Austin & Anor v Commonwealth of Australia M10/2001 [2002] HCATrans 298 (19 June 2002)

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Melbourne No M10 of 2001

B e t w e e n -

ROBERT PETER AUSTIN

First Plaintiff

KATHRYN ELIZABETH KINGS

Second Plaintiff

and

THE COMMONWEALTH OF AUSTRALIA

Defendant

GLEESON CJ

GAUDRON J

McHUGH J

GUMMOW J

KIRBY J

HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 19 JUNE 2002, AT 10.18 AM

Copyright in the High Court of Australia

MR G.A.A. NETTLE, QC: May it please the Court, I appear with my learned friend, MR M.K. MOSHINSKY, for the plaintiffs. (instructed by Allens Arthur Robinson)

MR D.M.J. BENNETT, QC, Solicitor-General of the Commonwealth: May it please the Court, I appear with my learned friends, MS M. SLOSS and MR G. A. HILL for the defendant. (instructed by the Australian Government Solicitor)

MR R.J. MEADOWS, QC, Solicitor-General for the State of Western Australia: May it please the Court, I appear with my learned friend, MS J.C. PRITCHARD, on behalf of the Attorney-General for Western Australia, intervening in support of the plaintiffs. (instructed by the Crown Solicitor for the State of Western Australia)

MR B.M. SELWAY, QC, Solicitor-General for the State of South Australia: May it please the Court, I appear with my learned friends, MR R.L. GOLDSMITH and MR B.D. ALLGROVE, for the Attorney-General of South Australia, intervening in support of the plaintiffs. (instructed by the Crown Solicitor for the State of South Australia)

MR J.W. SHAW, QC: May it please the Court, I appear with my learned friend, MR M.J. LEEMING, for the Attorney-General of New South Wales, for the plaintiffs. (instructed by the Crown Solicitor for the State of New South Wales)

McHUGH J: For the plaintiffs or supporting the plaintiffs?

MR SHAW: Supporting the plaintiffs.

MR M.A. DREYFUS, QC: If it please the Court, I appear with my learned friend, MS K.L. EMERTON, for the Attorney-General for the State of Victoria, supporting the plaintiffs. (instructed by the Victorian Government Solicitor)

GLEESON CJ: In this matter it is possible that I have a direct pecuniary interest in the outcome but I understand that it would, in any event, only be modest in proportions. I understand that the parties have no objection to my sitting in the matter.

MR NETTLE: That is so, Your Honour.

GLEESON CJ: Yes, Mr Nettle.

KIRBY J: In this matter although I have no pecuniary interest, my brother, Justice David Kirby, has an interest. I brought this to the notice of the parties and I understand they have no objection to my sitting. I have also brought to their notice the fact that I have made representations to the Federal Government concerning the Federal Pensions Act 1986 , so far without success, in relation to my partner and I understand that that gives no cause for objection.

GLEESON CJ: Yes, Mr Nettle.

MR NETTLE: If the Court pleases. Your Honours, the case stated raises two questions for decision. The first is the proper construction of the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act and in particular whether it applies to the plaintiffs.

The second question, which of course arises really only if the first is answered affirmatively, is whether that Act, if it does apply, so much discriminates against members of constitutionally protected funds that it is constitutionally invalid. May I start with the legislation. Your Honours have the Superannuation Contributions Tax (Assessment and Collection) Act at tab 5 of volume 1 of the plaintiffs' materials. It is to be noted in section 3 that as first enacted as part of the scheme which came in to force in June 1997 this Act was intended to apply to schemes of the sort of which the plaintiffs are members. You will see in section 3 that it was expressly provided that the Act found the Crown in right of the State.

If your Honours turn then to the Imposition Act, which you will find under tab 4 of the materials, and in particular to section 9 of it, you will see that despite the fact that the Assessment Act provided that it should apply to the Crown in right of the State, section 9 of the Imposition Act provided that it did not impose a tax on the property of the State, obviously to avoid the operation of section 114 of the Constitution. It is to be observed that, had nothing further occurred after the enactment of those two Acts, it would appear that the Superannuation Contributions Tax Assessment Act would have applied and clearly so to the two schemes of which the plaintiffs are members.

Can I ask your Honours to go back to the Superannuation Contributions Tax Assessment Act at tab 5 and turn first to section 7, where it is provided in subsection (1) that:

Superannuation contributions surcharge is payable on a member's surchargeable contributions -

but in 7(2), that no surcharge is to be levied unless the adjusted salary or annual income of the member exceeds the surcharge threshold. I note in passing, section 7(4), which was not in the Act at the time at which it was first enacted, it was not inserted until Act No 191 of 1997 which took effect on 7 December 1997. It is of course, as your Honours now understand, with respect, the anti-overlap provision.

GUMMOW J: No, I do not. You had better assume, Mr Nettle, that the mysteries and surprises that all this legislation will disclose could be revealed slowly.

MR NETTLE: Justice Gummow, what I propose to do if I may is to come back in a moment and give to you a piece of paper which demonstrates how it came about, but may I just note for the moment that, as first enacted, section 7(4) was not there.

GUMMOW J: Yes.

MR NETTLE: Now, you may see, with respect, that section 7(4) provides that this Act, the Superannuation Contributions Tax Assessment Act, which I will call the general Act, as it first enacted, would have applied to those things which are now the subject of the Constitutionally Protected Funds Act. It is only because of the later addition of section 7(4) that it no longer applies to those things which are the subject of the Constitutionally Protected Funds Act. I will return to that when I come to the detail of the first question of construction of whether the Constitutionally Protected Funds Act, according to its proper meaning, does apply to the schemes of which the plaintiffs are members.

KIRBY J: I have not had time to study this legislation carefully. Did Federal legislation at or about the same time impose a similar tax upon Federal and State members of Parliament?

MR NETTLE: Yes, your Honour. What happened was that in addition to the passing of the Superannuation Contributions Tax (Assessment and Collection) Act, there was passed also a Superannuation Contributions Tax (Application to the Commonwealth) Act, a copy of which we have in the materials, which made it apply to superannuation schemes and to the Commonwealth as the superannuation provider, as indeed it did in effect to others that were not the Commonwealth.

GLEESON CJ: What is it in the legislation that makes pensions superannuation?

MR NETTLE: It does not. There is a host of deeming provisions through which I will need to take the Court to demonstrate how it is that it is at least contended by the Commonwealth that it can exact surcharge upon pensions which are payable to members of constitutionally protected funds. But quite clearly it is not the same thing, and it appears in part, although not adequately, to have been recognised that it is not the same thing, as one travels through the detail.

GLEESON CJ: I thought parliamentarians were entitled to superannuation, not pensions.

MR NETTLE: That is correct.

KIRBY J: And the constitutionally protected funds relate to judges, the Governor-General, governors, and other such persons. Is that the scheme?

MR NETTLE: Yes and no. That is what is said to be the scheme. One of our submissions is - and a principal and first submission is - that, as properly construed, the two schemes of which the plaintiffs are members are not constitutionally protected funds.

GAUDRON J: Well, do you not say, there are no schemes of which they are members?

KIRBY J: No funds.

MR NETTLE: Well, there are no funds, but they are members of schemes, clearly enough.

GAUDRON J: Schemes, being defined?

MR NETTLE: I beg your pardon?

GAUDRON J: Being defined somewhere?

MR NETTLE: Yes, being defined. They are members of pension schemes, judges' pensions schemes - the one under the Judges' Pensions Act of New South Wales, and the other under the Supreme Court Act of Victoria.

GAUDRON J: You will take us to the definitions, in due course - - -

MR NETTLE: I will.

GAUDRON J: - - - but for my part, I do not understand judges to be members of pension schemes in the ordinary use of those words.

MR NETTLE: Your Honour, I understand, with respect, and I will take you to the verbiage which is contended by the Commonwealth to put them in the position as if they were. Coming back, if I may, to the general Act, the Superannuation Contributions Tax Assessment Act, I have taken your Honours to section 7. I have asked you to note that, by reason of the addition of section 7(4), it does not apply to schemes which are the subject of the Constitutionally Protected Funds Act. If I can put that aside for a moment and deal with the position as it was when this Act was first enacted.

Can I ask your Honours to go to section 8, where the conception of surchargeable contributions is dealt with. It is dealt with in two ways; that is to say, there are two sorts of surchargeable contributions. One is contributions which attract surcharge. The other is pretend or deemed contributions which are defined in terms of benefits which are said to accrue. May I take those in turn, first the easy one, section 8(2) - - -

KIRBY J: I do not think it helps to say pretend because it is not at all unusual in legislation to have deeming provisions.

MR NETTLE: As your Honour pleases. I used this inadvisably, and I will come to it in a moment - not pejoratively, your Honour. Section 8(1) explains how the surchargeable contributions are worked out. Section 8(2) provides what the surchargeable contributions are for "a member other than a member of a defined benefits superannuation scheme". Now, what this means is that if one is asking what the surchargeable contributions are for a member of a scheme who is not a defined benefits member, his contributions are worked out with, in effect, contributed amounts, paragraph (c).

Now, the contributed amounts, as you will see, referred to in subparagraphs (1), (2) and (3) are, essentially speaking, contributions actually truly made into the superannuation fund for that member for that year which attract certain taxation concessions such as for an employer a deduction under section 82AAC and for a member a deduction under section 82AAT. You can see that if you look first at paragraph (c)(i) where reference is made to section 274(1)(a), which are contributions of the kind which attract tax deductions under 82AAC for employer - - -

GUMMOW J: Just a minute, 82?

MR NETTLE: Section 82AAC.

GUMMOW J: Yes.

MR NETTLE: Then in subparagraph (c)(ii) the reference to section 82AAT - which those on this side of the Bar table know about -which are the deductions for those who make contributions on their own behalf.

GLEESON CJ: Like self-employed barristers?

MR NETTLE: Like self-employed barristers, or indeed, members of funds who wish to top up or add something additional to what their employer puts in.

GLEESON CJ: Is there a limit on the amount that a barrister can contribute?

MR NETTLE: Yes, there is, your Honour, and it goes by references to age. Up to 50 it is a certain amount - over - I mean, one can contribute more but the maximum tax deduction cuts in at age 50 and it is just over $100,000 per annum with 100 per cent deduction up to 3,000 and thereafter 75,000, up to $108,000 which is the limit. There it is, 8(2), the surchargeable contributions in the case of a member of a fund where real contributions are made.

Now can we contrast that with subsection 8(3) which provides for the calculation of surchargeable contributions of members of defined benefits superannuation schemes. Before I go to the detail, may I ask your Honours to turn over to section 43 which is the definition section at the end of the Act to the definition of "defined benefits superannuation scheme" and you will see that it s defined in terms of "a public sector superannuation scheme that" is "regulated". That means regulated under the Superannuation Industries (Supervision) Act - I will come back to that -"or exempt" and particularly, "has at least 1 defined benefit member".

GLEESON CJ: Am I right in thinking that the general object of this legislation was explained to provide some kind of amelioration to set off in part the tax concessions that were available to contributors to superannuation schemes of the kind we have just been discussing?

MR NETTLE: Your Honour is absolutely right. When it was first enacted, it was said that the purpose of it was to ameliorate the excesses of the advantages which were being taken by high income earners in the use that they were making of the tax concessions that were available to them under the Act, such as the deductibility under 82AAT and to the deductibility of employer contributions under 82AAC.

If your Honour turns in the materials filed by plaintiff at volume 2 to tab 20, you will come to the second reading speech for the superannuation contributions surcharge legislation and you will see there in the right-hand column of the Hansard of 13 February 1997 the second reading speech where it was said that the "bill forms part of a complete package". Then over the page, pertinently to the Chief Justice's question, in the first full paragraph page 887:

The superannuation system has been inequitably biased in favour of high income earners. Those high income earners have been benefiting from the concessional taxation treatment of superannuation to a much greater extent than low income earners. The introduction of the superannuation contributions surcharge for high income earners is this government's response to ensure that the superannuation system is more equitable for all Australians, while also ensuring that superannuation remains an attractive savings option.

From budget night 1996 all employer and deductible personal superannuation contributions made by, or for, high income earners are now subject to a surcharge of up to 15 per cent.

KIRBY J: Did I read somewhere that originally it did not have a provision in relation to the constitutionally protected persons and that came in later?

MR NETTLE: Yes, it did.

KIRBY J: Somebody must have seen an oversight.

MR NETTLE: Well, it is interesting your Honour should say that. I will need to go into it in a bit of detail, but can I just explain that to your Honour. Your Honour sees what is said there in the second reading speech. Your Honour sees, if one looks back to the Superannuation Contributions Tax Assessment Act that in the case of the surchargeable contributions calculated under 8(2) for members other than defined benefits schemes, the calculation was indeed one in respect of contributions actually made of the kind referred to in the second reading speech. That is to say, although one got in those days, happily, a big deduction for superannuation contributions, the surcharge for high income earners had the effect of reducing by 15 per cent the effect of those deductions. I mean, it could have been perhaps more efficaciously done by turning down to a lower level the percentage of deductibility that was afforded. But it was not done that way. It was done by means of the surcharge by reference to high income earners.

But then comes the extension beyond mere contributions to schemes where there are no, necessarily, contributions made or, if they are made, they do not equate into a lump sum which is taken out of the superannuation fund representing the savings which have been accumulated. That is what brings us to - - -

KIRBY J: And I think the delay is explained in the Solicitor for South Australia's submissions, I think, that there were negotiations between the Commonwealth and the States for a time.

MR NETTLE: That is correct.

KIRBY J: Are we allowed to have a look at that, having regard to the case stated before us? Is that available to us? There is no objection to our receiving this additional factual information?

