
others. (at p393)

3. Pay-roll tax, levied by the Commonwealth in accordance with the Pay-roll Tax Act 1941 (Cth)
and the Pay-roll Tax Assessment Act 1941-1969 (Cth), is expressly levied upon the Crown in right
of a State along with other employers. For thirty years State governments accepted the obligation
thus imposed. Now the validity of the tax is challenged so far as it affects the States. It is said that it
is beyond the power of the Commonwealth Parliament to subject the States to a tax calculated by
reference to wages paid from a State treasury to State servants. The question, thus belatedly raised,
is an offshoot of recent disagreements between State and Commonwealth governments as to the way
in which revenue should be raised by, and apportioned between them. The matter comes to the
Court as a purely legal question of the extent of the power of the Commonwealth Parliament under
s. 51 (ii.) of the Constitution "to make laws for the peace, order, and good government of the
Commonwealth with respect to . . . Taxation ; but so as not to discriminate between States or parts
of States". Nevertheless there were in the arguments for the States some distant echoes and muffled
undertones of a conflict, of politics and policy, between assertions of State "sovereignty" and so-
called "State rights" on one side and federal power and Commonwealth supremacy on the other - a
controversy that is sometimes described as an issue between "federalists" and "centralists", each
term being used as praise or abuse according to taste and persuasion. In federations of all kinds this
has been a perennial controversy. That is well brought out in a passage from the paper "The Tyranny
of Doctrine" that Professor Helen Shirley Thomas contributed to Essays in Legal History in Honour
of Felix Frankfurter (1966), p. 531 :

       "It is common knowledge that federalism is a central
       feature of the American system of government. It is well
       known that the system is one of divided powers, and that the
       power distribution is made in a special way. The historical
       record of federalism the world over also makes it perfectly
       clear that where powers are divided according to the federal
       formula, conflicts over the exercise of power are absolutely
       inevitable. Anguished cries about the alarming growth of
       national power were heard throughout the land during the
       first administration of President George Washington, and
       they have been filling the air ever since. There has never
       been a time when serious claims were not being made regarding
       the alleged undue or dangerous expansion of national power
       at the expense of the states. Nor has there ever been a time
       when charges were not being made to the effect that the
       states were invading the legitimate sphere of national activity.
       Where two power systems exist side by side, disputes over
       jurisdiction are bound to arise.
       All branches of government, state and national, have a
       hand in resolving these disputes. Since we have a written
       constitution, however, and judicial review, the Supreme
       Court is not only involved in dealing with these disputes
       over power, but plays a prominent part in acting as an umpire
       of the system." (at p394)

4. But, unlike the Supreme Court of the United States, this Court, the Federal Supreme Court as the
Constitution calls it, is not the umpire in conflicts arising from the terms of an agreement or treaty.
Our task is simply to interpret and apply the provisions of the Constitution as a statute of the
Imperial Parliament. That does not mean that it is not a statute of a special kind. It is. It is the
instrument of government for Australia. It was enacted because, as the preamble to the Constitution
Act states, the peoples of the Australian Colonies had agreed to unite in one indissoluble Federal
Commonwealth under the British Crown and under the Constitution that the Act established. In
1908 Higgins J. used words that have not withered or grown sterile with the years. Nor is their
vitality diminished by their having been said in the course of a dissenting judgment. His Honour
said - in the Brewery Labels Case (Attorney-General (N.S.W.) v. Brewery Employ'es Union of
N.S.W.) [1908] HCA 94[1908] HCA 94; ; (1908) 6 CLR 469, at pp 611, 612 :

       ". . . although we are to interpret the words of the
       Constitution
       on the same principles of interpretation as we apply
       to any ordinary law, these very principles of interpretation
       compel us to take into account the nature and scope of the
       Act that we are interpreting - to remember that it is a
       Constitution,
       a mechanism under which laws are to be made,
       and not a mere Act which declares what the law is to be." (at p395)

5. I have on other occasions adverted to differing legal consequences that flow from the different
origins, historically and juristically, of our Constitution from that of the United States. I shall allude
to that again here. I do so because to my mind the phrase "dual sovereignty", which we sometimes
hear, is for law a misleading misnomer when applied to the Commonwealth of Australia. There is
dual authority but only one sovereignty. The Commonwealth Constitution was enacted at
Westminster in 1900 as a product of the assent and agreement of the peoples of the Australian
Colonies. It was sought by Australians, not imposed upon them. The Constitution Act itself was
carefully worded so as not to be coercive. Section 3 provided that Western Australia should not
become part of the new Commonwealth unless Her Majesty was satisfied that the people of that
Colony had agreed thereto. As an agreement of peoples, British subjects in British Colonies, and the
enactment thereafter by the sovereign legislature of the British Empire of a law to give effect to
their wishes, the Australian federation can be described as springing from an agreement or compact.
But agreement became merged in law. The word "compact" is still appropriate but strictly only if
used in a different sense - not as meaning a pact between independent parties, but as describing a
compaction, a putting of separate things firmly together by force of law. The Colonies which in
1901 became States in the new Commonwealth were not before then sovereign bodies in any strict
legal sense ; and certainly the Constitution did not make them so. They were self-governing colonies
which, when the Commonwealth came into existence as a new Dominion of the Crown, lost some of
their former powers and gained no new powers. They became components of a federation, the
Commonwealth of Australia. It became a nation. Its nationhood was in the course of time to be
consolidated in war, by economic and commercial integration, by the unifying influence of federal
law, by the decline of dependence upon British naval and military power and by a recognition and
acceptance of external interests and obligations. With these developments the position of the
Commonwealth, the federal government, has waxed ; and that of the States has waned. In law that is
a result of the paramount position of the Commonwealth Parliament in matters of concurrent power.
And this legal supremacy has been reinforced in fact by financial dominance. That the
Commonwealth would, as time went on, enter progressively, directly or indirectly, into fields that
had formerly been occupied by the States, was from an early date seen as likely to occur. This was
greatly aided after the decision in the Engineers' Case (1920) 28 CLR 129 , which diverted the flow
of constitutional law into new channels. I have never thought it right to regard the discarding of the
doctrine of the implied immunity of the States and other results of the Engineers' Case [1920] HCA
54; (1920) 28 CLR 129 as the correction of antecedent errors or as the uprooting of heresy. To
return today to the discarded theories would indeed be an error and the adoption of a heresy. But
that is because in 1920 the Constitution was read in a new light, a light reflected from events that
had, over twenty years, led to a growing realization that Australians were now one people and
Australia one country and that national laws might meet national needs. For lawyers the
abandonment of old interpretations of the limits of constitutional powers was readily acceptable. It
meant only insistence on rules of statutory interpretation to which they were well accustomed. But
reading the instrument in this light does not to my mind mean that the original judges of the High
Court were wrong in their understanding of what at the time of federation was believed to be the
effect of the Constitution and in reading it accordingly. As I see it the Engineers' Case (1), looked at
as an event in legal and constitutional history, was a consequence of developments that had occurred
outside the law courts as well as a cause of further developments there. That is not surprising for the
Constitution is not an ordinary statute : it is a fundamental law. In any country where the spirit of
the common law holds sway the enunciation by courts of constitutional principles based on the
interpretation of a written constitution may vary and develop in response to changing circumstances.
This does not mean that courts have transgressed lawful boundaries : or that they may do so. (at
p397)

6. The course of constitutional interpretation in Canada has been different from here. There
provincial powers have, by decisions of the Privy Council, tended to increase and federal powers to
be restricted : see Halsbury's Laws of England, 3rd ed., vol. 5, pp. 499, 500 ; and I add to the cases
there mentioned Attorney-General (Ontario) v. Winner (1954) AC 541 , a judgment that is indirectly
illuminating for us. The different courses that the constitutional law of Australia and Canada have
taken is not only the result of differing philosophies of a federal system reflected in the predilections
of particular individuals. That may have had an influence, as, for Canada, is pointed out in an
interesting article : Robinson, "Lord Haldane and the British North America Act", University of
Toronto Law Journal, vol. 20, pp. 55-69 (1970). But the different consequences of judicial
interpretation flow mainly from radical differences in the terms of the two instruments to be
interpreted, our Constitution and the British North America Act. (at p397)

7. Clearly the Constitution assumes the continued existence of the States as constituent elements in a
federation. Rhetorical assertions that the Commonwealth Parliament cannot destroy the States can
thus stand without question. But that does not justify, as legal propositions, some unqualified and
question begging, assertions that were made in the course of the argument in this case - such as that
one government does not tax another government, that any Commonwealth taxation law is invalid
which unduly as it was said affects State governments. (at p397)

8. The apophthegm, "the power to tax involves the power to destroy" is not a valid criterion for
measuring the scope of a power of taxation that is expressly conferred by statute. In saying that I do
not mean to underrate, in its own context, the eloquent judgment of John Marshall C.J. in M'Culloch
v. Maryland (1819) 4 Wheat 316 (4 Law Ed 579) . It can always be read with undiminished
pleasure. But constitutional doctrine in the United States has come a long way since that case and
since Collector v. Day [1870] USSC 24; (1871) 11 Wall 113 (20 Law Ed 122) . If I felt that any sure
guidance for us in the case that is now before us could be found in the law of the United States, I
would be more inclined to seek it today in the judgment of Stone J., later Chief Justice of the
Supreme Court of the United States, in Helvering v. Gerhardt [2008] USSC 14; (1938) 304 US 405
(82 Law Ed 1427) . (at p397)

9. As to the proposition that a Commonwealth law cannot impede or frustrate the exercise by a State
government of its governmental functions : this seems an expression, in reverse, of the Canadian
doctrine which forbids a Province to control completely a corporation created by the Dominion. In
Attorney-General (Ontario) v. Winner (1954) AC 541 that was stated by the Privy Council (1954)
AC, at p 578 as follows :

       ". . . legislation (scil. of a Province) will be invalid if a
       Dominion company is sterilized in all its functions and
       activities or its status and essential capacities are impaired
       in a substantial degree. What provisions have the effect of
       sterilizing all the functions and activities of a company or
       impair its status and capacities in an essential degree will, of
       course, depend on the circumstances of each case."

