By Duncan Bedford
The High Court of Australia has unanimously confirmed the constitutional validity of the retroactive validation of surcharge land taxes and duties imposed by Australian States on foreign owners.
The Court’s ruling confirms that Commonwealth laws can retroactively change the effect of State laws.
Under s 109 of the Commonwealth of Australia Constitution Act 1900 (Cth) (Australian Constitution), Commonwealth laws prevail over inconsistent State laws.
Most States impose surcharge land tax and duty (Surcharges) on ‘foreign’ individuals, companies and trusts, in pursuit of various policy goals.
Australia has Double Tax Agreements (DTAs) with other nations, some of which (including those with Germany and New Zealand, amongst others) contain non-discrimination clauses preventing one country from taxing residents of the other more heavily than its own. These DTAs are incorporated into Australian law by the International Tax Agreements Act 1953 (Cth) (ITAA), particularly s 5(1).
Before April 8, 2024, the assessment of Surcharges was inconsistent with these treaty-based non-discrimination rules because they taxed foreign residents at a higher rate than comparable Australian taxpayers, and were therefore invalid under s 109.
To address this, the Commonwealth enacted the Treasury Laws Amendment (Foreign Investment) Act 2024 (Cth) (Amending Act), inserting a new s 5(3) into the ITAA, which provides that s 5(1) only applies to Federal income tax and fringe benefits tax (i.e. not State taxes). Section 2 of Schedule 1 to the Amending Act provides that this change applies to taxes payable on or after 1 January 2018, retroactively validating assessment of Surcharges during periods in which these assessments were constitutionally invalid.
The Parties in the High Court case
- The GG Entities – G Global 120E T2 Pty Ltd and G Global 180Q Pty Ltd, ultimately owned by German company DWS Grundbesitz GmbH, challenged Queensland surcharge land-tax assessments for the 2021 and 2022 financial years.
- Mr Francis Stott – a New Zealand citizen who owned Victorian land and was assessed for surcharge land tax from 2016 to 2024.
- The Commissioners of State Revenue for Queensland and Victoria, who issued Surcharge assessments to the GG Entities and Mr Stott respectively.
Key issues
- External affairs power (s 51(xxix)): Were the changes in the Amending Act supported by the external affairs power?
- Retroactivity: Did the Amending Act validly remove inconsistencies that existed before April 8, 2024?
- Acquisition of property (s 51(xxxi)): Did the changes in the Amending Act amount to an acquisition of property requiring ‘just-terms’ compensation?
The Court found in favour of the State Commissioners on all issues, confirming the validity of the Amending Act and therefore the historical validity of the State tax foreign surcharges.
Decision
- External affairs power
The Court held that section 5(3) of the ITAA was supported by s 51(xxix) of the Australian Constitution – the external affairs power.
The Court confirmed that s 5(1) of the ITAA reflected a valid application of the external affairs power. It also determined that a power to enact certain laws must also include a power to limit the operation of them. In this regard, s 5(3) of the ITAA constituted a limitation of the operation of section s 5(1) to Surcharges, and therefore a valid exercise of the external affairs power.
2. Retroactivity
The Court ruled that the wording of the Amending Act evinced a clear intention that s 5(3) of the ITAA have a retroactive operation, thereby overcoming the presumption against the retroactive application of legislation, and curing the inconsistency between the Surcharges and the non-discrimination clauses in the DTAs.
In reaching this decision, the Court reopened and overruled University of Wollongong v Metwally (1984) 158 CLR 447, holding that Parliament may retrospectively remove an inconsistency between Commonwealth and State laws if its intention is clear.
3. Acquisition of property
The Court rejected the argument that extinguishing restitutionary claims for the recovery of Surcharges amounted to an acquisition of property.
The Court affirmed that laws imposing genuine taxation do not constitute a law with respect to the acquisition of property within s 51(xxxi) of the Australian Constitution and therefore do not require compensation on ‘just-terms’. The Court determined that the retroactive revival of historical Surcharges under the Amending Legislation amounted to genuine taxation.
Future considerations
- Constitutional validity of Surcharges confirmed. The decision confirmed the Constitutional validity of the validation of Surcharges by the Commonwealth, via the external affairs power.
- Retroactive legislative change validated. The Court’s reopening and overruling of Metwally confirms that Commonwealth laws can retroactively change the effect of State laws.
- International implications. While the High Court has concluded that the Amending Act altered the domestic operation of some DTAs, it is worth noting that the DTAs themselves have not been changed. It will be interesting to see how this outcome is received by the counterparties to those agreements. Effectively, before the Amending Act, Australian taxes (including State taxes) could not discriminate against nationals from those countries – and now they can, despite the fact that this is contrary to some DTA terms. Presumably this will raise questions as to Australia’s reliability in the context of international taxation agreements.
- Windfall tax provisions. As a contingency to an unfavourable High Court decision, Queensland and Victoria both introduced provisions that would be engaged if the Surcharges were found to be invalid under s 109 of the Australian Constitution. The effect of the provisions was to impose duty and land tax at the purported surcharge rate as if the Surcharges were validly imposed. Given the outcome of this case favoured the Commissioners, there remain questions as to what will become of these provisions, and whether they will be utilised in future to overcome similar issues of validity.
– Duncan Bedford is a Partner in the McCullough Robertson Lawyers Tax team, and Head of McR’s Food and Agribusiness Group. He specialises in transaction taxes, transaction structuring and inbound investment.