MR NETTLE: There is certainly no objection from our quarter, your Honour. I would have thought, with great respect, it really is - - -

KIRBY J: It is helpful to know that there were negotiations to try to find a way more consonant with the original scheme which would in effect require the States to change their legislation and their system.

MR NETTLE: But if I may say so, your Honour, we are running ahead a bit. Before one can run in this, one really has to walk, and it is frightfully complex. One goes with the steps. We are still at the stage before these constitutionally protected funds were treated differently. We are looking at the Act as if there were no section 7(4) in it. We are looking at it as it was originally enacted in that it applied to all of the funds and schemes of the kind to which it referred and it was provided simply that it would not tax the property of the States by reason of the Imposition Act. What needs to be understood is that even at the outset before there was any special treatment for constitutionally protected funds, there was within the Act first a surcharge upon contributions actually made - that is under 8(2) - and secondly, surcharge calculated by reference to what is called benefits accrued where there were no contributions or at least where the scheme was a defined benefits scheme.

HAYNE J: You were at the definition of "defined benefits scheme" in section 43 and we find in that, do we not, that "defined benefits schemes" can be either a public sector scheme having certain characteristics or a scheme which is not a public sector scheme which has other different characteristics, one of which is that the non-public sector superannuation scheme is a scheme with at least one defined benefit member and some or all of the contributions to which are not allocated, that is, to coin a phrase to contrast with a public sector scheme, a private defined benefits super scheme is one to which there are necessarily contributions.

MR NETTLE: Yes, that is correct.

HAYNE J: So that the criterion of distinction with which we are concerned in section 8 is not necessarily whether there were contributions or not; it is whether the fund meets the characteristics of a "defined benefits super scheme".

MR NETTLE: Your Honour is absolutely right. It makes the point that the Act was in a sense covering the field. It was covering it for funds into which contributions were actually made and it was covering it for funds into which contributions were not made provided the benefits were defined benefits.

HAYNE J: Now is not the time to come to it, but at some point I am intrigued by the notion that anyone would run a defined benefits super scheme unless it was a public sector enterprise with a direct line to boundless sources of money to meet the obligations that have to be met under that defined scheme, but perhaps now is not the time to come to it.

MR NETTLE: No, your Honour, although there are examples of private defined benefit schemes. In any event, I got to......I wanted to take the Court next to the method of calculation, although I will come back to it later. What needs to be contrasted here is the method of calculation for surchargeable contributions in the case of non-defined benefits schemes and the method of calculation in respect of defined benefits schemes.

In the case of non-defined benefits schemes one takes as the starting points the contributed amounts which are referred to in section 8(2)(c). However, in the case of a defined benefits scheme one does not use contributed amounts because there may not be any, although there may be. One takes instead what is referred to in section 8(4) as "The actuarial value of the benefits that accrued" and to work out what the actuarial value of the benefits that accrued is one looks to section 8(5) which provides in short that it is the method set out in the Regulations or such other method as the Commissioner may approve from time to time.

McHUGH J: Why are you spending so much time on this as opposed to the members of constitutionally protected superannuation funds? Is it for a discrimination argument?

MR NETTLE: It is the construction argument. That is to say, if you understand this Act, as we would submit, with respect, it is properly to be understood, then - - -

McHUGH J: This Act being?

MR NETTLE: The Superannuation Contributions Tax Assessment Act.

McHUGH J: Yes.

MR NETTLE: It appears to have applied from the outset to schemes of the kind of which the plaintiffs are members, subject only to the section 9 of the Imposition Act, and the addition of section 7(4) did not have the effect of making it so cease to apply.

In order to understand why it is that we contend at the end of the day neither of these schemes is a scheme of the kind which is referred to in the Superannuation Constitutionally Protected Funds Act it is necessary first, we think, to understand how the Act originally applied, how then it was altered by the addition of section 7(4) and why, and, finally, the mechanism which was used in order to carve out and treat separately certain funds.

The other reason I am spending time - and I was even going to spend a bit more, I am sorry - was to contrast the methods of calculation, was for the purposes of the argument which comes later when one turns to the constitutionality of the legislation to show why it is, we submit, that the calculation methods are so arbitrary and capricious that they are really not a tax but something which is in effect left for whim.

Having worked out the contributions, it is next necessary to understand who it is that he is liable to pay the surcharge. That is dealt with in section 8A in part. Section 8A defines the conception of the "holder". Putting it shortly, the holder is he or she that holds the contributions at the relevant time. There is one exception to that, which I will not need to deal with I think, which is in section 8A(4) but it deals with a very small window of time which for present purposes need not make the thing more complex than it necessarily is.

Putting it shortly, therefore, the holder is the provider of the superannuation or the trustee of the superannuation fund and it is the holder who is subjected to liability for the surcharge by section 10. If the scheme, of which this holder is the holder, is a scheme other than an unfunded - defined unfunded benefits scheme, his liability to pay the surcharge arises one month after assessment, as is provided for in sections 15(1) and 15(3).

GUMMOW J: Just going back to section 8A, it does not really tell you what "hold" means, does it?

MR NETTLE: No, it does not.

GUMMOW J: It is not a legal expression.

MR NETTLE: It is not.

GUMMOW J: It has no natural legal meaning.

MR NETTLE: I agree, with respect.

GUMMOW J: Is it given any legal meaning? It is not, is it?

MR NETTLE: It is just that section 8A(1) explains who the "holder" is. Section 8A(4) is obviously conditioned by that.

GLEESON CJ: You would need the read this in the context of the Income Tax Assessment Act, would you not?

MR NETTLE: You would. I have to come to the Income Tax Assessment Act for just that reason, your Honour.

KIRBY J: Except that the word "holder" implies that there is something to hold.

MR NETTLE: To hold, and ordinarily there will be.

KIRBY J: Which is ordinarily going to be the case.

MR NETTLE: The contributions which will be held, but in the case of schemes of which there are no contributions to hold, there must be someone else.

HAYNE J: Have we not got to, before we depart from 8A, look at who superannuation providers are, as defined?

MR NETTLE: Yes.

HAYNE J: It is a maze, I know, and there are 500 paths to varying destinations.

MR NETTLE: Section 43 defines, as your Honour knows, by reference to the trustee, essentially, but others are included also.

HAYNE J: In that inimitable fashion, "trustee" is, in turn, defined.

MR NETTLE: Defined to include, in cases where he is not a trustee - - -

HAYNE J: This daisy chain drafting really has to stop.

MR NETTLE: Your Honour, I am conscious of the fact that there are lots of people who want to speak, and I have to finish by the end of today.

GAUDRON J: Well, I think, for my part, we just do need to come to grips with this legislation. It will save others time if you deal with it, I think.

MR NETTLE: May I say then, this. The effect of 8A appears to be that it is the holder who has to pay the surcharge ordinarily, and the holder is, as Mr Justice Hayne observes, the provider, and the provider is ordinarily the trustee, but it may be other things.

GAUDRON J: How do we find "trustee" from "provider"? "Provider" is defined, is it?

MR NETTLE: If your Honour goes to "superannuation provider" in section 43, you will see that the first possibility is, "the trustee of a superannuation fund".

GAUDRON J: Yes. Thank you.

GUMMOW J: Then you go to the definition of "trustee" on the next page, which tells you it may be the manager, but it does not tell you what "manage" means.

HAYNE J: This is just ludicrous.

GAUDRON J: Well, in any event, it is not ordinarily the person - - -

MR NETTLE: The member.

GAUDRON J: - - - entitled to share in the fund or to receive payment from the fund in due course.

MR NETTLE: Correct, your Honour. It is the organisation that runs, or sometimes funds, the scheme. Note that that is the holder, whether or not there are contributions actually made.

GUMMOW J: Why is that, Mr Nettle?

MR NETTLE: Because - no, I withdraw that, your Honour. The holder is the holder. Section 10 imposes the liability to pay the superannuation surcharge on the holder, with some exceptions, notably, in section 10(3), if the superannuation provider:

ceases to be the holder of the contributions, or begins to pay a pension or annuity based on the contributions -

so if the funds go out of the hands of the holder, he ceases to be the provider who has to pay the surcharge, and the liability - putting it roughly - follows the money to the hands where it finishes up.

Similarly, in section 10(4)(c), if the member takes the pension or takes the money out of the fund, then the liability shifts to him. Again, the liability follows the money. Then there is a further exception, which is provided for in section 16. It provides especially for what are called "unfunded defined benefits" schemes. Your Honours will remember I took you to section 8(3), which provided for the calculation of surcharge for defined benefits schemes, both funded, and, as Justice Hayne observed, unfunded.

The calculation for all defined benefits schemes is to be found in 8(3), but if it is funded, the liability to pay the surcharge falls on the provider under section 10, whereas if it is unfunded, it is dealt with differently, under section 16. Again, to approximate, if there is real money rather than deeming, then it is the provider who pays - for the obvious reason that there is a fund thereout of which to pay it - but if there is no real money, if it is unfunded, then special provision is made. The special provision is to say that the liability, instead of arising each year and having to be discharged each year - as is the general case - is accrued, together with interest, until the benefits begin to be payable.

GLEESON CJ: What if no benefit ever becomes payable?

MR NETTLE: Then it does not become payable. I am sorry, that is not meant to be glib. If a benefit does not become payable, then there is no liability to pay surcharge upon the superannuation provider under this section. Your Honour can see that, first, subsections (1), (2) and (3) provide for accruing the liability from year to year with interest; subsection (4) the imposition of interest; (5) is the rate; and then we in (6) get to the important part when it becomes payable. It becomes payable when the lump sum or the pension or annuity becomes payable and when it becomes so payable the surcharge is payable by the provider, not the member, the provider.

Again, if I may say so and I trust I am labouring the point, looking at the Act as it was before the constitutional amendments were made six months after its inception, the provisions were general and, in particular, when they applied to an unfunded defined benefits scheme of the kind which is dealt with in section 16, it was the provider - the provider not the member - that was liable to pay the surcharge. I labour the point, if I may say, Justice McHugh, because this goes to the discrimination argument. This is what demonstrates, when you come later to contrast it with the Constitutionally Protected Funds Act, the way in which members of constitutionally protected funds have been singled out and discriminated against in a way which is not repeated with any other taxpayer by imposing upon them, as opposed to their providers, the liability to pay the surcharge.

KIRBY J: The reason it could not be imposed on the provider was in this case the provider is the State and section 114 of the Constitution forbids it, is that right?

MR NETTLE: Your Honour, I do not want to squib the answer, but the answer is maybe, and I will need to spend a little more time later saying why it is maybe, rather than yes. The answer is that it may be, rather than it is, because obviously enough by reason of The Pay-roll Tax Case and The Second Fringe Benefits Tax Case in this Court, it has been decided that the Commonwealth can tax the State on things other than property.

KIRBY J: Yes, so long as it is done evenly on all employees and people in like positions.

MR NETTLE: Yes. I mean the view might have been taken, although it appears perhaps not have been taken, that the Commonwealth could quite easily have imposed upon the State the liability under section 16 to pay the surcharge in the way it imposed it upon private people.

GAUDRON J: Now, we are to assume, are we, that there are private sector unfunded defined benefit schemes?

MR NETTLE: Yes, you are. That is the fact. It is indubitably the fact. I think it is in the stated case somewhere but, in any event, it is the fact.

KIRBY J: There is no law of superannuation that forbids that because that was part of the problem with some of these large corporations that went under, was it not, that they had unfunded - - -

MR NETTLE: More than that, your Honour. In the happy days when it used to be thought desirable to retain employees rather than cycle them through every couple of years, it was one of the big incentives to have unfunded private defined benefit schemes. A man worked for 40 years and got a pension, and it was the employer that funded it, not contributions or anything else.

KIRBY J: Even a few woman worked for 40 years.

GAUDRON J: I do not think so.

MR NETTLE: Well, not in those days, your Honour. It is a long time ago. But in any event, the point is this, before section 7(4) goes into this Superannuation Contributions Tax Assessment Act, six months after its inception, this Act, according to its terms, apparently, applied to schemes of the kind of which the plaintiffs are members because those schemes, as defined, on one view appear to be unfunded defined benefits schemes.

They are unfunded because the State obviously does not make contributions to any fund from which to pay the pension and they are defined benefits - albeit that at another point of the case we contest this - because the amount is fixed by reference to salary, albeit that it is a salary of another judge, the one who continues rather than the one who retires.

GLEESON CJ: Now, I have a slight problem with that proposition because according to the definition in section 43:

An unfunded defined benefits superannuation scheme means a superannuation scheme that is declared by the regulations to be an unfunded benefits superannuation scheme.

So unless there was some regulation that declared a scheme to be of that character, it did not have that character, did it?

MR NETTLE: Your Honour, this is where I have to hand to you, if I may - the short answer is the Act has been amended since it was enacted. When it was first enacted it did not have that definition. It had one which would have included the judges.

GLEESON CJ: Do you mean by that that the document that we have behind tab 5 is a dangerous place to go looking for the terms of this legislation as at the time you are speaking?

MR NETTLE: At the time at which I am speaking, yes. What you have is two sets of the legislation, one at the time of the assessments and one currently. What you do not have is the time of enactment, that is to say, in June 1997.

GLEESON CJ: Well, when did the definition of "unfunded defined benefits superannuation scheme" come into section 43?

MR NETTLE: Your Honour, you can see that if you look to the piece of paper I have given you. Below the definition of "unfunded defined benefits scheme" as it is now, you will see that on the right-hand side, bottom right corner, originally it meant:

A defined benefits superannuation scheme under which all or some of the amounts that will be required for the payment of benefits are not paid into the fund -

That is the original starting point. Then move across to the left-hand side of the footnote, you will see that, "effective 5 June 1997" but by enactment made later. They changed that to read:

in respect of which no fund is established . . .