I would find no difficulty in applying those words to a Commonwealth tax in its impact upon a State
government in some hypothetical case. But they certainly cannot apply to the present case. The
payment by the States of pay-roll tax for many years past has not destroyed them or sterilized them.
(at p398)

10. I am not satisfied that there is, for present purposes, any sure line of distinction between what
were called in the argument essential functions of government, or "those things which only a
government can do", and commercial activities which governments today commonly undertake.
Moreover, I am not sure whether, in the postulated distinction, commercial activities were to be
confined to trading undertakings conducted in competition with private enterprise as distinct from
government monopolies, or whether they extended from undertakings which might produce a
commercial profit, such as transport services, to those which ordinarily would not do so but for the
enjoyment of which the subject must pay a fee, as for example to enter a government-controlled art
gallery. I considered the validity of the distinction between various functions that governments in
fact undertake in what I wrote in Ex parte Professional Engineers' Association [1959] HCA 47;
(1959) 107 CLR 208, at pp 272-276 . I shall not repeat that. The difficulties that beset the topic are
not for me alleviated by the Saratoga Springs Case (New York v. United States of America [1946]
USSC 13; (1946) 326 US 572 (90 Law Ed 326) ), although I acknowledge that the judgments in that
case are incidentally relevant to the present case. (at p398)

11. I turn now from exotic doctrines from America to the provisions of our Constitution. We must
always remember that the Constitution was, as this Court has said, intended to endure and to be
applied in changing circumstances. Doubtless, like all statutes, it must be read "naturally in the light
of the circumstances in which it was made" (the Engineers' Case [1920] HCA 54; (1920) 28 CLR
129, at p 152 ). But it is necessary to remember too that, as Higgins J. said in the Brewery Labels
Case [1908] HCA 94; (1908) 6 CLR 469, at p 610 - he was speaking there of trade marks - "The
usage in 1900 gives us the central type; it does not give us the circumference of the power". In other
words, the subjects on which the Commonwealth Parliament may legislate are generically
described. Their denotation is not fixed. When the validity of a law made by the Parliament is
questioned, the first consideration is always whether it is a law with respect to one of the subject-
matters expressly listed in s. 51, or is a matter incidental within the meaning of s. 51 (xxxix.). (at
p399)

12. The power to make laws with respect to a particular subject matter means that the validity of
any questioned law depends on what it commands and to whom its command is addressed. "With
respect to" is a compound preposition. It does not differ in effect from the corresponding phrase "in
relation to" in the British North America Act 1867. Each is a periphrasis for such single words as
"of", "about", "on", "concerning", "touching". I may say that I have not chosen those just at random.
They, with the phrases "referring to", "relating to" and "treating of", happen to be the headings
under which the laws of Athens on various topics were mentioned in Potter's Antiquities of Greece,
Ch. 26. I do not think that much is to be gained by either elaboration or paraphrase of the phrase
"with respect to". "Characterization" is the now common jargon. And in some cases it may for some
people be helpful to translate this by asking what is the pith and substance of a law. That phrase,
"pith and substance", became common currency in the Privy Council in cases under the British
North America Act. Examples are Attorney-General (British Columbia) v. Attorney-General
(Canada) (1937) AC 368, at p 389 ; and Canadian Federation of Agriculture v. Attorney-General
(Quebec) (1951) AC 179, at p 195 . In that context the expression was first used, so far as I have
noticed, by Lord Watson in Union Colliery Co. of British Columbia Ltd. v. Bryden (1899) AC 580,
at p 587 . It was perhaps then a modification of "pith and marrow", a natural old English metaphor,
which became well known in patent law. It was there commonly used to describe the essence, or
quintessence, of an invention from the time Bowen L.J. so used it in Wenham Gas Co. Ltd. v.
Champion Gas Lamp Co. (1891) 9 RPC 49, at p 56 . It can be readily understood and applied as the
test of infringement of a patented invention. And it has been useful in cases under the Canadian
Constitution for determining whether a law of the Dominion or a Province encroaches upon a field
reserved for the other. That too is readily understandable. But, unless we were to revert again to the
discarded view of mutual immunities, no question of encroachment upon a forbidden State field, or
of infringement of State rights, can arise in the same way under our Constitution. The question
under s. 51 is always whether a particular enactment is within Commonwealth power. It is never
whether it invades a State's domain. The question is one of sub-sumption under a particular
description. It is not one of classification into categories mutually exclusive; for a law may be quite
properly described as with respect to more than one subject, one perhaps within and another without
Commonwealth power. I shall return later to this aspect. (at p400)

13. That the Pay-roll Tax Act and the Assessment Act are laws with respect to taxation imposed on
employers generally is beyond question. The only question is whether the express inclusion of the
Crown in right of a State among the employers liable to tax is for some reason beyond
Commonwealth legislative power. Every power mentioned in s. 51 is by the terms of the section
exercisable "subject to this Constitution". That was pointed out in the course of the argument. But
the phrase, I consider, means subject to any express general provision of the Constitution, such as s.
92 or s. 116, or to any express special provision relating to one of the listed subject matters. The
only relevant provision relating to the power of taxation is s. 114. I go again to Canada to notice
what was said in Abbott v. City of St. John (1908) 40 SCR 597, at pp 609, 613 , and approved by
the Privy Council in Caron v. The King (1924) AC 999 , of the effect of a provision of the British
North America Act similar to s. 114 of our Constitution. I am unable to see that the pay-roll tax
involves any contravention of s. 114. If it is invalid in its application to State government pay-rolls,
this must arise from some implied exemption. (at p400)

14. On some great occasions in history taxes have provoked great questions. A kind of race-memory
of this may have lingered - especially in the United States because of the place that the Stamp Act of
1765 had as midwife of American independence. Lecky wrote, in his History of England in the
Eighteenth Century, Ch. IX, that: "The Stamp Act, when its ultimate consequences are considered,
must be deemed one of the most momentous legislative Acts in the history of mankind." And he
said:

       "The principle which led Hampden to refuse twenty
       shillings of ship money was substantially the same as that
       which inspired the resistance to the Stamp Act. It might be
       impossible to show by the letter of the law that there was
       any generical distinction between taxing and other legislative
       Acts; but in the constitutional traditions of the English
       people a broad line did undoubtedly exist."

A tax law is thus peculiarly likely to attract suppositions of inherent reservations and limitations. Yet
one result of the Engineers' Case (1920) 28 CLR 129 is often said to be a denial of any room for
implications in the Constitution. But that I think is too sweeping a statement. (at p401)

15. The word "implication" is sometimes loosely used. It is not now an acceptable view that the rule
in The Moorcock (1889) 14 PD 64 can govern the interpretation of the Constitution,
notwithstanding that in Attorney-General (Q.) v. Attorney-General (Cth) [1915] HCA 39; (1915) 20
CLR 148, at pp 162, 163 , Griffith C.J. so used it. Nevertheless I do not think that in reading the
Constitution we must shy away from the word "implication" and disavow every concept that it
connotes. Implications of The Moorcock kind give content and consequences to written contracts.
Implications of a different kind may aid the interpretation of statutory provisions. That is because
these must always be read as parts of a whole and with due regard to the subject with which the
statute deals. In each case an implication means that something not expressed is to be understood.
But in the one case this involves an addition to what is expressed: in the other it explains, perhaps
limits, the effect of what is expressed. It is in the latter sense that, in my view of the matter,
implications have a place in the interpretation of the Constitution: and I consider it is the sense that
Dixon J. intended when in Australian National Airways Pty. Ltd. v. The Commonwealth [1945]
HCA 41; (1945) 71 CLR 29, at p 85 he said: "We should avoid pedantic and narrow constructions in
dealing with an instrument of government and I do not see why we should be fearful about making
implications." His Honour, when Chief Justice, repeated this observation in Lamshed v. Lake [1958]
HCA 14; (1958) 99 CLR 132, at p 144 . I said, in Spratt v. Hermes (1965) 114 CLR 226, at p 272 ,
that it is well to remember it. I still think so. The only emendation that I would venture is that I
would prefer not to say "making implications", because our avowed task is simply the revealing or
uncovering of implications that are already there. (at p402)

16. In Melbourne Corporation v. The Commonwealth (1947) 74 CLR, at p 70 Starke J. said: "The
federal character of the Australian Constitution carries implications of its own." That I respectfully
endorse. I think that it is the firm ground on which the judgments in that case must stand. The
decision might I think have been put in another way: that, eschewing any kind of implication, the
enactment in question, although couched as a command to bankers, could be regarded as in
substance not a law with respect to banking, but simply as a command to States and State authorities
as to the way they must carry on their affairs. It might therefore perhaps have been treated as being
with respect to a subject not within the competence of the Commonwealth Parliament, and not with
respect to one that was. Latham C.J. got close to deciding the case in that way. But when his
judgment is read as a whole I think he did not. He said that legislation by the Commonwealth would
be invalid if it were "really with respect to a State or State functions as such and not with respect to
the subject in respect of which it is sought to bind the State" (1947) 74 CLR, at p 61 . But he had
already rejected the argument that the enactment in question was not a law with respect to banking
(1947) 74 CLR, at p 50 . He had, however, left open the question of its validity having regard to its
impact on the governmental functions of the States: and that I take it was the dominant influence in
his conclusion. As I read the judgments of other members of the Court it seems to me that they too
did not say that the law was not with respect to banking. Rather they said that it was: but in varying
terms they condemned it because it was directed against the States. Latham C.J. acknowledged in
Uther's Case (In re Richard Foreman & Sons Pty. Ltd.; Uther v. Federal Commissioner of Taxation)
[1947] HCA 45; (1947) 74 CLR 508, at p 519 that this was the basis of the decision. The law thus
contravened assumptions or implications arising from the federal nature of the Constitution and the
position of the States. I shall not set out passages in the judgments, the verbiage of which had so
much detailed scrutiny in the arguments that we heard. I accept the decision and the ground on
which I think it stands. But to suppose that the words used in judgments must be taken as binding
pronouncements of received doctrine is I think to take a path that can lead one astray. I have said
elsewhere, especially in Damjanovic's Case (Damjanovic & Sons Pty. Ltd. v. The Commonwealth)
[1968] HCA 42; (1968) 117 CLR 390, at pp 407-409 , that I distrust taking the words of judicial
exposition of the language of the Constitution as if they were themselves the language that they seek
to explain and expound. Exegesis must not be substituted for the text. I can now add, to what I have
previously said of this, a respectful reference to Lord Upjohn's pertinent remarks when delivering
the judgment of the Privy Council in Ogden Industries Pty. Ltd. v. Lucas [1968] UKPCHCA 1;
(1968) 118 CLR 32, at p 39: (1970) AC 113, at p 127 . (at p403)

17. The position that I take is this: The several subject matters with respect to which the
Commonwealth is empowered by the Constitution to make laws for the peace, order and good
government of the Commonwealth are not to be narrowed or limited by implications. Their scope
and amplitude depend simply on the words by which they are expressed. But implications arising
from the existence of the States as parts of the Commonwealth and as constituents of the federation
may restrict the manner in which the Parliament can lawfully exercise its power to make laws with
respect to a particular subject matter. These implications, or perhaps it were better to say underlying
assumptions of the Constitution, relate to the use of a power not to the inherent nature of the subject
matter of the law. Of course whether or not a law promotes peace, order and good government is for
the Parliament, not for a court, to decide. But a law, although it be with respect to a designated
subject matter, cannot be for the peace, order and good government of the Commonwealth if it be
directed to the States to prevent their carrying out their functions as parts of the Commonwealth. (at
p403)

18. Applying that to the present case, I cannot see that the pay-roll tax is invalid in its incidence
upon the States. It is not aimed at them otherwise than as employers along with other employers. We
cannot say that the Crown in right of the States is exempt from the operation of Commonwealth law.
Since 1908 it has been established that this is not so, and in respect of taxation no less than of other
matters : R. v. Sutton [1908] HCA 26; (1908) 5 CLR 789 ; Attorney-General (N.S.W.) v. Collector
of Customs (N.S.W.) [1908] HCA 28[1908] HCA 28; ; (1908) 5 CLR 818 . (at p403)

19. A Commonwealth Act that levied a tax upon the States alone would, I consider, be beyond
Commonwealth power ; but not because it was not a law with respect to taxation. I cannot conceive
of a law imposing a tax, or regulating the assessment and collection of a tax, that would not be
properly called a law with respect to taxation. It might be equally well called a law with respect to
some other subject : but, as I have said, the Constitution does not require that every law be
catalogued under one heading only. A law may be with respect to more than one subject matter. To
take two or three examples : A law imposing land tax is properly called a law with respect to
taxation and landowners. The wool tax considered by this Court in Logan Downs Pty. Ltd. v.
Federal Commissioner of Taxation [1965] HCA 16; (1965) 112 CLR 177 was a law with respect to
taxation and not the less so because it could also be properly called a law with respect to wool, wool
marketing, wool brokers and wool growers. Gift duty is imposed by a law with respect to taxation
which is also a law with respect to gifts. A Commonwealth law simply imposing a tax upon the
revenues of the States would be a law with respect to taxation. But I consider that it would be an
illegitimate use by Parliament of its power to make laws because of the principles and limitations,
call them implications or what you will, recognized in the Melbourne Corporation Case [1947]
HCA 26; (1947) 74 CLR 31 . However, the pay-roll tax is far removed from that. There is in it no
"discrimination against" the States, to use that awkward but much used phrase, which I take it
connotes an adverse distinction with regard to something or somebody. The pay-roll tax applies
without any discriminations between employers generally including the States. Some reference was
made to the exemption that the Act allows to independent schools, as distinct from government
schools, in respect of salaries and wages paid. This, it was said, was a discrimination against the
States. But it seems to me a far-fetched proposition that a special exoneration of some persons
within a State from a general obligation results in the exoneration of the State itself from the
liability expressly imposed on it and otherwise valid. (at p404)

20. In conclusion I would say that the financial relations between the Commonwealth and the States
do, I have no doubt, create serious problems for governments. But they are political not legal
problems. They are better resolved I feel by co-operation in council and conference than by
conflicts in court. I cannot forbear from quoting two sentences of Edmund Burke that I recently
came across in his Observations on a Late Publication intituled The Present State of the Nation,
written in 1769:

       "It is easy to parade with an high talk of parliamentary
       rights, of the universality of legislative powers, and of uniform
       taxation. Men of sense when new projects come before them,
       always think a discourse proving the mere right or mere
       power of acting in the manner proposed, to be no more than
       a very unpleasant way of mis-spending time."

That may well be the conclusion of any man of sense who reads this lengthy discourse. It only
comes to this, that I would allow the demurrer. (at p405)

OWEN J. I have had the advantage of reading the judgment of the Chief Justice. I agree with it and
it follows that in my opinion the demurrer to the statement of claim should be allowed. (at p405)

WALSH J. The State of Victoria has challenged the validity of the imposition upon it of a liability to
pay pay-roll tax on wages paid by it to certain officers and employees. The statement of claim, as
amended, has confined the claim to the seeking of declarations to the effect that it is beyond the
power of the Commonwealth Parliament to render the plaintiff liable to pay the tax in respect of the
wages paid by it to those of its officers and servants who are employed in certain specified
departments of government. But the submissions made on its behalf include submissions which, if
accepted, would deny validity to legislation imposing any tax on the plaintiff in respect of wages
paid to any of its employees in any of its activities. (at p405)

2. I think it is clear that the laws which are challenged can be properly described as laws with
respect to taxation. If the argument for the plaintiff is to be upheld, either in its broader aspect or in
its more limited aspect, it must be upheld, in my opinion, upon the ground that although the
legislation is concerned with a subject matter which is within Commonwealth power, that power is
limited, by means of an implication derived from the nature and the structure of the federal system
embodied in the Constitution, in such a way that it does not authorize the imposition of a tax upon
the wages paid by a State to its employees or at any rate upon the wages paid to some of its
employees. It would not be possible, in my opinion, to support a conclusion that the legislation in so
far as it is expressed to bind the Crown in the right of a State, is not a law with respect to taxation
and is for that reason beyond power. The defendant contends that once it appears that a law can be
properly described as a law with respect to taxation, it follows that it is within power,
notwithstanding that the Crown in right of a State is subjected to it, unless it can be shown that the
law contravenes some specific provision of the Constitution, such as s. 114, and this cannot be
shown. It was said that the principles laid down in Amalgamated Society of Engineers v. Adelaide
Steamship Co. Ltd. [1920] HCA 54; (1920) 28 CLR 129 require that those contentions be accepted.
It was submitted that it is inconsistent with those principles that the ambit of the power to legislate
with respect to an enumerated subject matter should be restricted in any way otherwise than by an
express provision specifically imposing some defined limitation upon it. (at p406)