(b) or under which all or some of the . . . benefits are not paid -

So that it is only when this final definition is substituted by Act No 131 of 1999 that the position changes to one of being prescribed by regulation. As it was originally enacted, it was an "undefined benefits scheme", subject to the other considerations, because there was no fund.

GUMMOW J: Taking the primary definition as it was, how then did section 16 operate as to the exaction of the payment to the revenue?

MR NETTLE: In this way, your Honour: the calculation of the surcharge was dealt with under sections 8(3), (4) and (5) by reference to this actuarial business of accrued benefits. The surcharge was then accumulated from year to year in accordance with section 16 and then when the pension started to be payable, that is to say when the judge retired or died or whatever it might have been, section 16(6) provided that the provider, namely the Crown in right of the State, had to pay the surcharge.

GUMMOW J: Yes, hence the question as to the validity of that.

MR NETTLE: Perhaps.

GUMMOW J: Perhaps. Yes, I understand. So amendments were then made, which had the effect of substituting another taxpayer, in effect?

MR NETTLE: That is right - let you jump ahead, but you are right. Can I just complete the Chief Justice's question that the regulation to which the definition now refers is the Superannuation Contributions Tax Regulations. You will find them under tab 9 point 9 in the material and it includes the judges' schemes, plus a whole lot of others, for that matter, but it includes those.

HAYNE J: Those being regulations made in 2000 or 2001?

MR NETTLE: That is correct, yes. Now, having got to that point, it is submitted that before these amendments were made six months later, the logic of this Act, albeit difficult to discern, was apparent. It was apparent in this sense: one starts with the philosophy of the enactment which was referred to in the second reading speech, which the Chief Justice mentioned, at tab 20 of the materials, namely to redress what was perceived to be an imbalance of too much contributions being made and too many tax deductions being derived by high income earners. One provided that a surcharge should be imposed by reference to the contributions which were made or, if they were not made because it was unfunded - - -

GUMMOW J: Where are these regulations, Mr Nettle?

MR NETTLE: Tab 9 point 9, your Honour, in the materials.

KIRBY J: Is this the plaintiffs' material; 9 is the Judges' Pensions Act of New South Wales?

MR NETTLE: Thank you, yes, case stated; I have used the wrong book, your Honour, thank you very much.

GUMMOW J: Yes, that is why our tipstaves are flummoxed.

MR NETTLE: Volume 2, tab 9, point 9.

GUMMOW J: Well, it is a compilation.

HAYNE J: Those changes were made, I believe, by Superannuation Contributions Tax (Assessment and Collection) Amendment Regulations 2000, No 1 of 2000, Regulations No 149 of 2000.

MR NETTLE: Thank you, your Honour. Can I point out whilst we have now gone to this regulation something which might not be immediately obvious, and that is that it is not confined to constitutionally protected funds. It includes a whole lot of undefined benefits schemes which are not constitutionally protected funds. It does of course include constitutionally protected funds also.

GAUDRON J: Where are the private sector unfunded defined benefits schemes?

MR NETTLE: I do not believe that you will find any.

HAYNE J: Page 419, Part 2. It may be a side wind, but are the university funds there referred to properly regarded as private or public sector funds?

MR NETTLE: I do not know, your Honour. It is certainly not the sort of thing that I had in mind when I answered the question before and said that there are unfunded defined benefits schemes in the private sector. I had in mind large - - -

HAYNE J: Again, it may be an entire side wind, Mr Nettle, and if it is, ignore it, but it is not evident to me how under the superannuation industry supervision regime there can readily at least be private unfunded defined benefits scheme. But if it is a side wind, tell me and we will move away.

MR NETTLE: No, it is not a side wind but I think it goes in this way, your Honour. If one starts with the definition of "unfunded defined benefits scheme" as it was at the time of enactment, that is the hand-up, one can see it was adequate in its terms to embrace a private unfunded defined benefits scheme.

GAUDRON J: But whether it did so in fact you say we will find by looking at the stated case, or we are to assume it did, but when you look to the regulation, apart from the university - - -

MR NETTLE: I am sorry, you are quite right but there is another point before that. That may be right, your Honour, but the point is a writ as originally defined the words were a broad compass and thus arguably included privates. Now, by reason - - -

GAUDRON J: I am interested as of fact because it seems to me this may well be relevant to discriminatory operation.

MR NETTLE: I appreciate the point but the point is this - you are quite right, with great respect. To start with, they are dealt with as unfunded defined benefits scheme and thus they have the benefit of section 16, which means that the liability is accrued and does not become payable by the provider until the pension begins to be paid.

GAUDRON J: But it becomes payable by the provider.

MR NETTLE: By the provider. Now, by reason of the regulations and the change in the definition, the private schemes perhaps are no longer under funded defined benefits schemes and therefore the providers do not have the benefit of accruing under section 16 but must pay from year to year, but still it is the providers that must pay, not the members. Whichever way you come at it, it is the providers, not the members, just like fringe benefits tax.

GLEESON CJ: I think the existence of private unfunded defined benefits schemes is being doubted. You were going to give us an example of one. You said large corporations had schemes of this kind.

MR NETTLE: Yes, your Honour. Your Honour, I am not going to give evidence from the Bar table I hope but the point is these are not regulated schemes because they do not comply with the Superannuation Industry (Supervision) Act. But there are oil companies, without naming them, and large corporations that have in place still, albeit quaintly I suppose, promises, covenants, by the company to the servant that upon retirement he or she will be entitled to a certain defined benefit.

McHUGH J: We had cases from the Industrial Relations Tribunal concerning those schemes up here a few years ago. Industrial disputes arose in relation to them.

GAUDRON J: Am I right in thinking that if there are private ones still, and either get the benefit of concessional deductions and similarly do not have a surcharge impost now?

MR NETTLE: Yes. No, I am sorry, they will have a surcharge impost if they are the sorts of schemes in respect of which either contributions are made or which are unfunded schemes within the meaning of the definition.

GAUDRON J: Yes, but it is now defined by reference to named funds, is it not?

MR NETTLE: They will not be unfunded defined benefits schemes, your Honour is absolutely right, so in the case of an unfunded defined benefits scheme - - -

GAUDRON J: A private - - -?

MR NETTLE: Unfunded defined, they will not have the benefit of section 16, they will have to go into section 10. In the case of an unfunded undefined benefits scheme they will still be under section 10.

GAUDRON J: No, let us go back. They will not get the benefit of tax concessions for deductions.

MR NETTLE: Correct.

GUMMOW J: And that take them outside the Supervision structure.

MR NETTLE: Correct.

HAYNE J: And therefore they are not defined benefits super schemes.

MR NETTLE: Correct.

HAYNE J: Because they are not a regulated super fund.

MR NETTLE: Correct. They are not regulated.

GAUDRON J: And therefore, I am asking, does it follow that a private sector employee who is entitled to a pension from such a person - I do not use the word "fund" because it seems to me to be silly to say that - but who was entitled by way of contract or trust to receive a pension does not get surcharged?

MR NETTLE: Surcharged, correct.

GAUDRON J: All right, just there is no surcharge.

MR NETTLE: There is no surcharge.

GAUDRON J: There is no tax liability other than the ordinary Income Tax Act provisions?

MR NETTLE: Correct.

GLEESON CJ: Which fits in with the original purpose of this legislation.

MR NETTLE: Which it does, which was to cut down on the excesses of deductions either by employer or employee, under 82AAC or 82AAT.

GLEESON CJ: It was to claw back some tax benefits which are not relevant to arrangements of the kind just being mentioned.

MR NETTLE: Correct, because no deductions have been claimed, there has been no excesses, quite.

HAYNE J: But to cut to the end, the consequence is that - - -

MR NETTLE: To cut to the end it does not matter - member does not pay.

HAYNE J: But that those in respect of whom no tax benefit accrues, namely, the constitutionally protected funds, are treated in the same way as those for whom tax benefits are being accrued.

MR NETTLE: Yes.

GAUDRON J: And not in the same way as private sector employees for whom no tax benefits are available.

MR NETTLE: Your Honour Justice Gaudron is certainly right, with respect, but not in the same way as the sort of private employee of which you have just spoken. The Commonwealth will say against the plaintiffs' case that there is already equality as between people in the position of the plaintiffs and members of unfunded defined benefits schemes by reason that in the case of defined benefits schemes which are complying funds there are already tax concessions which are matched by a tax rebate upon the pension, whereas in the case of those who are outside that, such as the pension schemes, they pay full tax on their pension but there is no deduction.

HAYNE J: At the risk of undue simplification, the super regulations that we now encounter all ultimately hang off the tax power, do they not?

MR NETTLE: Yes, they do, your Honour.

GUMMOW J: We said that in Breckler, I think.

HAYNE J: And it is largely a system of carrot rather than carrot and stick, that there are benefits to be obtained by becoming a regulated fund.

MR NETTLE: Yes.

HAYNE J: The surcharge legislation, the general legislation with which we are presently looking, concerns two kinds of fund, public funds and regulated funds.

MR NETTLE: Yes.

HAYNE J: Some public funds may also be regulated, but public and regulated. If they are regulated, they are in the tax benefit structure.

MR NETTLE: Yes.

HAYNE J: But the public funds, unless regulated, are outside that tax benefit structure?

MR NETTLE: Essentially. Your Honour is one ahead of me in this. I was merely going to make the submission that as the Act stood before the addition of section 7(4) it made logic. It was logical. It did achieve the purpose as originally stated in the explanatory memorandum. It did claw back the benefits. More importantly, even from my point of view, it did not impose upon a member of an unfunded defined benefits scheme a liability to pay surcharge, either in respect of something which he or she never had and might never get or, indeed, at all.

KIRBY J: The Commonwealth's answer to that is that you are slipping into the mistake of having to distinguish between the receipt of the actual funds and the receipt of the entitlement.

MR NETTLE: Your Honour, in another place I would say, "How good is that?" I mean, how good is an entitlement which might end tomorrow notwithstanding that I have paid all of the surcharge?

GLEESON CJ: Why is it an entitlement? You have to live to become entitled to it.

MR NETTLE: Exactly, it accrues from day to day. But if that is to be classed as an entitlement, it is submitted it is not worth much. It is all very well to say that I have an accrued right to receive a pension whilst I continue to live, but it is not worth any longer than I continue to live.

KIRBY J: But in most cases it will be a significant entitlement.

MR NETTLE: Not necessarily - - -

KIRBY J: Not necessarily but - - -

MR NETTLE: - - - or, indeed, if I may say so, necessarily more than equal the times, that it will not be as much as the surcharge. If you look to the calculations which are annexed, particularly in the tables, indeed, to the cases stated, you can see how the liability goes up. So that, for example, in the case of the first plaintiff a liability of something in excess of $500,000 is due to be paid on, if not day 1, then day 90 after pension begins to be payable. If he drops on day 100, he has not had much pension to satisfy the obligation.

KIRBY J: Well, one can see the arguable unfairness of this but many taxes are unfair.

MR NETTLE: Certainly, but not in a way in which they are not unfair to everybody or at least the general stream with which one is dealing with the subject of taxation. It is only this Act that singles out and discriminates against the members of the constitutionally protected funds in a way in which it does not against any other relevantly affected by this class of legislation. Therein, it is submitted, lies the vice. It singles them out and makes them pay, as opposed to the provider, in a way that it does not do for any other affected taxpayer.

KIRBY J: And who are the constitutionally protected persons? They are the governors, the Governor-General, and the judges.

MR NETTLE: Judges.

KIRBY J: That is all.

MR NETTLE: There are a couple of other odds and sods, your Honour - - -

GAUDRON J: Solicitors-General, I think.

MR NETTLE: I am sorry. I do not put those in odds and sods.

GUMMOW J: Anyhow, for present purposes, you say, they are the State, for the purposes of the Melbourne Corporation doctrine.

MR NETTLE: I do.

GLEESON CJ: Mr Nettle - - -

MR NETTLE: And indeed, it is conceded, Justice Gummow. It is conceded that it is an agency of the State.

GUMMOW J: It is not an agency, it is an essential element of it.

GLEESON CJ: Is that expression, "constitutionally protected", defined or - - -

MR NETTLE: It is, your Honour, and I have to come to it because this is the construction question. I have taken a long time to get here, I am sorry. Having now - - -

GUMMOW J: You have been very quick, actually.

MR NETTLE: Having now seen the way in which the Act stood, as it came into force on 5 June 1997, and remembering that as it so came into force there was no attempt to tax the property of the State. On the contrary, it was expressly provided in section 9 of the Imposition Act that it would not impose a tax on the property of any State.

GUMMOW J: Just stopping there for a minute, part of the problem is that it seems that whoever is behind the advising in all of this had 114 in mind, as a threat, but they did not think about the Melbourne Corporation doctrine, which is a wider principle - perhaps of which 114 is a particular species of a genus - and that has given rise to this problem.

MR NETTLE: I understand.

GUMMOW J: That seems to be what is going on.

MR NETTLE: Your Honour, that is the interesting part of the case, if I may say so, but - - -

GUMMOW J: Yes, that is right. They may have been over-anxious about 114.

MR NETTLE: I still have the foothills to cover before I get there.

GUMMOW J: Yes.

MR NETTLE: Can I come to the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act. Your Honours have it in tab 3 of the materials. That is the ring binders. Can I also ask your Honours to have in front of you tab 21 of the grey binders, the plaintiffs' materials, which contains the second reading speech for the introduction of this Act. A list of really labouring things - and I wish to endeavour to make a point which really only dawned on me fairly lately in the preparation of the case, and that is that because of section 9 of the Imposition Act, there was no problem, if it is to be so described, with section 114.