3. The plaintiff contends however that the foregoing submissions on behalf of the defendant are not
in accordance either with the principal judgment in the Engineers' Case [1920] HCA 54; (1920) 28
CLR 129 itself or with the interpretations given to that judgment in subsequent cases. It is clear that
the general rule of interpretation adopted in the Engineers' Case [1920] HCA 54; (1920) 28 CLR
129 has been declared repeatedly to be subject to reservations or qualifications, additional to those
which are imposed expressly in relation to particular powers by provisions of the Constitution other
than s. 51 or are imposed specifically by the terms of a paragraph in s. 51, for example, the words in
s. 51 (ii.) itself - "but so as not to discriminate between States or parts of States". It has been argued
in the present case that in some respects those judicial declarations go beyond what was said in the
Engineers' Case (1920) 28 CLR 129 and beyond what is consistent with its basic principles. But
whether that be so or not, there is a substantial body of authority for the proposition that the federal
nature of the Constitution does give rise to implications by which some limitations are imposed
upon the extent of the power of the Commonwealth Parliament to subject the States to its
legislation. That proposition has not been regarded as inconsistent with the principles enunciated in
the Engineers' Case [1920] HCA 54[1920] HCA 54; ; (1920) 28 CLR 129 . It has been affirmed by
members of this Court who were authors of the leading judgment in that case as well as by others
who were not. It is supported not only by dicta but also by the decision in Melbourne Corporation v.
The Commonwealth [1947] HCA 26; (1947) 74 CLR 31 , unless that case should be regarded as
having been decided upon the ground that the law which was declared to be invalid was not a law
"with respect to" banking, within the meaning of s. 51 (xiii.). But, in my opinion, the majority of
those members of the Court who held the law to be invalid decided that it was invalid because the
effect of the law upon the States was such that, although it might be a law with respect to banking, it
was beyond the power of the Commonwealth Parliament to enact it. The judgments in the
Melbourne Corporation Case [1947] HCA 26; (1947) 74 CLR 31 have been discussed by Menzies J.
in his judgment in the present case, and I agree, with respect, with what his Honour has written
about it. Therefore, my further references to it will be less extensive than otherwise they would have
been. But in relation to the question whether the decision was based upon the view that the law was
outside the subject matter described in s. 51 (xiii.), I refer to what was said in another case in which
argument was heard almost immediately after judgment was given in the Melbourne Corporation
Case. In In re Richard Foreman & Sons Pty. Ltd. ; Uther v. Federal Commissioner of Taxation
[1947] HCA 45; (1947) 74 CLR 508, at p 519 Latham C.J. said :

       "In the recent case of Melbourne Corporation v. The
       Commonwealth
       [1947] HCA 26; (1947) 74 CLR 31
       it was held by this Court that the
       Commonwealth
       Parliament had no power to make laws which were
       directed against and impaired the exercise of an essential
       governmental function of the State."

I refer also to the observations of Starke J. (1947) 74 CLR, at p 525 and of Williams J. (1947) 74
CLR, at p 539 . The decision was afterwards held in The Commonwealth v. Cigamatic Pty. Ltd. (in
liq.) [1962] HCA 40[1962] HCA 40; ; (1962) 108 CLR 372 to have been in part erroneous. My
purpose here is not to support the correctness of the statements to which I have referred but merely
to show what was the effect of the decision in the Melbourne Corporation Case [1947] HCA 26;
(1947) 74 CLR 31 in the opinion of Justices who had taken part in it. (at p407)

4. On several occasions, both before and after the Melbourne Corporation Case [1947] HCA 26;
(1947) 74 CLR 31 was decided and in that case itself, Sir Owen Dixon formulated what was in his
opinion the basic principle laid down in the Engineers' Case [1920] HCA 54; (1920) 28 CLR 129
and he made observations relating to reservations or qualifications which he thought had been made,
concerning the prima facie rule of interpretation which it established. On the first and second of
those occasions, that is to say, in Australian Railways Union v. Victorian Railways Commissioners
[1930] HCA 52; (1930) 44 CLR 319, at p 390 and in West v. The Commissioner of Taxation
(N.S.W.) [1937] HCA 26; (1937) 56 CLR 657, at pp 682, 683 , his Honour did not refer specifically
to the taxation power. But in Federal Commissioner of Taxation v. Official Liquidator of E. O.
Farley Ltd. [1940] HCA 13; (1940) 63 CLR 278, at p 316 , his Honour said, in the course of
discussing a question as to what could be regarded as incidental to the taxation power, that in the
Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 "the taxation power was singled out as an
instance of a legislative power the extent of which in relation to the States might in the future come
up for special consideration". Again in Essendon Corporation v. Criterion Theatres Ltd. [1947]
HCA 15; (1947) 74 CLR 1, at p 19 . Dixon J. said that in the Engineers' Case [1920] HCA 54[1920]
HCA 54; ; (1920) 28 CLR 129 an express reservation had been made covering the power of
taxation. He added : "The reservation is expressed in a somewhat indefinite manner." In the
Melbourne Corporation Case [1947] HCA 26; (1947) 74 CLR 31 , Dixon J. made observations
relating to the taxation power, which have been quoted in part by Menzies J., and to which I shall
make some further reference later. In Ex parte Professional Engineers' Association [1959] HCA 47;
(1959) 107 CLR 208, at p 239 Dixon C.J. again adverted to the Engineers' Case [1920] HCA
54[1920] HCA 54; ; (1920) 28 CLR 129 and suggested that perhaps "the reservations and
qualifications therein expressed concerning the federal power of taxation and laws directed specially
to the States and also perhaps the prerogative of the Crown received too little attention". (at p408)

5. The plaintiff sought to rely on the foregoing statements as warnings against a ready acceptance of
the view that once it is seen that a law may be described as a law with respect to taxation, no further
question can arise concerning its validity in so far as it affects the States, other than a question
relating to some specific provision, such as s. 114. But it is not enough for the plaintiff to assert that
a further question may arise for consideration. Nor is it enough for it to maintain that some taxation
laws could have such an effect upon the independence or upon the functions of the States that their
enactment would be beyond power. In order to succeed, the plaintiff must establish that in the
enactment of the laws which have been challenged the legislative power of the Parliament to bind
the States has been exceeded. It must obtain the acceptance by the Court of a principle by which a
limitation upon power is imposed by reference to some criterion or test which is seen to be satisfied
when it is applied to the particular laws with which the case is concerned. (at p408)

6. It could not be and it was not maintained that every Commonwealth law which purports to bind
the States is to that extent invalid. It was contended, however, that every law which purports to
impose any tax (other than customs duties) upon a State is beyond power. The exception of customs
duties was made because of the decision in Attorney-General (N.S.W.) v. Collector of Customs
(N.S.W.) (Steel Rails Case) [1908] HCA 28; (1908) 5 CLR 818 . But once an exception is made of
any tax, it must be difficult to maintain that, subject to that exception, all taxation laws binding a
State are beyond power. Counsel for the plaintiff advanced reasons for maintaining the general
proposition whilst admitting an exception to it. But I have not found them convincing. It is true that,
as counsel pointed out, some attention was given in the Steel Rails Case to the exclusive nature of
the customs power and of other Commonwealth powers which were thought to be relevant. But it is
not acceptable, in my opinion, to regard either the exclusive nature of those powers or the supposed
necessity of treating the States as bound in order that the customs power might be effectively
exercised, as a sufficient reason for regarding the levy of customs duties on the States as being
compatible with their continued existence and independence preserved to them by the Constitution
with which, according to the argument, the imposition of any other tax would be incompatible. The
States would be affected no more and no less by a law made under, or connected with, an exclusive
power, than by a law made under a concurrent power. In the Engineers' Case (1920) 28 CLR, at p
159 it was said of the distinction between exclusive and concurrent powers : "That distinction
affects the legislative power of the States, but not the effect of Commonwealth Acts once made."
The distinction was there regarded as not one on which the validity of the Commonwealth law
depended. (at p409)

7. In my opinion, the general proposition that (leaving aside customs duties) the States have a
constitutional protection against the exercise by the Commonwealth Parliament of the taxation
power cannot be accepted. It has never been decided that they have nor has this been definitely
affirmed in any of the dicta referring to the taxation power as a power which requires, or may
require, special consideration. An assertion that a question may require examination is not
tantamount to an assertion that the question ought to be answered in a particular way. If it be
accepted that in the Engineers' Case [1920] HCA 54[1920] HCA 54; ; (1920) 28 CLR 129 the
question of the scope of the taxation power in relation to the States was the subject of a
"reservation", that case still does not provide support for the proposition that no tax (apart from
customs duties) can be lawfully levied on a State. Nor is that general proposition supported by the
Melbourne Corporation Case [1947] HCA 26; (1947) 74 CLR 31 . In that case when Rich J. referred
(1947) 74 CLR, at p 66 to taxation by way of illustration of actions on the part of the
Commonwealth which would be, in his opinion, invalid, his reference was not to all taxes imposed
by a Commonwealth law on the States but to a particular taxing Act of the kind which he specified.
Starke J., in his discussion of the matter in the same case (1947) 74 CLR, at pp 70-72 , did not assert
that there was a general rule by which the States were protected against taxation laws, nor was that
asserted by Dixon J. in any of the cases to which I have referred above. (at p409)

8. When it has been stated that there are limitations derived from the structure of the federal system
upon the legislative power of the Commonwealth Parliament to enact laws which affect the States,
the limitations have been described in various ways, but have not been completely and precisely
formulated. Taxation laws have been mentioned as illustrations of laws which might be, in their
effect upon the States, laws of a kind the enactment of which would be beyond power. If a general
rule were adopted that a law imposing a tax upon States is invalid for the reason that the taxation
power is, because of its special nature, a power which cannot be exercised so as to bind the States,
there could not be any need or any justification for saying that such a law may sometimes be invalid
for the reason that it falls within a wider class of laws which affect the independence of the States in
a manner regarded as being beyond power. The distinction, to which I am seeking to draw attention,
between a limitation said to be based on the nature of the taxation power and a constitutional
limitation said to be derived from broader and more far-reaching principles which may be
applicable to some taxation laws, was made by Dixon J. in the Melbourne Corporation Case (1947)
74 CLR, at p 81 where his Honour said :

       "The objection to the use of federal power to single out
       States and place upon them special burdens or disabilities
       does not spring from the nature of the power of taxation.
       The character of the power lends point to the objection but
       it does not give rise to it. The federal system itself is the
       foundation of the restraint upon the use of the power to control
       the States. The same constitutional objection applies to
       other powers, if under them the States are made the objects of
       special burdens or disabilities."

The restraint upon the use of power to which his Honour there referred is not an absolute restraint. It
is not of the same character or extent and it has not the same basis as the inability of a State to make
laws binding upon the Commonwealth. It is a limited restraint. I have said above that the limitations
have been described in various ways. Some of these descriptions have been in terms which, in my
opinion, do not provide satisfactory tests for determining whether or not a law is valid. For example,
a statement that a law is invalid if it subjects the governmental functions of a State to "undue
interference" provides no satisfactory means for determining what is "undue". Again there are
difficulties in a test which makes the decision of a legal question depend upon a distinction made by
the Court between functions of governments which are "normal" or are "essential" and those which
are not. A recognition that there are difficulties in formulating a single test in precise and
comprehensive terms does not provide, in my opinion, a reason for denying that there can be any
limitation by implication upon the power to affect the States. But if it be accepted that such a
limitation exists, what must be decided is whether the laws which are here under challenge are of
such a kind or operate in such a way in relation to the States that they are thereby invalidated. At
this point I think it is necessary to refer to the question whether any such limitation can be
applicable only to laws which "single out" the States or may be applicable also to some general
laws. (at p411)

9. The statement of principle by Dixon J. in the Melbourne Corporation Case (1947) 74 CLR, at p
81 which refers to the use of federal power "to single out States and place upon them special
burdens or disabilities" was not intended, in my opinion, to be an exhaustive statement. It is not
necessarily in conflict with the statement by Rich J. (1947) 74 CLR, at p 66 to the effect that in
addition to cases where the law singles out the States there may be invalidity in a law by which the
States are subjected to some provision of general application which in its application to them would
prevent them from performing their essential functions or would impede them in so doing. Dixon J.,
himself, said in Bank of N.S.W. v. The Commonwealth (1948) 76 CLR 1, at p 338 :

       "No doubt without discrimination laws applying to States
       may operate against them in such a way that it must be
       beyond Federal power to enact them."

Nevertheless, although it may be that some laws of general application may be invalid in so far as
they apply to the States, I am of opinion that the laws which are here challenged, and which in my
opinion are general laws, cannot be brought within the principle stated by Rich J. concerning the
invalidity of general laws. Clearly the laws do not prevent the States from performing their
functions and, in my opinion, they do not, in any relevant sense, impede them in doing so. There is
not, in my opinion, any ground upon which it could be asserted that the challenged laws in so far as
they bind the States bring about any such destruction or curtailment of the right of the States to
continue in existence or to exercise their functions, as could require the power of the Parliament to
enact them to be denied. Since the challenged laws are, in my opinion, laws of general application
and are not laws which "single out" the States or place "special burdens or disabilities" upon them
then the plaintiff cannot rely on any restraint to which the power to enact laws of the latter
description may be subject. In my opinion they are not laws which in any relevant sense
discriminate against the States or single them out. (at p412)

10. Section 15 (bb) of the Pay-roll Tax Assessment Act provides for exemptions from tax and these
include an exemption in respect of wages paid by a school or college which is carried on by a body
corporate, society or association otherwise than for the purpose of profit or gain to the individual
members of the body corporate, society or association and which is not carried on by or on behalf of
a State. In my opinion the exclusion of the States from the benefit of the exemption which is
allowed to the schools or colleges described in s. 15 (bb) does not have the effect that the Act should
be regarded as singling out the States and placing a special burden upon them. The laws remain
general laws, notwithstanding that there are specified exceptions from their operation. The Acts
cannot be regarded as if they enacted or included the enactment of a separate and distinct law which
imposed a special discriminatory tax upon the employment by States of teachers. (at p412)

11. In support of the submissions that the laws are beyond power in so far as they apply to the
wages paid to the civil servants specified in the statement of claim two propositions were advanced
which were said to be overlapping but distinct. One was that the tax was invalid because it selects a
criterion of a kind which impinges directly upon the States in that the employment of civil servants
is something without which a State cannot continue to exist as a unit of government. The second
proposition was that the tax was invalid because it is beyond power to tax the States in respect of
functions which are unique to government in the sense that they can be performed only by
governments. Assuming that it would be beyond power for the Commonwealth Parliament to make
a law which would prevent the States from continuing to exist as independent units of government
and from continuing to exercise those functions which governments alone can perform or which are
necessary for the continued existence of the States the propositions which I have set out cannot be
sustained except upon the assumption that any law by which a tax is imposed directly upon the
States in consequence of acts done by them in the exercise of those functions is a law which
prevents or controls the exercise of those functions. In my opinion that assumption is not a valid
one. The plaintiff must assert that a tax law which affects the States either in relation to the exercise
by it of activities in which it is necessarily engaged or in relation to activities of a kind in which no
one else engages is beyond power. But unless the reason for the invalidity lies in the nature of the
power, the submissions under consideration if accepted ought to lead to the conclusion that other
laws which impinge directly upon the carrying out by the State of such activities must likewise be
invalid. I have already stated reasons for rejecting the view that a taxation law affecting the States is
invalidated simply on the ground that the taxation power is of a special nature which cannot be used
so as to bind the States. Once that is rejected, the argument for the plaintiff must be that the placing
of any obligation upon it, by a Commonwealth law, in relation to the exercise of functions of the
kind under consideration, must be beyond power. (at p413)

12. It may be that a taxation law affecting the States would be beyond power if it were of the kind
indicated by Dixon J. in the Melbourne Corporation Case [1947] HCA 26; (1947) 74 CLR 31 in the
passage to which I have already referred, or of the kind to which Rich J. referred. These are
questions which do not arise and need not be decided in this case, since the laws which are
challenged are not, in my opinion, laws of the kind to which their Honours referred. In my opinion
the submissions that the continued existence or the independence of the States or their capacity to
carry out their functions are destroyed or threatened in a way which is beyond power by any tax law
which applies to a State in relation to the carrying out by it of its functions, or of particular
functions of the kind to which the submissions for the plaintiff in their more limited form referred,
cannot be accepted. (at p413)
13. It was put on behalf of the plaintiff in a subsidiary argument that as a matter of construction of s.
51 (ii.) the word "Taxation" should be taken to refer only to the taxing of those who are subjects and
not to extend to States or their governments. In my opinion, there is no basis for that construction
either in the language of the Constitution or in authority and it should not be accepted. It may be
that the word is commonly used to indicate the obtaining of revenue from citizens but there is no
sound reason, in my opinion, to confine its meaning in that way and it has not been regarded in any
of the authorities as being so confined. (at p413)

14. In my opinion, s. 114 of the Constitution has no application to the pay-roll tax. It is not a tax on
property of any kind belonging to a State. (at p413)

15. In my opinion the demurrer should be allowed. (at p413)

GIBBS J. By the Pay-roll Tax Act 1941-1966 (Cth) a tax at the rate of 2 1/2% is imposed on all
wages paid or payable by any employer. The tax, which is known as pay-roll tax, is levied in
accordance with the provisions of the Pay-roll Tax Assessment Act 1941-1969 (Cth) ("the
Assessment Act"). The employer who pays, or is liable to pay, the wages is required to pay the tax
(s. 4 of the Pay-roll Tax Act 1941-1966 ; s. 13 of the Assessment Act). Section 3 (1) of the
Assessment Act provides that in that Act, unless the contrary intention appears, "employer" means
any person who pays or is liable to pay any wages and includes (inter alia) the Crown in the right of
a State. Returns to enable the tax to be assessed are normally furnished monthly (s. 18) and for the
purposes of determining the tax payable an amount of $1,733.33 is deducted from the amount of an
employer's wages in any month (s. 14). If the wages paid or payable by an employer in any year do
not exceed $20,800 the tax is refunded or rebated (s. 16). Certain exemptions, to which later
reference will be made, are allowed by s. 15. By Div. 2 of Pt III rebates of tax are allowable by
reference to the exports of the employer for the year in question and s. 16V, which forms part of
Div. 2, provides :

       "Where a trade or business, or more than one trade or
       business, is carried on by the Crown in right of a State, this
       Division applies as if -
       (a) the Crown were, in respect of each trade or business, a
       separate employer ; and
       (b) the Crown were not, as such an employer, entitled to any
       deduction under section fourteen of this Act."