The regime as enacted in June 1997 could not contravene section 114, because section 9 of the Imposition Act expressly prohibited it from doing so. There was not the possibility of a contravention of 114, because section 9 stopped it. Now, can we turn to the explanatory memorandum which, it is submitted, is to be understood against that background. Not that it was feared that the Act as enacted might contravene 114, on the contrary, but because it was known that the Act as enacted could not bring in certain funds constituting the property of the State, to which section 114 would apply, it was necessary to make separate and different provision for members of those funds.

Putting it shortly, your Honours, what was being sought to be done was to deal with members of funds - that is, real funds - to the application of which surcharge would have constituted a contravention of section 114. The judges' pension schemes are not schemes with real funds to the application of which surcharge might have attracted section 114. They could perfectly happily, on one view of the matter, continue to be dealt with under the Superannuation Contributions Tax (Assessment and Collection) Act, by requiring the provider, namely, the State, to pay the surcharge, without contravention of section 114.

It was not necessary to enact the Constitutionally Protected Funds Act, nor, is it submitted, was it perceived to be necessary to enact it in order to get into the net judges and other such entities like Solicitors-General. On the contrary, the purpose of enacting the Constitutionally Protected Funds Act was to get into the net and get into the net only those schemes for which there were real funds to the application of which surcharge would have contravened 114, as in the South Australian Superannuation Trust Case of 1992.

KIRBY J: But that would, in the words of the parliamentary secretary, leave a number of high income persons in the country not contributing equitably with other high income persons across the board.

MR NETTLE: Doubtless, but is not the judges who are in that class because their - - -

McHUGH J: I was going to say why do you accept that because they were not getting any taxation deduction.

MR NETTLE: No, I agree, with respect. The point is I am trying to deal with his Honour's question about the words. The words are directed to people who are getting lots of things and not bearing their fair share.

GUMMOW J: That is said to be the equity.

MR NETTLE: That is said to be the equity but, more importantly - if one is allowed to look this closely at the words, at the top of page 9124 in that first incomplete paragraph, second sentence:

The legislation cannot apply to certain state superannuation funds because they are protected from revenue measures under the constitution.

"State superannuation funds because they are protected". What is protected undoubtedly are funds of the kind of which the South Australian State Superannuation Trust was one, dealt with by this Court, where there are real funds which are the property of the Crown set aside in a fund. That is what attracts 114, but imposing upon a State of itself a liability to pay a tax with respect to some sort of benefit paid to employees or people in pari materia is not imposing a tax on the property of the State. It was so held by this Court in the South Australian Superannuation Trust Case, hence the income was held to be not such as to attract 114.

So it is submitted that the proper view to take of the purpose which was sought to be achieved by this enactment was not to drag into the Superannuation Constitutionally Protected Funds Act judges and other such people, but on the contrary to drag in and drag in only funds which by reason of section 9 of the Imposition Act were at the time outside the net because they had real funds which were property of the State which section 114 guarded.

KIRBY J: That is hard to reconcile with the speech of the Minister.

MR NETTLE: On the contrary, your Honour, it is submitted not. I hope I am not making a virtual necessity, but - - -

KIRBY J: As I understand what the - they may have been wrong and they may have made a mistake.

MR NETTLE: It is a possibility, although it is pretty hard, if I may say so in my respectful submission, to think that the Crown in right of the Commonwealth made a mistake about its ability to impose tax upon a State. It had twice tested it in this Court with the payroll tax back in 1970 and fringe benefits in the 1990s and twice it had got the answer it was looking for, namely that it could. So it is, with respect, although possible, difficult to accept that the Commonwealth believed that it could not if it wished continue to impose surcharge upon the States under section 16 of the Assessment Act. With great respect, I accept what you say. It does, for a few other reasons, look like there might have been a mistake maybe.

KIRBY J: It is hard then to see why such an apparently inequitable tax would be introduced if it did not have to be.

MR NETTLE: If my view of the matter is correct, that is to say the one I submit to your Honours, that all that was being sought to be done here was to bring into the net funds which were protected by 114, it squares with the equity, because those that were not funds within 114, like the judges' schemes, were already in the net and being dealt with under the Assessment Act, section 16, by imposing the liability on the provider, as is the case with privates. What was left outside were the few sorts of State funds that had real funds set aside and, therefore, because they were real funds to which section 114 might apply, were protected from the net by section 9 of the Imposition Act.

What the Minister seems to be saying, with respect, is that, "We intend now to bring into the net what has so far been kept outside it." That is to say, funds which are real funds to which 114 applies. Not things which are not real funds, which are already dealt with under the Assessment Act in section 16, because they are already being dealt with equitably for the benefit of all Australians or whatever it is that was said to be informing the whole thing.

Can I turn then, your Honours, to tab 5 of the materials, to the Constitutionally Protected Funds Act - - -

GUMMOW J: The Assessment Act?

MR NETTLE: I am sorry, tab 3, thank you.

GUMMOW J: The Assessment rather than the Imposition.

MR NETTLE: Yes, thank you. I would ask your Honours to go first to section 5, "Object of Act". This is to be read together and at one with section 7(4) of the Contributions Tax Assessment Act to which I took you earlier, which was introduced at the same time, and said that no longer will the Assessment Act apply to what are termed constitutionally protected funds; they will now be dealt with separately and differently under the Constitutionally Protected Funds Act.

"Constitutionally protected fund" is defined in section 38 of the Constitutionally Protected Funds Act as having the same meaning that it does in Part IX of the Assessment Act. One's heart sinks, but it is not as bad as that. You have Part IX of the Assessment Act at tabs 6 and 7 - tab 6 will suffice. If your Honours would be kind enough to go to that, you will see in it, at section 267, the definition of "constitutionally protected fund" as being one as prescribed by regulations. You have the regulations in the case stated book at volume 2 at page 384, which is behind tab 9.6. Your Honours, here comes the essence of our principal argument upon construction. Section 267 defines "constitutionally protected fund" in terms of what is prescribed. Regulation 177, which you have at case stated book page 384 behind tab 9.6, states, and it is important to read the words in paragraph (a):

a fund of the kind to which, in the absence of section 271A of the Act, Part IX of the Act would apply -

Do not bother about the rest, I mean, it is obvious. It is important to note that it must be, to come within the definition, a fund of the kind to which, in the absence of section 271A, Part IX would have applied.

The question is obviously, therefore, what are funds of a kind to which Part IX would have applied but for section 271A? I will come back to that in just a moment but whilst I have the legislation open, can I briefly contrast the treatment afforded to members under the Constitutionally Protected Funds Act with the treatment which you have seen afforded to members under the Assessment Act.

Sticking with the Constitutionally Protected Funds Act, could I ask your Honours to go next, please, to section 8 which is equivalent in essential respects to section 7 of the Assessment Act, "surcharge is payable" on the surchargeable contributions but no surcharge is payable, section 8(2), unless income exceeds the surcharge threshold.

Next to section 9, where the calculation of benefits is dealt with. First, in section 9(2) with members of funds other than defined benefits funds and just like section 8(2) of the Assessment Act, the surcharge is calculated on actual contributions or "contributed amounts" as they are called of the kind which, roughly speaking, no more than that, almost wholly speaking attract tax benefits under 82AAC or 82AAT.

Next to members of defined benefits in section 9(4) which equates to section 8(3) of the Assessment Act. The methodology is set out in section 9(5). It is again a fiction or a deeming or a supposition based upon actuarial value of the kind which is prescribed by regulation which is the, as you have seen, methodology set out in SCR 71. What it does, broadly speaking, just as it does in the case of defined benefits members under the Assessment Act, is to make an actuarial supposition as to the rate at which pension accrues and as to the sorts of contributions which would have to be made by an employer into a fund, if there were one, to pay it and to work out by actuarial techniques, complex and varied, the amount of money which would represent the actuarial value of those calculations and then to apply to it a formula to work out the notional surchargeable contributions.

KIRBY J: Now, you say actuarial techniques are varied. Is - - -

MR NETTLE: I am going to come to it, your Honour, in considerable detail. The methodology is laid down by SCR 71.

KIRBY J: Yes.

MR NETTLE: That methodology requires the registered actuary or qualified actuary to act in accordance with standards or precepts which are set and about which there could be no complaint. The difficulty is that even one doing his best or her best, acting in accordance with those standards, is given wide latitude to make assumptions and suppositions which is the material show result in considerable differences between the two plaintiffs and thus, no doubt, between any two for a whole lot of reasons and that is - - -

GLEESON CJ: Mr Nettle, where does interest come into it?

MR NETTLE: Interest?

GLEESON CJ: Interest.

MR NETTLE: Interest, because with defined benefits members under the Constitutionally Protected Funds Act the position is just the same as it is for unfunded defined benefits members under the Assessment Act, that is to say, the liability may be accumulated until pension becomes payable and as it accumulates, it attracts interest at the rate prescribed. So that, putting it shortly, your Honour, in the case of a member of a constitutionally protected fund, there will in each year be made by the Commissioner of Taxation an assessment of his or her surchargeable contributions in accordance with this methodology but by reason of the provisions I am about to take you to, that liability, although then a debt due, can be deferred as to time of payment until the member of the constitutionally protected fund begins to receive pension and as it is deferred, it attracts interest so that it builds up and builds up and builds up and thus, as you have seen in the case for example of the first plaintiff, it is in excess of $500,000 by day one of pensionable age.

GLEESON CJ: And it could not find any reference in section 6 to the matter of interest?

MR NETTLE: No, that comes later. I am about to go to the next section, if I may, just to complete it. Section 14 is the assessment. Section 15 provides that when it becomes payable. Section 15 is the deferment. Section 15(4) provides for the debiting of interest.

KIRBY J: Is the scope of variance in actuarial value reduced by a provision such as section 9(6) that allows the Minister to fix a method? I see in the material that you have given us that it apparently has not?

MR NETTLE: No, he has not. What he has done is - I suppose the answer is theoretically that is possible. As matters stand, the Commissioner of Taxation has recommended in his ruling, SCR 71, a methodology, and that has been enshrined in regulation. Until and unless that is changed by edict it will continue to produce the difficulties for which we contend.

In fairness, it must be said, that they are arrested in part by the fact that there is a cap upon surchargeable contributions of 15 per cent of what is called the employer's contribution, but that in turn is an actuarial calculated conception which gives rise again to a repetition of all the variances of the kind of which I have spoken. In dollar terms it is minimised, but in terms of variances arising between different taxpayers because of different actuaries, making different assumptions, the scope is unlimited.

KIRBY J: Well, it is not unlimited, but it is within a very large potential variance?

MR NETTLE: Yes. You have had the materials. I will take you again to them. In the case stated there is set out the assumptions about which actuaries are permitted to decide in accordance with the methodology laid down in SCR 71 and yet within those there is, we would contend, wide variances of the kind which are shown between decrement rates, assumptions about how long one's spouse lives, assumptions about how much older than one is one's spouse or partner is, and all of the other things which go into actuarial calculations to determine actuarially the supposed value of a benefit yet to be derived and which may never be derived.

KIRBY J: Is this a feature of tax legislation? I have not seen it before, but is "actuarial value" something that has slipped into tax legislation, or is it unique to this?

MR NETTLE: I do not know that it has slipped into tax legislation, your Honour. I think it would be fair to say that it is something which is at the root of superannuation as such. Actuaries all the time are, of course, making actuarial calculations of the kind here in accordance with the same methods to determine how much contribution the employer should put into the fund each year; how much it needs to be topped up each year to make sure that there is enough there at the end of the day. Just like an insurance company actuary calculates the reserves, or should each year, to make sure there is enough there at the end of the day.

It cannot be said that the methodologies which are prescribed are essentially, if at all, any different to those which are used by private actuaries to calculate the sorts of contributions which private employers ought make into real funds to provide for superannuation. They are just the same. But that is not to gainsay that they are still capable of, and do, produce significant variances which do become important when they inform the way in which one is to be taxed as opposed to the way in which a fund is to be filled up to provide for a benefit at the end of the day.

GLEESON CJ: Are they not relevant to calculations of reasonable retirement benefit limits that attract concessional tax treatment?

MR NETTLE: Yes, they do. He uses actuarial methodology of just that, which, of course, is the essence of superannuation. I had taken your Honours to section 15 to show that in the case of defined benefits schemes which are constitutionally protected schemes the liability exists but the time for payment is deferred until the pension begins.

GUMMOW J: What is this notion of surcharge? It seems some Orwellian fantasy.

MR NETTLE: It is political speak to, I suppose, fit with the conception which originally informed this, that because there were high income earners out there deriving significant tax deductions for contributions which were made into funds which were questionable, they should be surcharged by having imposed upon them a tax liability in addition to their ordinary income tax liability.

GLEESON CJ: Another form of political speak is equity. Some people take the view there is no equity in the - - -

MR NETTLE: It is different - - -

KIRBY J: But the marginal rate of taxation is a form of surcharge. It is not at all unusual in our country to have higher rates of taxation on high income earning people.

MR NETTLE: Your Honour is quite right, with respect. It is not inapt to describe it as a surcharge in that sense. It is an extra liability with which one is loaded.

GUMMOW J: But is it a tax?

GAUDRON J: Yes. What we have to decide is if it is a tax at the end of the day.

GUMMOW J: And whether there is more than one subject of taxation.

GAUDRON J: It not having been called a tax, I suppose gets your big toe in the door.

MR NETTLE: That sounds good to me, if I may say so, your Honour.

GAUDRON J: I do not think it takes you past your big toe, Mr Nettle.

HAYNE J: But it is a very big big toe is it, Mr Nettle?

MR NETTLE: I had taken you to section 15 but I had passed too quickly over sections 11 and 12. Section 11 is critical because it imposes the liability to pay surcharge on the member in contradistinction to the case of those who are not constitutionally protected, where, as you have seen, the liability is imposed upon the provider.

GAUDRON J: Are there constitutionally protected funds that apply in the federal sphere?

MR NETTLE: No. The answer is no, but what there is is a Superannuation Contributions Tax (Application to the Commonwealth) Act which makes the Act apply to Commonwealth superannuation schemes mutatis mutandis in the way in which it applies to those which might be regarded as being constitutionally protected.

GAUDRON J: But at the end of the day the member of the Commonwealth arrangement, I take it, is not left with a tax burden.

MR NETTLE: It works in this way, your Honour - the answer is yes and no. It works this way. Under, as I showed you, the Contributions Tax Assessment Act, unfunded defined benefit member schemes have the liability to pay the surcharge deferred until pension began. Even then, however, it was payable by the provider, not by the member.

GAUDRON J: Yes.

MR NETTLE: What the application to the Commonwealth Act does is make that regime apply to Commonwealth funds.

GAUDRON J: Exactly.

MR NETTLE: With the consequence that it is the Commonwealth as the provider that must pay the surcharge.

GAUDRON J: It has ways of adjusting for it, but I am right in thinking, am I not, that the impact on Chapter III judges pursuant to the Pensions Act provisions applicable to them is different from the impact on State judges?

MR NETTLE: Yes, it is, unquestionably, both at law and in fact.

GAUDRON J: Exactly.

GLEESON CJ: And principally manifests itself in the fact that Chapter III judges do not incur this lump sum liability.

MR NETTLE: Correct.

GLEESON CJ: They just get their pensions reduced.

MR NETTLE: Their pensions reduced. Because their provider, the Commonwealth, pays the surcharge - to itself, of course, but pays it - and then actuarially passes on what is thought to be or said to be the benefit of that surcharge having been paid through to the judge in the form of a reduced pension under the Commonwealth Judges' Pensions Act.

GLEESON CJ: Am I right in thinking that if a Chapter III judge gets run over by a bus the week after the pension became payable - - -

MR NETTLE: It stops.

GLEESON CJ: - - - everybody calls it quits?

MR NETTLE: Yes, they do.

GLEESON CJ: Whereas if one of the constitutionally protected State judges - - -

MR NETTLE: His estate is liable.

GLEESON CJ: - - - gets run over by a bus, his estate is liable for $500,000, in the case of the first plaintiff, or whatever the case may be.

MR NETTLE: That is correct. Now, all of what your Honour says is absolutely correct, with respect, but I should say, because no doubt it will be said against me if I do not, that the position has been largely addressed, as they say, by the passage of legislation in various States which permits some judges - not yet all, but some judges - to commute their State pension rights to a lump sum in an amount necessary to discharge the surcharge liability. Under that legislation, clearly in Victoria, less clearly in New South Wales, there will be passed on in the form of a reduced pension the burden of that to the judge. I need to come to that and deal with it a bit later, but it still does not afford to people in the position of the plaintiffs the same benefit, if it can be so described laughingly, as befalls the Federal Court judge because the tax which is imposed upon the State judge is imposed regardless and sublimely unconcerned about whether there are any commutation rights in existence.

McHUGH J: But the fact that that legislation has been passed strengthens your argument, does it not, on the Melbourne Corporation point because - - -

MR NETTLE: Clearly. You have to do it to get the judges - - -

McHUGH J: - - -the effect of this is it has forced the States to make these capital payments, these commutation payments.

MR NETTLE: As was said when that legislation was passed, you were not getting the people who it was sought to get lining up to do the job, faced with a $500,00 liability present-day money on day 1 of your pension.

GLEESON CJ: That is a very notional form of commutation, is it not?

MR NETTLE: Of course it is.

KIRBY J: People have still accepted judicial appointments in the State since this legislation came into force. Let us not get too carried away.

MR NETTLE: .....the first plaintiff, your Honour.

GAUDRON J: On the other hand, there seem to be a lot of part-time judges that have come into the State since then.

GLEESON CJ: We know the ones who have accepted and we do not know the ones who have not accepted.

MR NETTLE: Correct, your Honour.

GUMMOW J: Anyway, I do not think that is really the substance of Justice McHugh's point, is it? The State has been forced itself to make a payment and for practical necessity has made it a State fund.

MR NETTLE: It is a living example of those contentions we put in the written argument about what it is that is to be concluded about the effect upon the States of this imposition.

GUMMOW J: Yes.

MR NETTLE: The point is 16(6) of the Assessment Act makes the superannuation provider liable to meet the surcharge once pension begins, whereas under the Constitutionally Protected Funds Act, and under it alone, it is the member who is made liable to pay the surcharge once the pension starts to become payable.

Can I come then, after looking at that, to the question of construction. I pose it in this way. Given that section 15 of the Constitutionally Protected Funds Act appears to have this effect of imposing upon members of constitutionally protected funds this liability, are the first and second plaintiffs members of constitutionally protected funds? The answer to that question is to be decided by a reference to section 267 of the Income Tax Assessment Act and Regulation 177, that is to say were the schemes of which the two plaintiffs were and are members schemes to which Part IX of the Income Tax Assessment Act would have applied but for the passage of section 271A?

GAUDRON J: But does not Regulation 177 name the Judges' Pensions Act as a scheme - - -

MR NETTLE: It does do that. It does not quite do it in the way that you said. What it says is those funds which are listed in the Schedule 14 to which Part IX would have applied in the absence of section 271A. I emphasise the word. It has to be a fund of the kind to which in the absence of 271A Part IX would have applied and then of the kind which is listed. There are two conditions to be satisfied. It must be a fund established under a State Act of the kind which is specified but, more importantly and at an anterior point, it must be a fund of a kind to which Part IX would have applied in the absence of 271A. One can see because it is obvious that there is listed in the regulation the Acts which govern the schemes of the two plaintiffs.

GAUDRON J: So this is the only one of New South Wales.

MR NETTLE: The Judges' Pensions Act of New South Wales and the Supreme Court Act in the case of Victoria.

GAUDRON J: There are other officers affected in other States?

MR NETTLE: Yes, there are.

KIRBY J: Were already serving masters in New South Wales treated as serving judges for the purpose of the Federal legislation?

MR NETTLE: I do not know the answer to that but I think the answer is no. I think all masters certainly in Victoria and I think elsewhere too - I do know. Masters were not treated as being judges because it was said they were not judges. The only exceptions I think were in South Australia where they have the status of a judge.

KIRBY J: They are called judges.

MR NETTLE: Yes.

KIRBY J: Even though by the State Act they are members of the court. I think that is the position in some States, that masters are members of the court.

MR NETTLE: Masters are members of the courts in both New South Wales. New South Wales, as your Honour knows, and in Victoria also.

GLEESON CJ: One of the problems is that the role of masters varies considerably as between various States.

MR NETTLE: Yes, it has. Even in the last 25 years it has changed beyond conception. Can I come back to the point, your Honours. There is no doubt that we are listed in the Acts to which reference is made but we are not, it is submitted, clearly not, indeed incontrovertibly not, funds of the kind to which Part IX of the Income Tax Assessment Act 1986 would have applied but for the passage of section 271A of the Income Tax Assessment Act.

GUMMOW J: Mr Nettle, I am getting lost, which is not a good thing. Regulation 177 is at page 384 of the materials.

MR NETTLE: May I restate the proposition, your Honour.

GUMMOW J: .....is a tax regulation made under 267 which defines "constitutionally protected fund" in terms of the regulations. How do we get from reg 177 into the New South Wales and Victorian judges' pensions legislation?

MR NETTLE: In this way. You see two conditions need to be satisfied: (a) it must be a fund of the kind about which I have been speaking; and (b) it must be a fund of a kind established under one of the Acts specified in Schedule 14. You will find Schedule 14 under the next tab, 9.7, at page 387, then you will see New South Wales Judges' Pensions Act and Victoria, last Act, 211, Supreme Court Act.

GUMMOW J: What is that? What is it that appears? That is another income tax regulation, is it?

MR NETTLE: What you have in front of you - no, I am sorry, that is the schedule to the regulations, Schedule 14.

GUMMOW J: Yes, thank you.

MR NETTLE: Clearly these two Acts, the New South Wales Judges' Pensions Act 1953 and the Victorian Supreme Court Act, are Acts which are listed in Schedule 14 to the regulations but neither of them is a fund of the kind to which in the absence of 271A Part IX would have applied. The first reason is that neither of them is a fund.

McHUGH J: Just before you go on, can I just go back. In determining what is the notional superannuation contribution component, do you take into account death benefits?

MR NETTLE: Yes.

McHUGH J: How does that work out in the case of somebody who, is say, a judge who is a bachelor?

MR NETTLE: Well, he misses out; that is one of the points. I mean, take a judge who is a bachelor: he gets the average, assuming that he has a wife of so many years younger and children, or whatever it is, so many years younger and he has a life expectancy which is the same, and his surcharges are worked out by reference to these actuarial calculations according to that average, when, in fact, he does not have all those benefits because he has got no defendants and no one will come along and pick these things up. So, again, it informs - and it is one of the things, as your Honours no doubt have seen in our case stated, which are listed as being considerations which make this arbitrary and capricious.

GLEESON CJ: Well, on the same basis, of course, it distinguishes between judges who are healthy and judges who are not healthy.

MR NETTLE: It does, and between males and females and all sorts of things. Granted, concessions are made for the life expectancy of women as opposed to men, because it is assumed that they will live longer, a little bit, but all sorts of weird and wonderful assumptions are made about how old their spouse is, and other such things, which appear, on one view, to bear very little relationship to the reality or the experience of judges. These are listed and later on this afternoon, if there is time, I will take your Honours to them.

GLEESON CJ: Just something that is prompted by your remark then, Mr Nettle, I hope that counsel will be able to agree between themselves on a division of time, bearing in mind though that Mr Nettle has had the obligation of taking us through the details of the legislation.

MR NETTLE: Your Honours, it would overstate it to say that there is an agreement but the arrangement, which I propounded and which the others graciously accepted, was that I would go the whole of today, except for an hour, at which point the interveners would begin and they would conclude shortly tomorrow morning, to be followed by my learned friend, the Solicitor-General for the Commonwealth for the better part of tomorrow.

GLEESON CJ: Thank you.

HAYNE J: It seems to assume Mr Bennett has a long way to catch up if he is going to have all that time. Anyway, go on.

MR NETTLE: Your Honours, the argument which I am about to attempt to present is dealt with in writing in paragraphs 25 through to 60 of our written argument. Can I start, however, with reference to Mr Justice Windeyer's decision in Scott v Commissioner of Taxation [1966] HCA 58; (1966) 40 ALJR 264 as to the meaning of a fund, because it tells one, as one would expect, that a fund is something which is set aside and a part into which moneys are put. The passage is at page 278. It begins in the conclusion section, left-hand column under the subheading "Appeals by Associated Provident Funds Pty Ltd". If I jump to the next paragraph, which is the last paragraph in that left column:

There is no definition in the Act of a superannuation fund. The meaning of the term must therefore depend upon ordinary usage, the attributes of a thing thus denominated being those which things ordinarily so described have.

The last couple of lines of that column read on and then, if I can go to just above line C in the next column:

In this connection "fund", I take it, ordinarily means money . . . set aside and invested, the surplus income therefrom being capitalised.

A little bit further down at D:

But in the sense that the word has in the Act contributions to a superannuation fund may I think will be made by one hand, that of the employer.

At E:

I think it could be, but however the fund be established, what section 23(j) -

note -

exempts from tax is the income of the fund. This I consider postulates a fund invested and yielding income.

Which is the essence, of course, of Part IX of the Income Tax Assessment Act, which was directed to the taxation of income derived by funds, that is to say, real funds where there was money set aside earning income.

Lastly, your Honours, in the paragraph just below F:

A superannuation fund for employees may, I take it, be said to be "established" when property composing the fund is set aside and subjected to the appropriate trusts.

Not surprising, but authoritative exposition. Two things, if I may. That conception of "fund" is exactly the same conception of fund as appears to have been employed when the Superannuation Contributions Tax (Assessment and Collection) Act was first enacted. That Act drew a clear distinction between superannuation schemes of which there was a fund and superannuation schemes for which there was not.

One need go no further than - although it can be found elsewhere - the definition of "unfunded defined benefits superannuation scheme", which I handed up to your Honours in the single photocopy this morning, which shows that, as first enacted, the definition of an "unfunded defined benefits scheme" was a scheme "in respect of which no fund is established". Obviously, it is submitted, with respect, the established fund to which reference is there being made is a fund set aside and apart for the earning of income of the kind to which Mr Justice Windeyer referred.

HAYNE J: Why should one begin the construction of Regulation 177(a) according to general conceptions, rather than beginning in Part IX of the Act?

MR NETTLE: With respect, your Honour is correct, but the point is this. Part IX of the Act, like section 23(j), to which Mr Justice Windeyer made reference, is concerned with the taxation of the income of superannuation funds. The submission - - -

HAYNE J: Well, its heading in print 10, is, "Taxation of Superannuation Business - - -

MR NETTLE: It is.

HAYNE J: - - - and Related Business".

MR NETTLE: But it is taxation of income, and income comes from nowhere but from funds. It does not come out of undefined benefits schemes, which are no more than a promise by the Crown to a judge or some other such person that they will pay some money at the end of the day. Part IX of the Income Tax Assessment Act only applied, was designed only to apply, and, according to its terms, could only ever apply, to funds which were compositionally - that is to say, by reference to their constituent documents - of a class which were capable of generating income.

GAUDRON J: But you are, nonetheless, looking at the words, "a fund" - - -

MR NETTLE: I am.

GAUDRON J: - - - in Reg 177.