Section 64 of the Assessment Act provides that each State shall, for the purposes of that Act, be
represented by such officer or officers as the State appoints and that nothing in that Act imposing
any penalty on an employer shall be construed as imposing a penalty on a State or any officer
representing that State. (at p414)

2. By this legislation, if it is valid, the Commonwealth has obliged the States, in common with other
employers, to pay a tax on all wages paid or payable to their employees. The State of Victoria
challenges the validity of this tax so far as it is imposed on the wages of certain of its officers and
employees who may, speaking imprecisely, be described as public servants employed to carry out
the ordinary functions of government. (at p414)

3. It may at first sight appear somewhat surprising that the Commonwealth, which each year makes
large payments to the States, should at the same time seek to raise money from the States by a tax
on the wages paid or payable to State public servants, and thus with one hand take money from the
treasury into which the other hand pays it. The history of the tax, which was originally designed to
provide funds for the payment of child endowment, the burden of which it was thought should
properly fall upon employers, of which each State was one, may reveal the reason why the tax was
first imposed on the States, whether or not it also discloses a reason for the continuance of the
imposition upon them. However, we are not concerned to inquire into the wisdom, merit,
expediency or economic or political justification for the legislation ; those are questions for the
Parliament if the tax is within its legislative competency. We are solely concerned with a strictly
legal question ; whether it is within the constitutional power of the Parliament to impose the tax in
question. (at p415)

4. By s. 51 (ii.) of the Constitution, the Parliament is given power, subject to the Constitution, to
make laws for the peace, order, and good government of the Commonwealth with respect to
taxation, but so as not to discriminate between States or parts of States. There is no doubt that a law
imposing a pay-roll tax is a law with respect to taxation. However, the State of Victoria contends
that in so far as the legislation imposes this tax on the States it is invalid. First, the State advances
the general proposition that the power given by s. 51 (ii.) does not enable the Parliament to make
laws taxing the States, although it is conceded that there may be exceptions to this general rule, for
example in the case of duties of customs and excise. In support of this proposition it is said that the
ordinary meaning of the term "taxation" is the raising of money for the purposes of government by
exaction from subjects and that the States are not subjects of the Commonwealth. Further, it is
submitted that the Commonwealth's power to make laws with respect to taxation is subject to the
Constitution, which recognizes and protects the coexistence of the Commonwealth and the States as
separate independent governments, and in consequence impliedly forbids the Commonwealth to tax
the States, or a State to tax the Commonwealth. If this proposition is not accepted in its generality, it
is submitted that at least the Commonwealth has no power to impose on a State a tax on the
employment of civil servants who are employed in activities that can only be carried on by a
government and whose employment is essential to the very existence of the State. In reply to these
arguments it is urged by the Solicitor-General for the Commonwealth that it is settled by
Amalgamated Society of Engineers v. Adelaide Steamship Company Ltd. (the Engineers' Case)
(1920) 28 CLR 129 that the Parliament of the Commonwealth has power to make laws binding on
the States with respect to the matters set forth in s. 51 of the Constitution, subject only to the
limitations arising from the words used in s. 51 to describe the various topics upon which the
Parliament may legislate and to such other limitations as are expressly imposed by the Constitution ;
no further limitations, he says, are to be implied. He submits that there is nothing in the words of s.
51 (ii.) themselves which gives rise to an implication that a tax should not be imposed on the States,
and that the Commonwealth Parliament accordingly has power to impose a tax on the States,
provided that the express limitations contained in the Constitution, particularly in s. 51 (ii.) itself
and in ss. 55, 99 and 114, are not infringed. (at p416)

5. Although it is true that the word "taxation" is sometimes thought to connote the levying of
revenue by a sovereign from its subjects, in my opinion its meaning is not limited in that way.
Compulsion is an essential feature of taxation (Lower Mainland Dairy Products Sales Adjustment
Committee v. Crystal Dairy Ltd. (1933) AC 168, at p 175 ) but it is not necessary that the authority
which imposes the tax and the person who is compelled to pay it should stand in the relation of
sovereign and subject. Obvious examples of taxation imposed on persons who are not subjects of the
power levying the tax are customs duties exacted from foreign traders and land taxes payable by
absentee landowners. In Matthews v. Chicory Marketing Board (Vict.) (1938) 60 CLR 263, at p 276
, Latham C.J. described a tax in the following words, which were later adopted by the Court in
Browns Transport Pty. Ltd. v. Kropp [1958] HCA 49; (1958) 100 CLR 117, at p 129 :

       "It is a compulsory exaction of money by a publci authority
       for public purposes, enforceable by law, and is not a payment
       for services rendered."

A compulsory contribution levied on the States by the Commonwealth, for the purposes of the
government of the Commonwealth, may be taxation, notwithstanding that the States are not subjects
of the Commonwealth. (at p416)

6. The important question that arises is, therefore, whether the words of s. 51 (ii.) must be read
subject to an implied restriction which prevents the Commonwealth from taxing the States, either at
all, or in circumstances which would include the present case. (at p416)

7. In the Engineers' Case [1920] HCA 54; (1920) 28 CLR 129 the Court rejected the doctrine of the
immunity of instrumentalities which had been based on implications thought to be rendered
necessary by a federal system of government and laid down the rule that "laws validly made by
authority of the Constitution, bind, so far as they purport to do so, the people of every State
considered as individuals or as political organisms called States - in other words, bind both Crown
and subjects" (1920) 28 CLR, at p 153 . The majority of the Court said (1920) 28 CLR, at p 154 that
"where the affirmative terms of a stated power" (granted by the Constitution to the Commonwealth
Parliament) "would justify an enactment, it rests upon those who rely on some limitation or
restriction upon the power, to indicate it in the Constitution", and that "it is a fundamental and fatal
error to read s. 107 as reserving any power from the Commonwealth that falls fairly within the
explicit terms of an express grant in s. 51, as that grant is reasonably construed, unless that
reservation is an explicitly stated". Although the judgments of the majority laid stress on the need to
turn to the language of the Constitution itself, to read it naturally and to permit it "to speak with its
own voice", the case did not decide that in the interpretation of the Constitution no implications
whatever are to be made. On the contrary, it was said (1920) 28 CLR, at p 155 :

       "The doctrine of 'implied prohibition'" (as their Honours
       called the doctrine of the immunity of instrumentalities)
       "finds no place where the ordinary principles of construction
       are applied so as to discover in the actual terms of the
       instrument
       their expressed or necessarily implied meaning." (at p417)

8. The ordinary principles of statutory construction do not preclude the making of implications
when these are necessary to give effect to the intention of the legislature as revealed in the statute as
a whole. The intention of the Imperial legislature in enacting the Constitution Act was to give effect
to the wish of the Australian people to join in a federal union and the purpose of the Constitution
was to establish a federal, and not a unitary, system for the government of Australia and accordingly
to provide for the distribution of the powers of government between the Commonwealth and the
States who were to be the constituent members of the federation. In some respects the
Commonwealth was placed in a position of supremacy, as the national interest required, but it would
be inconsistent with the very basis of the federation that the Commonwealth's powers should extend
to reduce the States to such a position of subordination that their very existence, or at least their
capacity to function effectually as independent units, would be dependent upon the manner in which
the Commonwealth exercised its powers, rather than on the legal limits of the powers themselves.
Thus, the purpose of the Constitution, and the scheme by which it is intended to be given effect,
necessarily give rise to implications as to the manner in which the Commonwealth and the States
respectively may exercise their powers, vis-a-vis each other. (at p418)

9. The necessity to make implications in construing the Constitution has been recognized in a
number of judgments of this Court. In West v. Commissioner of Taxation (N.S.W.) [1937] HCA 26;
(1937) 56 CLR 657, at pp 681, 682 Dixon J. said :

       "Since the Engineers' Case
       [1920] HCA 54; (1920) 28 CLR 129
       a notion seems to have
       gained currency that in interpreting the Constitution no
       implications
       can be made. Such a method of construction would
       defeat the intention of any instrument, but of all instruments
       a written constitution seems the last to which it could be
       applied. I do not think that the judgment of the majority
       of the Court in the Engineers' Case meant to propound such a
       doctrine. It is inconsistent with many of the reasons
       afterwards
       advanced by Isaacs J. himself for his dissent in Pirrie
       v. McFarlane
       [1925] HCA 30[1925] HCA 30; ; (1925) 36 CLR 170, at p 191
       ."