MR NETTLE: I am, your Honour. I do jump ahead by going to the authority before I go to the words, granted, but I do so because I went too quickly. Part IX is concerned with the taxation of income derived from funds. Section 23(j) is concerned with exactly the same thing. Mr Justice Windeyer thought that because there is no definition of "fund", where it is referred to, it is appropriate to use the ordinary conception of the word, and it is submitted that is, with great respect, not only right but clearly applicable here, because here, in Part IX, we are dealing with the same area of exigency. We are dealing with the taxation of income derived. It is no more to be supposed that Part IX was directed at a scheme from which income could not be derived than it is to be supposed it was directed at me.

GLEESON CJ: Well, these were commonly called unfunded liabilities.

MR NETTLE: Correct.

HAYNE J: Part IX, on this understanding, hinges about section 278, bringing trustees of complying super funds, making them liable to tax, and 286, trustees of non-complying super funds being liable to pay tax. Those are the two provisions which you, on your contention, put forward as the two fulcrums about which Part IX moves.

MR NETTLE: They are, your Honour. Can I perhaps put it slightly more systematically, but thank you, by starting at section 270.

GLEESON CJ: Do we have this in our materials?

MR NETTLE: Tab 6 of the book of materials, if your Honours please. Section 270:

A reference in this Part to a fund or unit trust includes a reference to a fund or unit trust established by . . . a law of the Commonwealth.

So at that point, it is submitted, one can start injecting what was said by Mr Justice Windeyer, "What is a fund, undefined? It is a fund in which something is set aside and apart." Secondly, to section 271A, granted it went in later, but it is relevant to note it at this point:

Income derived by a constitutionally protected fund is exempt from tax.

Here is the sort of fund which was dealt with by section 9 of the Superannuation Contributions Tax Imposition Act, that is to say, a constitutionally protected fund for which there was a real fund generating real income as opposed to the unfunded schemes which are said now to have been brought in under the Constitutionally Protected Funds Act.

GUMMOW J: That would be true of unit trusts as well?

MR NETTLE: It would.

GUMMOW J: But we have to go to Division 6C, do we not, of Part III? In other words, there is a further definition of unit trust, but there is not one of fund.

MR NETTLE: Correct. Moreover, you do not have there again the Act as it was at the time that section 271A was enacted. Can I give to your Honours some photocopies, please? Your Honours have a bundle there clipped together. The first part I will come back to, which is the ETP provisions; the second part is the rebate, which I will come back to, and the last in there is Part IX of the Taxation of Superannuation Business, which is taken from the 2000 CCH legislation, but hopefully has under it what the enactment used to be at the time at which 271A was enacted.

Could I ask Your Honours to go in that first to section 271(1) which, like Part IX of the Imposition Act, saved the income of funds with the property of the Crown for fear of contravening section 114. Now, you will see in that print that subsection (2) has been omitted - and here comes the important part - which fits back together with why it is that one needs to concentrate so much upon the opening words of Regulation 177, upon a fund to which Part IX would have applied but for 271A. Your Honours will see that in the old section 271(2). It used to be provided that:

For the purposes of this Part, a fund is a constitutionally protected fund in relation to a year of income if . . . any -

note "any" -

applies to the fund in relation to any tax in relation to the year of income.

Now, it could only be as it used to be a constitutionally protected fund if, but for its existence, section 271(1) would have applied to any of its income during the relevant year of income. It follows that, in order to come within the old section 271(2), it had to be a fund which was capable of and indeed did - but I put that aside - had to be a fund which was capable of generating income. For if it were not, it could not be one to which section 271(1) would have applied.

Now, could I ask your Honours to turn to the second of those sets of photocopies to the provisions, Division 2AA, beginning with section 27A and go in the first place to the definition of "complying superannuation fund" which you will see on the second page has the same meaning as in Part IX. If you look back at the Part IX I handed up to you in photocopy at page 574 - that is the one we have just been looking at, second page of the photocopy - you will see that "complying superannuation fund" is defined about halfway down the page as having "the meaning given by section 45 of the" Superannuation Industry (Supervision) Act, but that it used to have a different meaning which you can see set out below, it:

means a fund in respect of which:

(a) the Insurance and Superannuation Commissioner has given a notice -

much the same thing but under the old regimes.

The point about this is, and it joins with one made by, I think with respect, the Chief Justice a little earlier, what these provisions are directed to are complying superannuation funds which, because they comply, amongst other things, are given concessional tax treatment upon their income and in respect of deductions, income and deductions. That is to say, it is a set of provisions Part IX about funds which are constitutionally - lower case "c" - capable of generating income.

GUMMOW J: Now, your argument would be cured by a new regulation, would it not?

MR NETTLE: No, because then the Commonwealth would run slap into the same difficulty which it faces on the second argument; that it would then be effectively, as a opposed to now ineffectively, singling out members of constitutionally protected funds and discriminating against them in a way which is unconstitutional. So, whilst the second question does not have to be answered, if the first is answered affirmatively, it would be highly desirable if it were nonetheless referred to.

GLEESON CJ: There is another question, however, is there not, about that regulation, 177?

MR NETTLE: Yes, your Honour.

GLEESON CJ: That is that it plainly assumes that the fund with which we are concerned is a fund of the kind?

MR NETTLE: No, with respect, not. What it does is assume that if it is a fund which is of the kind that generates income, that is established under one of those listed acts, then it will go outside Part IX.

McHUGH J: It has to be established.

MR NETTLE: It has to be established by it.

McHUGH J: Yes.

MR NETTLE: Now, the form could change from time to time. I think there is, indeed, one State superannuation judge's scheme that has a it of funding in it.

HAYNE J: Tasmania.

KIRBY J: Save for Tasmania, it is called a contributory fund - - -

MR NETTLE: Thank you, yes, Tasmania.

GLEESON CJ: So what the regulation means is that if the Judges' Pension Act is ever amended so as to set up a fund of the kind and - - -

MR NETTLE: To which Part I would have applied but for 271A, it will be constitutionally protected and it must - - -

GLEESON CJ: I think that is what the regulation was intended to be.

MR NETTLE: I say it was intended that way, as you will see, as this development of Part IX unfolds. It was intended that way for exactly the same reason that 271A was enacted. It was enacted after the South Australian Superannuation Trust Investment Case in this Court when it was decided that the Commonwealth could not levy tax upon the capital gains of the fund. The consequence of that was, having regard to the definition of "constitutionally protected fund", that there was some part of the income of the fund which was taxable with the consequence that it then became an untaxed fund, thus it was exempt from the benefits of the provisions in ETP, which I will take you to a little bit later. It was thought by the Commonwealth that that was unfair. These people were getting taxed on most, but a little on not, therefore, it should be either all in or all out and it was decided to adopt the course of taking it all out to take altogether outside the concessional treatment in Part IX the funds of the kind which were funds that were constitutionally protected and deal with them elsewhere.

GLEESON CJ: Your proposition is simply that Part IX never had anything to do with the fund to which Justice Austin belongs? I am sorry, I will withdraw that. Never had anything to do with entitlements of the kind that affect the first plaintiff?

MR NETTLE: Your Honour, that is absolutely right and at the risk of waiving the point, can I direct attention back to the Superannuation Contributions Tax Assessment Act as it was first enacted because it too conceived of that as being the position. It too drew the distinction between a scheme on the one hand and on the other hand a scheme which had a fund. It did that, as I showed you in the hand-up page, where there was defined the unfunded defined benefits scheme in terms of a scheme, some part of which was not funded. It conceived of fund in exactly the Mr Justice Windeyer sense that one saw in Scott's Case.

GLEESON CJ: It did not cover unfunded retirement benefit entitlements.

MR NETTLE: It did but it treated them differently to ones for which there were funds. Its conception of funds was the Justice Windeyer conception and it treated them by saying the surchargeable contributions will be the actual contributions - you make contributed amounts - made to the fund, multiplied by the surchargeable factor. It then said in the case of unfunded schemes - not funds, unfunded schemes - one will work out by this actuarial methodology some supposed accrued benefit and impose tax upon that and make it be paid by the provider.

GLEESON CJ: Mr Nettle, I do not think you have shown us - you may have and I may not have noticed it - what it is, in the case of what I will call a "regular superannuation fund" of the kind to which Part IX applies, that produces the result that this surcharge is passed on to the member?

MR NETTLE: In the case of a regular fund not being Commonwealth, it - the provider - can only pass it on by agreement or by amendment of the trust deed to allow, if you like, the burden of it to be reflected in a reduced benefit to the member.

GAUDRON J: Or indirectly, I presume, in terms of the - - -

MR NETTLE: Salary.

GAUDRON J: I meant the amount to be distributed at the end of the day.

MR NETTLE: Quite, except, your Honour, if it were undefined that that would be right.

GAUDRON J: Yes, but in a defined benefit one might well be - - -

MR NETTLE: It is a defined benefit, you have to turn down the definition or find or find some money elsewhere. There is a whole lot of contention as your Honours, with respect, have probably seen in the papers about whether or not it is permissible for private regular-type superannuation providers to pass on to their members the burden of the tax which is imposed.

GLEESON CJ: My recollection is that one of the most controversial issues at the time this legislation was in contemplation was the position of trustee companies of superannuation funds.

MR NETTLE: Exactly so, and different views - I do not know if this is material or not, but any way different views have been taken in different places. The Commonwealth on the one hand contends that because it has a provision in, as I say, the Superannuation Industry (Supervision) Regulations which provides for some sort of variation, it is open to a provider, forcibly and without going to the court under section 67, to get a variation of the trust deed. Other views are taken elsewhere. I will leave it to Mr Bennett because he has more time than I have to take to the regulations but I will invite the Court at the end of the day to take the view that the Superannuation Industry (Supervision) Regulation just does not do that. We would invite the Court to conclude on the material before it, as indeed is the reality we would submit, that it is not open for a provider forcibly to impose upon a member a passing on, it can only be done by agreement.

GUMMOW J: Why would not the trustee have an indemnity?

MR NETTLE: Out of the fund?

GUMMOW J: Yes.

MR NETTLE: The view which has been taken, I understand, is - - -

GUMMOW J: Just general law. Forget about statute.

MR NETTLE: Of course, he is entitled to an indemnity as conditioned by the terms of the trust. If the trust provides that a member's defined benefit is not to be reduced by, inter alia, the right of the trustee to take an indemnity, the answer would be obvious.

GUMMOW J: The trustee might resign.

MR NETTLE: Well, he might, or he might refuse to pass it on.

GAUDRON J: Or at the end of the day the trust might have to be dissolved as insolvent.

MR NETTLE: Or he might have to call for more contributions from the employer to top up the actuarially calculated reserves to keep the money coming. There is a host of possibilities. But the short point is - - -

GUMMOW J: We do not have to solve them.

MR NETTLE: You do not have to solve that one, your Honour, no, although you do have to solve a couple here. I was at section 271 and I had taken your Honours to the definition of "complying fund". Could I ask now that you go back to section 27A in the ETP provisions still in these photocopied bundles to the definition there of "taxed superannuation fund". You will find it at the page which has 394 at the top of it. You will see that it is defined in terms of:

in relation to an ETP, means a superannuation fund that:

(a) is, or has been:

(i) an eligible superannuation fund . . .

(b) is not a constitutionally protected fund, within the meaning of Part IX -

That means that a taxed superannuation fund was one which was, amongst other things, subject to tax under Part IX and it was a taxed superannuation fund which then gave rise to the benefits by way of deduction and rebate upon the payment of eligible termination payments which are provided for elsewhere in the Act to which I will take you.

GAUDRON J: I am sorry, I have been lost. It is my fault. Why do the definitions in 27A carry over to Part IX? I have just lost that thread.

MR NETTLE: No, that is right, your Honour. If your Honour goes to section 274 you will see that taxable contributions are defined in terms of contributions made by reference to funds of the kind which are taxable. In order to get - - -

HAYNE J: Where do I find that?

MR NETTLE: Can I ask you to just go to 159SM. Section 159SM entitles a member to a rebate in respect of the tax payable by reference to benefits. They are defined in terms of a section 27H amount. That is why I have taken you to section 27H. Then in section 159SM(2) - and this I trust is the answer to your Honour Justice Gaudron's question - the benefit of that rebate does not apply to an untaxed superannuation fund.

Now, the consequence of the South Australia State Superannuation Trust Case in this Court was that part of the income of that trust was liable to tax.

GAUDRON J: All of the income, was it not, but not the capital gains.

MR NETTLE: Well, yes. Your Honour is right.

GAUDRON J: I am not often right in this area.

MR NETTLE: With respect, I meant no disrespect: that is correct. But the point about that was that if one then went back to section 271(2) as it used be before the amendments, the trust became a constitutionally protected fund because some part of the income was subject to tax, albeit that the rest of it was subject to tax. The consequence of that was that it became an untaxed fund by reason of the definitions. The consequence of that was that there was no longer an entitlement to the section 27H rebate, which I have shown to you at 159SM.

GAUDRON J: But you rely on all of that to say Part IX is concerned with real funds. Funds with real money.

MR NETTLE: With real money.

GAUDRON J: Which are capable of - - -

MR NETTLE: Capable of producing income.

GAUDRON J: Yes.

MR NETTLE: I do not mean capable just because they are in the money this year. I mean constitutionally capable, that is to say, they are an entity of a design which, given the right facts and circumstances, would generate income as opposed to something which is constitutionally incapable of generating income, like a judge's pension scheme under a State superannuation Act.

GAUDRON J: Because it is unfunded.

MR NETTLE: It just cannot happen.

GAUDRON J: Because there is no fund.

MR NETTLE: There is no fund. There is no mechanism. There are no arms and legs to generate it. There is just nothing there which would - - -

GAUDRON J: Does it matter in terms of the definition of taxed superannuation fund - I do not think it does. I will just - - -

MR NETTLE: It has to be taxed in order to get the benefit of the section 159SM rebate. If it is untaxed, that is to say if it is not a taxed fund, it does not get the benefit of the rebate.

GAUDRON J: Yes, and it does not matter for the purposes of your argument that it was taxed on income, but not capital gains; it was still taxed.