It may be added that it is also inconsistent with reasons that have since been advanced by Rich and
Starke JJ., who were also members of the majority in the Engineers' Case [1920] HCA 54; (1920)
28 CLR 129 , (see South Australia v. The Commonwealth [1942] HCA 14; (1942) 65 CLR 373, at p
447 , R. v. Commonwealth Court of Conciliation and Arbitration ; Ex parte Victoria [1942] HCA
39; (1942) 66 CLR 488, at pp 515, 516 , and Melbourne Corporation v. The Commonwealth [1947]
HCA 26; (1947) 74 CLR 31, at pp 65, 66, 70-75 ). (at p418)

10. The question what limitations may be implied on the power of the Commonwealth to make laws
affecting the operations of the States was considered by Dixon J. in a number of cases before the
matter finally fell for decision in Melbourne Corporation v. The Commonwealth [1947] HCA 26;
(1947) 74 CLR 31 . In Australian Railways Union v. Victorian Railways Commissioners [1930]
HCA 52; (1930) 44 CLR 319, at p 390 and West v. Commissioner of Taxation (N.S.W.) (1937) 56
CLR, at p 682 that learned Judge suggested that the principle that prima facie a grant of legislative
power to the Commonwealth enables it to make laws affecting the operations of the States or their
agencies may be subject to two reservations, the first relating to cases where the State is acting in
the exercise of the Crown's prerogative and the second to laws discriminating against the States or
their agencies. In Essendon Corporation v. Criterion Theatres Ltd. [1947] HCA 15; (1947) 74 CLR
1, at pp 19, 22, 23 , he suggested a third reservation, viz. that the taxation power might by reason of
its special nature be subject to implied restraints. In the same case, Latham C.J. tentatively
expressed a similar view. He said:

       "The Commonwealth can impose customs duties upon
       importation of goods by a State . . . but it has never been
       held that the general Commonwealth power of taxation
       extends to a State or that a State can tax the Commonwealth.
       This question was not fully argued. As at present advised I
       am of opinion that it seems to be necessarily involved in the
       very conception of a federal Constitution that the
       Commonwealth
       or Dominion cannot, except within some limits which
       would need very careful definition, tax the States or Provinces
       and that the States or Provinces cannot tax the
       Commonwealth
       or Dominion."
       (1947) 74 CLR, at p 14

In Melbourne Corporation v. The Commonwealth [1947] HCA 26; (1947) 74 CLR 31 the Court
held, by a majority, that s. 48 of the Banking Act 1945 (Cth), which provided that "Except with the
consent in writing of the Treasurer, a bank shall not conduct any banking business for a State or for
any authority of a State, including a local governing authority", was not a valid exercise of
Commonwealth power. Although different reasons were given by the various members of the
majority to support their decision, in my opinion all of them held or recognized that implications
must be made in the Constitution because of its federal nature. Rich J. (1947) 74 CLR, at p 67 held
that the section was invalid because it impaired the power of the States freely to use the facilities
provided by banks, a power which is essential to the efficient working of the business of
government. In his opinion, any action on the part of the Commonwealth in purported exercise of its
constitutional powers, which would prevent a State from continuing to exist and function as such is
invalid. He went on to say :

"Such action on the part of the Commonwealth may be
invalid in two classes of case, one, where the Commonwealth
singles out the States or agencies to which they have delegated
some of the normal and essential functions of government,
and imposes on them restrictions which prevent them from
performing those functions or impede them in doing so ;
another, where, although the States or their essential agencies
are not singled out, they are subjected to some provision of
general application, which, in its application to them, would
so prevent or impede them. Action of the former type would
be invalid because there is nothing in the Commonwealth
Constitution to authorize such action by the Commonwealth.
A general income tax Act which purported to include within
its scope the general revenues of the States derived from State
taxation would be an instance of the latter."
(1947) 74 CLR, at p 66

Starke J. rejected the notion that any distinction should be drawn between governmental, or primary
and inalienable, and trading functions, and did not agree that the presence or absence of
discrimination was a decisive test. He held that the question is "whether the legislation or the
executive action curtails or interferes in a substantial manner with the exercise of constitutional
power by the other." (1947) 74 CLR, at pp 74-75 Dixon J. applied the principle that he had
previously enunciated, and held the section bad as a law which discriminated against the States
(1947) 74 CLR, at p 84 . He explained his notion of discriminatory legislation as follows (1947) 74
CLR, at pp 78-79 :

"The reservation relates to the use of federal legislative
power to make, not a general law which governs all alike who
come within the area of its operation whether they are subjects
of the Crown or the agents of the Crown in right of a State,
but a law which discriminates against States, or a law which
places a particular disability or burden upon an operation or
activity of a State, and more especially upon the execution
of its constitutional powers. . . . Legislation of that nature
discloses an immediate object of controlling the State in the
course which otherwise the Executive Government of the
State might adopt, if that Government were left free to
exercise its authority."

In other words, the Commonwealth cannot make "a law aimed at the restriction or control of a State
in the exercise of its executive authority." (1947) 74 CLR, at p 83 He remarked that it was
unnecessary to say anything about the possible reservation relating to the taxation power, which did
not enter into the determination of the case before him (1947) 74 CLR, at p 78 , but he did say
(1947) 74 CLR, at p 81 :

"What is important is the firm adherence to the principle
that the federal power of taxation will not support a law which
places a special burden upon the States. They cannot be
singled out and taxed as States in respect of some exercise of
their functions. Such a tax is aimed at the States and is an
attempt to use federal power to burden or, may be, to
control State action."

The judgments of the other two members of the majority reveal a somewhat different approach.
Latham C.J. commenced by holding (1947) 74 CLR, at p 50 that "the argument that s. 48 is not
legislation with respect to banking should not be accepted" and further held that the section was not
legislation with respect to State banking, but upheld the challenge to its validity because it was a law
which singled out and was aimed at or directed against the States. He held (1947) 74 CLR, at p 60
that federal laws which "discriminate" against the States, in the sense that they single out the States
for taxation or some other form of control, and laws which "unduly interfere" with the performance
of what are clearly State functions of government, are invalid. The reason why discriminatory laws
are invalid is, he said (1947) 74 CLR, at p 61 :

". . . that what is called 'discrimination' shows that the
legislation is really legislation by the Commonwealth with
respect to a State or State functions as such and not with
respect to the subject in respect of which it is sought to bind
the State."

He added (1947) 74 CLR, at pp 61, 62 :

"Similarly, federal legislation which, though referring to
a subject of federal power, is really legislation about what is
clearly a State governmental function, may be said to
'interfere
unduly' with that function and therefore to be invalid. . . .
In my opinion the invalidity of a federal law which seeks to
control a State governmental function is brought about by
the fact that it is in substance a law with respect to a subject
as to which the Commonwealth Parliament has no power to
make laws."

I find this reasoning rather difficult to reconcile with his finding that the law which he held invalid
in the case before him was a law with respect to banking. Williams J. said (1947) 74 CLR, at p 99
that :

". . . there arises from the very nature of the federal compact,
which contemplates two independent political organisms, each
supreme within its own sphere, existing side by side and
exerting divided authority over the same persons and in the
same territory, a necessary implication that neither the
Commonwealth
nor the States may exercise their respective
constitutional
powers for the purpose of affecting the capacity of
the other to perform its essential governmental functions.
Therefore a federal law which purports to bind the States
must be examined to ascertain whether it is really a law for
the peace, order and good government of the Commonwealth
with respect to one of the enumerated subjects, or a law which,
under colour of such a purpose, is really a law the purpose of
which is to interfere with such functions."

In his opinion, a discriminatory law is not necessarily bad, although the presence of discrimination
points strongly to the law being aimed at the States (1947) 74 CLR, at p 99 . He held (1947) 74
CLR, at p 100 that s. 48 was in pith and substance a law aimed at giving directions to the States as
to the manner in which they should exercise part of their sovereign powers and was invalid. (at
p421)

11. The reasons given for the decision in Melbourne Corporation v. The Commonwealth [1947]
HCA 26; (1947) 74 CLR 31 do not reveal one ground common to all of the judgments upon which
the decision of the majority rested. In my opinion, however, it is not right to regard the case simply
as a decision that s. 48 of the Banking Act, properly understood, was not a law for the peace, order
and good government of the Commonwealth with respect to banking. In my opinion the decision is
authority for the view that although s. 48 was such a law it was invalid because it infringed an
implied restriction on the power of the Commonwealth. In two later cases Latham C.J. expressed the
ratio of the decision in words which in my opinion show that, whatever his earlier view, he
understood the width of the principle for which it is authority. In Bank of New South Wales v. The
Commonwealth [1948] HCA 7; (1948) 76 CLR 1, at pp 242, 243 he said :

       "In the Melbourne Corporation Case
       [1947] HCA 26; (1947) 74 CLR 31
       it was held that a
       system of federal government, involving the co-existence of
       Commonwealth and States, involved the continuance of the
       existence of the States as political entities not subject to any
       form of Commonwealth control in respect of the discharge of
       their own lawful functions. The States may be bound by
       some Commonwealth laws (Engineers' Case
       [1920] HCA 54; (1920) 28 CLR 129
       ) but, as
       governments,
       the States are independent of the Commonwealth and
       are not subjects of the Commonwealth ; and in respect of the
       functions which are left to the States the Commonwealth has
       no power by means of legislation of restricting the States in
       the performance of the normal and essential functions of
       government : per Rich J.
       (1947) 74 CLR, at p 66
       . Thus the Commonwealth
       Parliament cannot destroy, curtail or interfere with the
       exercise of constitutional power by a State, and the
       management
       and control by the States of their revenues and funds
       is a constitutional power of vital importance to them : per
       Starke J.
       (1947) 74 CLR, at p 75
       . The Constitution should not be understood as
       authorizing the Commonwealth to make a law 'aimed at the
       restriction or control of a State in the exercise of its executive
       authority' : per Dixon J.
       (1947) 74 CLR, at p 83
       . Williams J.
       (1947) 74 CLR, at p 99
       held that s. 48
       of the Banking Act 1945 was a law which discriminated against
       the States and their agencies and was in substance a law
       which sought to give direction to the States as to the manner
       in which they should exercise their executive, legislative,
       judicial or governmental functions and that it was therefore
       invalid."