MR NETTLE: It got some tax on its fund.

GAUDRON J: Yes.

MR NETTLE: That took it outside the benefit of the rebate provision. Nevertheless, it was still subject to tax on the funds that were being generated. Because it did not have the benefit of the rebate, the Commonwealth took the view that there was unfairness, or inequity, I suppose they would say, which required some amendment. The amendment was to take the whole thing outside the benefit of these concessional provisions and to say, not only no rebate, but no tax. So it is an untaxed fund, or not a taxed fund, and there is no rebate. It did that by passing section 271A to say that henceforth a fund of the kind to which Part IX might once have applied will be regarded as being a constitutionally protected fund.

The point is further borne out by the explanatory memorandum which you have in the materials filed by the plaintiff at volume 2 under tab 19. In paragraph 17.2 of that explanatory memorandum under tab 19 reference is made to the South Australian Superannuation Case and particularly might I direct the Court's attention to paragraph 17.3, where the inequity or disequity, as they say, was perceived which required the amendment to be made. Further, can I ask your Honours to go to paragraph 17.5 where it was perceived that:

A fund is a constitutionally protected superannuation fund if the assets of the fund belong to the State Government.

So it is a real fund, obviously, which is capable of producing income. So it follows in paragraph 17.6, et cetera. The intention was that henceforth real funds which were comprised of State Government assets would be treated as being constitutionally protected and taken outside the net.

But note the reasoning and the circumstances which led there. Originally they were dealt with in part by the definition of constitutionally protected fund which was in section 271(2) of the Income Tax Assessment Act 1968 in terms of a fund some part of which was exempt from tax by section 114. So as originally conceived, they were talking about real funds, the property of which would be property of the State, which would attract section 114. Then there is the decision of this Court in South Australian Superannuation Trust, which says that part of it is exempt and part of it is in.

The consequence of that is that it becomes a fund of which part of the income is subject to tax. It therefore, under the old definition, becomes a constitutionally protected fund. It therefore, under the definition of taxed superannuation fund, ceases to be a taxed superannuation fund. It therefore ceases to attract the benefit of the section 27H rebate and the 159SM and the 159SJ rebate. Because of the imbalance of that - that is to say, income is being taxed but there are no rebates on the other end - the whole thing is taken out and it ceases to be taxed because it is constitutionally protected, that is to say Part IX will no longer apply to it, but equally, no longer will there be rebates under section 159SM and 159SJ.

So what was sought to be done - and no more than this was sought to be done - was to take out of Part IX what was in there already, namely, funds which were real funds, capable of generating income. That is why, it is submitted, that when Regulation 177 was passed pursuant to the new section 267, it was passed in what at first appears to be the somewhat Delphic terms of a fund to which Part IX would have applied but for the passage of section 271A. The consequence is, it is submitted, and it is clear, that there never was in Part IX, and there never was in the new definition of constitutionally protected fund, any fund which was not a real fund, capable of generating income.

What is the consequence of that? It is this. When you come back to the definition of "constitutionally protected fund" in the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Assessment and Collection Act, it is defined as having the same meaning as it has in Part IX. The meaning it has in Part IX is, as you have now seen, a fund which was a real fund which was capable of producing income, not a covenant 'twixt the Crown and one of its judges that it will pay an amount of money if he or she lives long enough to serve the 25 years or whatever it is and get the thing at the end of the day.

So it is submitted it is plain, albeit tedious, that it never was the case that the judges' pension schemes of which the plaintiffs are members were constitutionally protected funds within the meaning of Part IX of the Income Tax Assessment Act. Quite clearly they were not. I mean, they never used to get taxed on their income because there was not any before all this occurred. Part IX has been there for years. They never were funds, in the sense that Mr Justice Windeyer uses the word, capable of generating income to which Part IX would have applied. Therefore, they were not funds to which Part IX would have applied but for the passage of section 271A following the decision of this Court in 1992 in the Super Trust Case.

GLEESON CJ: And they were never funds that got the benefit of the concessional tax treatment, which it was the purpose of this legislation to cut back.

MR NETTLE: Exactly so. We started with this. There is the obvious logic and equity of it when they first set up the Act. They were treated like private unfunded defined benefits schemes or unfunded defined benefits schemes by making the provider pay the tax. They were not singled out and treated separately, as they are now said to be, by this members Constitutionally Protected Fund Act, nor did they have to be because section 9 of the Imposition Act as it was first enacted guarded against the possibility of infraction of section 114 of the Constitution.

So, your Honours, if we come back to the Constitutionally Protected Funds Assessment and Collection Act to section 5 which makes it apply, it applies only to constitutionally protected funds. When we look for the definition of "constitutionally protected funds" we look in section 38 and it is defined there as having the same meaning as in Part IX of the Income Tax Assessment Act which means that the Superannuation Contributions Tax (Members of Constitutionally Protected Superannuation Funds) Act is not an Act which applies to either of the schemes of which the two plaintiffs are members.

KIRBY J: Fairly clearly, from what we know about the background, it was the purpose of the Commonwealth Government to extend the application to judges' pensions schemes?

MR NETTLE: No, with respect not. I hope I am not quibbling with this but what we know, as opposed to what has often been assumed, is what is said in the second reading speech.

KIRBY J: I would like to know whether it is your submission that this is an Act that has misfired or this is an Act that was never intended to apply to judges' pensions. Now, I would find the latter very curious, given what we know about the negotiations set out in the Solicitor for South Australia's submissions and what I took to be the government's justification of this being to secure equity of high income earners on their "superannuation" rights.

MR NETTLE: Your Honour, I used to think that someone had made a mistake; when I stop to think about it I think that is so improbable as to be unacceptable. The Commonwealth does not make mistakes about things like this, because it knows too much about them.

KIRBY J: Exactly, so this is misfiring, is it?

MR NETTLE: No, it is not. That too was my first thought, but it is not; it is this: Commonwealth first enacted the SCT Act so as, at least in terms, to purport to apply to judges' pensions. I showed your Honour that this morning. They went to the States then, according to the South Australians, to get their co-operation and the rest of it, and the States said, "We contend that that would constitute a tax upon the property of the State if you taxed us under section 16(6) of the Imposition Collection Act Assessment Act".

Rather than take a chance on it, the Commonwealth has enacted the SCT miscellaneous, I should say, members of the Constitutionally Protected Fund Act, first for the stated reason given by the Minister in his second reading speech, namely to cover the funds that are real funds and are outside the net because of section 9 of the Imposition Act.

Secondly because, if it turns out to be the case, contrary to the Commonwealth's expectation, but in accordance with the States' assertions, that these other funds, like judges' pension funds, are funds which have property of the State which would be subject to tax, then they will be protected. But that would only be so if they are funds of the kind to which Part IX would have applied, but for the enactment of section 271A. They will only be funds of a kind to which section 114 of the Constitution could have applied, if they are funds constituted of State property.

KIRBY J: I understand your submission on construction.

MR NETTLE: No, but more than that. I think it was - - -

KIRBY J: But I mean, we cannot really pretend to ourselves, can we, that this scheme was designed to cover the very small number of constitutionally protected funds that were true funds. This was fiction built on estimates. The fiction was to deem the judges' pensions Act's funds and the estimate was the actuarial estimate in order to give that reality.

MR NETTLE: No, that is wrong, I am sorry. According to this analysis the - - -

GUMMOW J: There were a large number of such funds, were there not?

MR NETTLE: That is right.

GAUDRON J: In New South Wales, for example, I think, the teachers had a contributory fund, all the public servants have a contributory fund; firemen, policemen, so forth and so on.

GLEESON CJ: Magistrates.

GAUDRON J: And magistrates still do. It was only office holders who did not have such a fund, as I recollect, but were the recipients of pensions.

GLEESON CJ: The expression is "constitutionally protected fund", not "constitutionally protected taxpayer".

MR NETTLE: If I can say so, that is right, your Honour. That is why one is driven back to say this cannot be a mistake. They are speaking in terms of a fund which is a term which had traditionally and always been used in contradistinction to a scheme which did not have a fund, and they decreed that there should be constitutionally protected funds, being funds to which Part IX would have applied. There would not be reason to do it otherwise because if they were not funds to which Part IX would not have applied, they were already in the net of the Assessment Act. It could only have been, and indeed it was said by the Minister expressly to be, the intention of this legislation to bring in superannuation funds that are protected from revenue measures under the Constitution. The only funds that were protected from revenue measures under the Constitution were funds, not schemes for which there were no funds.

So, he has submitted that although it seems perhaps surprising at first glance, it cannot and ought not be concluded it was a mistake. It is a very careful selection of the definition of "constitutionally protected fund" in terms of Part IX of the Income Tax Assessment Act. I mean if they had truly meant just the judges schemes and the Governor-General scheme and whatever other schemes there are, surely to goodness the Commonwealth would have just listed them. Why would it go to the elaborate provision of saying it has the same meaning as it does in Part IX of the Income Tax Assessment Act which is directed at only funds which are capable of generating income and attracting tax?

HAYNE J: But it now has listed them and the list is obviously broad. Say, for example, under New South Wales State Authority Superannuation Act, et cetera, et cetera, is a much broader class than judges and office holders.

MR NETTLE: Indeed, it is, but even then, your Honour, as the Chief Justice said before, only if the scheme is one which is of a kind or subsequently amended under that Act to be a fund capable of generating income.

GAUDRON J: And many of those funds, we can assume are; many of those listed are such funds.

HAYNE J: And the police fund. Any fund that has employees will necessarily have funds through the superannuation guarantee provisions, will it not?

MR NETTLE: Possibly, possibly not. The second plaintiff is the case in point. The guarantee provisions to which the States agreed have been provided through the State Superannuation Act by a bit on the side, as it were, rather than by amending the principle scheme.

To answer your Honour's question, it is submitted the Court ought not decide the matter on the basis that this is a falsa demonstratio and what was really intended by the doctrine of the meaning in Part IX were the funds established by Acts which are listed in the Schedule 14 to Regulation 177 regardless of whether they are funds. On the contrary, would conclude by reference not only to history but also by reference to what is said in the second reading speech, that it was intended to do exactly what has been done, namely, to bring in only those funds which are funds.

KIRBY J: But you say that is what the Parliament did. If the Commonwealth Government had taken that view, its answer to the first plaintiff's case was to simply say you misunderstood the legislation. The legislation does not bite in his case.

MR NETTLE: Ultimately that is the answer, even if it is unsatisfying. The legislation is the legislation.

GUMMOW J: Now, Mr Nettle, what you are saying may well be right, but one's understanding would be assisted, I guess, by seeing what surrounded the Commonwealth legislation for the Commonwealth office holders or Commonwealth pensioners who have subscriptions. I am not suggesting you do it now - - -

MR NETTLE: No. I can do it after lunch, but - - -

GUMMOW J: I see the mileage you get out of the first reading speech for the Assessment Act - - -

MR NETTLE: It is easy, your Honour. It in fact makes the point for this reason: the Commonwealth judges, just like the State judges, on this argument, were within the Assessment Act because, although they were members of unfunded defined benefits schemes, they got brought in under section 16(6) by their provider having to pay. It was said, it is like politicians saying that there has to be equity, therefore the Commonwealth judges should be treated the same way - and also the politicians, more importantly - therefore there was the passage of the SCT Imposition Act - Application Act to the Commonwealth. The consequence of that was under that Act to deem that the Commonwealth was the provider so that it had to pay under section 16(6) of the Assessment Act, in the same way that a provider would have to pay for a private or other member under the Assessment Act.

GLEESON CJ: And then pass it on to the members?

MR NETTLE: Well, that came subsequently. They passed through amendments to the Commonwealth Judges' Pensions Act, so as to put through, in what was said to be equity or some such thing, the burden of the surcharge which was paid by the provider, so that the judges would bear it in the same way that all other high-earning Australians did, and - - -

GUMMOW J: In the same way as they thought would happen in the States.

KIRBY J: But the States would not play.

MR NETTLE: With respect, not. With great respect, not. This is the point. Remember that the Assessment Act was passed - - -

GUMMOW J: Yes, but they would, if the States co-operated, which they have not.

MR NETTLE: Your Honour jumps ahead too far, if I may say so. June the Assessment Act was passed. It was thought by the Commonwealth that it did apply to the judges' pensions scheme of the States, just as it was made to apply to the Federal judges by the Application Act. It is only because the States kicked up a song and dance that to make it apply to their pension schemes would be contrary to section 114 that this enabling legislation was put forward to say to the extent that there are any constitutionally protected funds they are brought into the Constitutionally Protected Funds Act. But that was something which only dawned upon them after there had been this discourse with the States in the six months that followed enactment.

GLEESON CJ: Is that a convenient time, Mr Nettle?

MR NETTLE: It is, your Honour.

GLEESON CJ: We will adjourn until 2.15.

AT 12.46 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.19 PM:

GLEESON CJ: Yes, Mr Nettle.

MR NETTLE: Could I very briefly attempt to finish the argument I was putting when your Honours rose which was that your Honours ought not take it as being a mistake or as a falsa demonstratio in adopting as a definition of constitutionally protected fund the meaning in section 267 of the Income Tax Assessment Act. May I say first, and in a sense, against myself that what appears in section 7 of the Constitutionally Protected Funds Assessment Act might be taken at first blush to think that it truly was the intention otherwise to make the Act apply to all judges' funds, whether or not they were real funds, the income of which would be subject to tax under Part IX. That is because, of course, it carves out and leaves unaffected by the Act a judge who was in office at the date of the commencement of the Act. The inference which might be drawn is that that would not have been necessary unless there were judges to whom the Act would otherwise apply. Therefore, it must be thought that all judges' schemes would be within the Act and the point that I make about the definition really was a mistake or a falsa demonstratio which purposive construction ought to override.