In Wenn v. Attorney-General (Vict.) (1948) 77 CLR 84, at p 113 . he said that in Melbourne
Corporation v. The Commonwealth [1947] HCA 26[1947] HCA 26; ; (1947) 74 CLR 31 :

". . . it was held that federal legislation was invalid if it
curtailed or interfered in a substantial manner with the exercise
of State constitutional power - if federal power was used for a
purpose of restricting or burdening the State in the exercise
of its constitutional powers - or if the law was aimed at
restriction or control of a State in the exercise of its executive
authority." (at p423)

12. The questions raised by these authorities, so far as they are relevant to the present case, have not
been settled by subsequent decisions. In Ex parte Professional Engineers' Association [1959] HCA
47; (1959) 107 CLR 208, at p 239 , Dixon C.J. suggested that in the Engineers' Case [1920] HCA
54; (1920) 28 CLR 129 "the reservations and qualifications therein expressed concerning the federal
power of taxation and laws directed specially to the States and also perhaps the prerogative of the
Crown received too little attention" but he did not amplify his discussion of this question. (at p423)

13. In my opinion these authorities do not support the proposition that the power of the
Commonwealth Parliament to make laws with respect to taxation is subject to an implied limitation
that excepts from the scope of the power any law that imposes taxation on the States. There is, on
the contrary, authority that the Commonwealth Parliament may validly pass such a law. R. v. Sutton
[1908] HCA 26; (1908) 5 CLR 789 and Attorney-General (N.S.W.) v. Collector of Customs
(N.S.W.) (Steel Rails Case) [1908] HCA 28; (1908) 5 CLR 818 establish that Commonwealth laws
imposing duties of customs are binding on the States. It is true that in those cases the Court attached
some significance to the fact that the Commonwealth's power to impose duties of customs and
excise is exclusive and to the unfortunate consequences that might result if the States were not
subject to the customs legislation of the Commonwealth. Nevertheless, the duties were clearly taxes
imposed by the Commonwealth Parliament by virtue of the power conferred by s. 51 (ii.) and these
decisions, which have remained authoritative for over sixty years, could not have been correct if the
taxation power were subject to a prohibition against its exercise so as to affect the States. Moreover,
the inclusion in the Constitution of s. 114, which expressly forbids the Commonwealth to impose
any tax upon property of any kind belonging to a State, would hardly have been necessary if the
Commonwealth had lacked power to impose any tax upon the States. In any case, it seems to me
that the federal nature of the Constitution, and its scheme and purpose, do not give rise to any
implication that no general law imposing taxation may validly be extended to the States. Such an
implication goes beyond what is required to preserve and protect the position of the States as
independent members of the federation, and would, on the other hand, lead to complexities and
difficulties in many cases. I hold that there should not be implied in the Constitution a limitation
upon the legislative powers of the Commonwealth that would render invalid any law to the extent to
which it purports to impose a tax upon the States. No doubt, however, laws imposing taxation upon
the States will be more likely than many other laws to offend against the limitations that apply
generally to Commonwealth powers. (at p424)

14. It then becomes necessary to determine whether the legislation in the present case is rendered
invalid by any such general limitation on Commonwealth power. It is unnecessary to discuss fully
the subject of the implied limitations on the power of the Commonwealth to make laws binding on
the States. Such matters as the extent of the Commonwealth power to affect the prerogative, or
whether the Commonwealth can compel the States to make appropriations of money in satisfaction
of liabilities imposed on them, or can impair or affect the Constitution of a State, do not fall for
consideration. Still less is it necessary to discuss the implications that may be made as to the
immunity of the Commonwealth from action by the States. In my respectful opinion, the view of Sir
Owen Dixon, that a Commonwealth law is bad if it discriminates against States, in the sense that it
imposes some special burden or disability upon them, so that it may be described as a law aimed at
their restriction or control, should be accepted. With all respect, however, I am not disposed to agree
that a law which is not discriminatory in this sense is necessarily valid if made within one of the
enumerated powers of the Commonwealth. A general law of the Commonwealth which would
prevent a State from continuing to exist and function as such would in my opinion be invalid. It is
true that in many cases a law which offended in this way would prove to be discriminatory, and I am
conscious of the imprecision of the test so far as it applies to general and nondiscriminatory laws.
The further formulations of the test by Rich and Starke JJ. in the Melbourne Corporation Case
[1947] HCA 26; (1947) 74 CLR 31 are not free from difficulty. To say that what the Constitution
impliedly forbids is a law which would prevent the States from performing the normal and essential
functions of government or impede them in doing so is to draw a distinction between essential and
inessential functions of government which is inappropriate to modern conditions and has probably
never been valid (cf. per Windeyer J. in Ex parte Professional Engineers' Association (1959) 107
CLR, at pp 274-276 ). To inquire whether a law curtails or interferes in a subsantial manner with the
exercise of constitutional power by the States leads only to the further question what is the
constitutional power of the States that is protected. For the purposes of the present case it is,
however, unnecessary to attempt to resolve these difficulties because the pay-roll tax in its present
form would not be invalid on any view of the question. Although in some cases it may be possible
to show that the nature of a tax on a particular activity, such as the employment of servants, renders
the continuance of that activity practically impossible, it has not been shown that the tax in the
present case prevents the States from employing civil servants or operates as a substantial
impediment to their employment. The tax has now been imposed upon and paid by the States for
nearly thirty years, and it has not been shown to have prevented the States from discharging their
functions or to have impeded them in so doing. They may have less money available for public
purposes because they have to pay the tax, but that could be said in every case in which a tax is
imposed on the States, and in itself it cannot amount to an impediment against State activity
sufficient to invalidate the tax. (at p425)

15. The question that remains is whether the legislation discriminates against the States. Section 15
of the Assessment Act provides that the provisions of Pt III (which deals generally with the liability
to the tax) shall not apply to wages paid by certain employers. These exemptions are not so
extensive that it can be said that the tax is aimed at the States, but one particular exemption, granted
by par. (bb) of s. 15 is in favour of wages paid -

       ". . . by a school or college (other than a technical school or
       a technical college) which -
       (i) is carried on by a body corporate, society or association
       otherwise than for the purpose of profit or gain to the
       individual members of the body corporate, society or
       association and is not carried on by or behalf of a
       State ; and
       (ii) provides education at or below, but not above, the
       secondary level of education".

The provision exempts from the tax the wages paid to the employees of most private schools in
Australia but it does not exempt wages paid by the States to teachers whom they employ. The wages
paid to teachers in State schools amount in total to a large sum and their inclusion for the purpose of
the assessment of pay-roll tax is far from being insignificant. It might, therefore, be said that the
State is under a substantial burden which is not placed generally on other persons who employ
school teachers. Although I do not regard this as altogether an easy question, I have reached the
conclusion that it is not right to look at the matter in that way. It was understandable that the
legislature should have wished to assist the advancement of education by exempting the wages paid
by schools which were not conducted for profit or gain. Most taxing statutes contain provision for
exemptions and exceptions, and it is of the nature of such statutes that not all taxpayers are treated
with absolute equality. The fact that certain private employers are given an exemption which is
denied to the States does not necessarily mean that the statute discriminates against the States in the
sense defined by Sir Owen Dixon. The question is, to some extent, one of degree. The most that can
be said is that in respect of one field of employment the State is taxed although certain private
employers escape. If the position of the States is compared with that of private employers generally,
it is not possible to say that the States are under such a special burden or disability that the
legislation is aimed at the restriction or control of the States. The provisions of s. 16V of the
Assessment Act, which I have already quoted, seem to place the States in a special position, but we
were informed by the Solicitor-General for the Commonwealth that the real aim and apparent effect
of the section is to give an advantage to the States in the collection of rebates, and those who
attacked the validity of the legislation did not challenge this statement or place any reliance upon the
provisions of the section in their submissions. I, therefore, conclude that the legislation does not
discriminate against the States in the sense to which I have referred. (at p426)

16. For the reasons I have given I have reached the conclusion that the legislation in question does
not infringe any implied prohibition to which the Commonwealth's power to make laws with respect
to taxation is subject. It is clear that the legislation does not offend against any express constitutional
prohibition ; in particular, it is not a tax on the property of a State within s. 114. The challenge to the
validity of the legislation therefore fails. (at p426)

17. I would allow the demurrer. (at p426)

ORDER

Demurrer allowed with costs. Action dismissed with costs.

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