It is submitted that that is not the conclusion which the Court ought reach. The analysis properly to be applied, it is submitted, is very much the same as that which is applicable to the definition in Regulation 177 itself, that is to say, a constitutionally protected fund is only a fund of the kind established by one of the Acts listed if but for section 271A of the Income Tax Assessment Act Part IX would have applied. So too here. If there is a judge whose emoluments would be affected and thus who would be subjected to surcharge by the beginning of this Act, he or she is exempted for fear that there is a reduction of their benefits contrary to section 72 of the Constitution or otherwise. But it is only if and to the extent that it is applicable, that is why the provision is put there for exactly the same reason that the verbiage was adopted in Regulation 177.

GAUDRON J: The consequence of that argument, if I am not badly mistaken, is, is it not, that the States will be liable, when pensions begin to be paid, for the surcharge, unless section 114 bites or unless the Melbourne Corporation principle applies?

MR NETTLE: Your Honour is correct, yes.

GAUDRON J: So really what this was about was insurance in the event that the States could argue that section 114 or the Melbourne Corporation principle or some other provision of the Constitution relieved them of the obligation to pay the accumulated surcharge as and when each judge retired.

MR NETTLE: That is exactly how I put it, your Honour.

HAYNE J: Do you point to any judge of any State court in respect of whom section 7 of the Constitutionally Protected Assessment and Collection Act would undoubtedly have had application?

MR NETTLE: I cannot point to any to whom it would undoubtedly have had application at the date of enactment, your Honour.

HAYNE J: I have in mind - and I simply do not know the answer - the fact that one of the list of Acts in the - - -

MR NETTLE: Tasmanian scheme.

HAYNE J: - - - is the Tasmanian Act entitled Judges' Contributory Pensions Act .

MR NETTLE: And that makes it a possibility.

HAYNE J: Well, at some point I would be glad to know what the answer is, if it is possible within the confines of the case stated to let me have it.

MR NETTLE: Well, the point is that it was in answer to one of your Honour's questions, Justice Kirby, you ought not conclude it is submitted despite what might be thought to be a mistake and despite the provision in section 7 that the adoption of the definition by reference to Part IX was a mistake or something which fails to foresee the consequences. On the contrary, it truly is, as Justice Gaudron has put it, insurance. That if and to the extent section 114 would be applicable, then the fund will be carved out and dealt with under the Constitutional Protected Fund Act but otherwise it is not, because it is not necessary to. It is dealt with under the acquisition.

KIRBY J: That is one interpretation. The other is depending on the interpretation question, that it is deliberate but is built on a fiction and that we have just got to go on with the fiction.

MR NETTLE: I cannot gainsay what your Honour says, with great respect.

KIRBY J: And that the fiction is designed to ensure that high income people pay more tax. It falls, as you have demonstrated, very unequally and unjustly and perhaps in a discriminatory manner but it is a policy across the whole board of high income earners in the Commonwealth.

MR NETTLE: If I may say so, I go with your Honour, with respect, through every step except for the last. That is where we do reach a point where the imposition of the tax is not part of a general scheme of imposing tax upon high income earners because in all other cases taxes such as these are imposed not upon the high income earners but upon the providers. These, and these alone, are people who are singled out to have the thing imposed upon them.

McHUGH J: Yes, but it also overlooks the point that the contributors to superannuation schemes get a tax deduction. State judges do not get any tax deductions. If you were going to have a fair and equitable scheme, then the State judges should get a tax deduction, the equivalent to their actuarial calculated contribution.

MR NETTLE: Your Honour, I agree. That is why, it is submitted, it is not nonsensical to conclude that when they took out the constitutionally protected funds they only intended to take out those funds that attracted such tax deductions. That is why they said a constitutionally protected fund has the meaning that it does in Part IX.

McHUGH J: What was unfair about the taxation deductions for high income earners is that they were getting the benefit of a tax deduction for their superannuation contribution. So they brought in this 15 per cent surcharge.

MR NETTLE: Yes.

McHUGH J: But whether the legislation is valid or invalid, it is very difficult to just say that it is fair in so far as applies to judges.

KIRBY J: But who is talking about fair? We are talking about tax statutes here, we are not talking about fairness.

GLEESON CJ: Exactly, there is no equity in a tax, but the point that Justice McHugh makes, I should have thought, is emphasised by the fact that what is surcharged is contributions. If you go back to the original statute, that is the one following tab 5, section 6, which sets out the hitchhikers' guide to this legislation - - -

MR NETTLE: Your Honour, I would like to say that is right, but it is only right so far as it goes. Remember, with schemes which are not defined "benefit schemes" the surcharge is imposed upon the contributed amounts, as you rightly say, with respect, under section 7.

GLEESON CJ: That is the ordinary case.

MR NETTLE: The ordinary case.

GLEESON CJ: The regular superannuation fund.

MR NETTLE: When there is a defined benefit scheme, then it is done by reference to the actuarial formula. I said to your Honour Justice Hayne this morning that there are defined benefit schemes out there in the ordinary world, there are any number of them; most of them are either pensions calculated as a percentage of final average salary or, alternatively, a lump sum being a multiple of final average salary. These are common place; indeed they constitute the majority of superannuation schemes out there amongst private persons. There is nothing new or exceptional about that. Where there are contributions, one would expect it to be calculated by reference to the contributed amount. Where, however, there is a defined benefit, which means that the benefit is not directly referable to the contributed amount, or even necessarily so, then it is calculated under the actuarial formula, but the burden is placed back upon the provider.

It is different - I mean, this is the discrimination - it is unarguably discrimination. It is different when you come to these so-called constitutionally protected funds, because whilst it is true that the so-called benefits accruing are calculated in the same fashion, they are imposed not upon the provider, but upon the member in a way that is not done with any other class of taxpayer.

KIRBY J: Yes, but that is done because of the particular way in which - this form of the remuneration. You, yourself, in your submissions, say this.

MR NETTLE: No, with respect, not. That is not right.

KIRBY J: This is part of, in a sense, a package of what a judge gets on appointment. You get your salary, but you do have a contingent benefit of very considerable worth and that is considerable money worth, in due course, if you fulfil the contingencies.

MR NETTLE: Your Honour, with respect, what you say is clearly right, but it is not different. If your Honour goes back to the Assessment Act, to the defined benefits provisions, people who are out there in private industry, who get a salary and pension package, let us say, virtually identical to a judge, in that their pension will be 60 per cent of final average salary until they die, have their contributions calculated under section 8 and paid for them by the provider. It is only the judge, or the constitutionally protected member, who is singled out and made to pay the surcharge, because, apparently, the Crown in right of the Commonwealth is concerned that to attempt to oppose the load upon the State provider would infringe section 114. That means that there has been an exercise in singling out and burdening a judge - and the other members of the constitutionally protected fund - for the sole reason that they cannot tax the provider in the way in which they would wish.

GLEESON CJ: But part of that is because judges' pensions are non-contributory. I once had to investigate why judges' pensions are non-contributory and it is because they used to be appointed at about an age when contributions would cut out, under ordinary contributory superannuation schemes. But it is the fact that judges' pensions are non-contributory that has produced this anomaly.

MR NETTLE: Yes. I say no more about it except to say that one does not have to treat judges in the way in which they have purportedly been treated by the Constitutional Protected Funds Act. In order to put - - -

KIRBY J: That could have been cured, if only the States had gone along with a revamping of their system, but they would not do that - - -

MR NETTLE: Well, who is to say?

KIRBY J: - - - and section 114 does create certain problems. Yet it cannot be right that people who are receiving a very substantial amount of income, on certain contingencies later in life for the period of their life, can somehow be put outside the net of Federal legislation taxing them.

McHUGH J: Contrary to what Justice Kirby says, there does not seem to me to be anything unfair about it because the ordinary people in private industry are getting their tax deductions year after year, up to $100,000.

KIRBY J: But that is a matter of detail, that is a matter of detail, the amount.

MR NETTLE: Your Honour, if I say so, one can do better than that.

HAYNE J: Detail in the assessment.

MR NETTLE: Your Honour Justice Kirby, the judges, if they had been left under the SCT Assessment Act, would have been treated like all of these other high income earners to whom you refer. They would have been treated the same because the surcharges would have been calculated in respect of their salary and pension and entitlements and their provider would have paid it.

KIRBY J: Yes, I realise all that but we are in a situation where there has been this peculiarity of this aspect of the income, contingent income of judges. I just find it hard to take that next step and say that it cannot be possible for the Federal Parliament to make laws, subject to the Constitution and subject to avoiding discrimination and so on, which do not impose a tax on that which other people pay on their superannuation.

MR NETTLE: I do not argue that they cannot. Indeed, on this part of the submission that is exactly what they did through the Assessment Act.

GAUDRON J: And you say that they in fact have.

MR NETTLE: Correct.

GAUDRON J: And that is what is still happening.

MR NETTLE: Correct.

GAUDRON J: But the burden is being thrown on the provider.

MR NETTLE: Yes, as it is with the private people.

GAUDRON J: As with the private people and it is no part of your case to say either that section 114 of the Constitution or the Melbourne Corporation principle renders it otherwise.

MR NETTLE: That only incepts if I am wrong in the submission that the constitutionally protected fund is inadequate to draw in the judges. Once that happens it is plain as a pike staff that there is discrimination against judges and members of constitutionally protected fund or inordinate proportions which puts it squarely within the Melbourne Corporation doctrine.

GAUDRON J: But you do not say that the imposition of an obligation on the States to do the same for judges and others, as is done in private practice or as is done in the private business world, invokes either the Melbourne Corporation Case or section 114? It is no part of your case?

MR NETTLE: Neither of those propositions is a part of my case.

GAUDRON J: That is for the States when Justice Austin retires to make that case if they wish to.

MR NETTLE: If they wish to. Nor do I say necessarily that the States can do it. I just say that what appears to be the case is that there is an ability there to impose upon the States a surcharge in the same way as is imposed upon private providers. Even if it had been intended to do otherwise, that is not what has been done with the definition of "constitutionally protected fund" in the Constitutionally Protected Funds Act.

KIRBY J: It is said that 100 judges are affected. None of them has fallen ill and had to retire, have they, so that this issue is - - -

MR NETTLE: I am sorry, I missed that last proposition, your Honour.

KIRBY J: None of those judges has fallen ill and had to retire, so this question is still in the future?

MR NETTLE: Yes, it is. Can I give to your Honours an answer in effect to Justice Gummow's question this morning of what is the position with the application to the Federal sphere.

GUMMOW J: Yes, thank you.

MR NETTLE: We give to your Honours, as we will give to everyone else in just a moment, copies of the explanatory memoranda replacement version for the Contributions Surcharge Reduction of Benefits Bill and the Contributions Surcharge Application to the Commonwealth Bill and they show no more than that it was intended as part of the broad package to make it apply to the Commonwealth as it applied in other places. It reinforces what is incontrovertible, namely that what was made to apply to the Federal judges was the regime laid down by the Assessment Act, not the regime laid down by the Constitutionally Protected Funds Act.

McHUGH J: A District Court judge, Judge Luland, died recently in New South Wales while in office. He would be affected by all this, would he not?

MR NETTLE: I suppose if he died recently, your Honour, yes, he would.

KIRBY J: Except that his appointment I think was before - - -

MR NETTLE: Pre-dates 7 December 1997. I think the only ones who are affected, that is to say post-7 December appointments, are still in existence and - - -

HAYNE J: A very guarded statement.

MR NETTLE: If the Court pleases, might I turn to the next argument. I am afraid it is still a constructional argument, but we wish to submit to the Court it is an important one. It is dealt with in our written submissions in paragraphs 41 to 52. It concerns both State and Federal judges really, because the same point arises under both the Assessment Act and the Constitutionally Protected Funds Act. It arises in this way. First, in the Constitutionally Protected Funds Act, you will remember that there is a difference in the method used to calculate surcharge as between, on the one hand, funds which are not defined benefit funds, in which case the surcharge is calculated on contributed amounts, and, on the other hand, surcharge on defined benefits funds where the surcharge is calculated by reference to the actuarial value of benefits accrued. If the two classes, that is to say those for which there are contributed amounts and defined benefit funds, do not cover the universe, then it is possible that there are schemes to which neither Act applies.

Going to the Constitutionally Protected Funds Act, and directing attention to section 8(3), your Honours will recall, I trust, that the surcharge liability for a member of a defined benefits superannuation scheme is calculated by reference to the actuarial value of the benefit said to accrue. Defined benefits superannuation scheme is, of course, defined in section 43 at the back of the Act, and it is in turn defined by reference to defined benefits member, which is also in section 43 of the Act. As you will see, a defined benefits member is a member entitled to be paid a pension, which is calculated by reference to the amount of the member's salary. I am sorry, I have referred you to section 43. It is 38 of the Members Protection Fund and 43 of the Assessment Act.

As I say, the point arises in both Acts. If there are persons, to use a neutral term, who have the benefit of a pension scheme but for whom there are neither contributed amounts nor of whom it can be said that they a defined benefit member, neither Act has application. It is submitted, when one looks at the definition of "defined benefit member", that judges, at least the first two plaintiffs, are not defined benefit members because their pension entitlement is not calculated by reference to their salary at a particular date or as a stated amount.

KIRBY J: Why is it not defined by reference to their salary at the date of their retirement?

MR NETTLE: To answer that question we would go to the case stated book volume 1, tab 9, page 54. We make reference there to the Judges' Pension Act 1953 of New South Wales under which section 3(3) - and we set out the terms towards the bottom of paragraph (a). The pension is calculated by reference to what is called "notional judicial salary" and it is equal to the salary not of the member at a particular date, but to the salary of the holder of the judicial office from time to time from which the member retires. The judge does not get - - -

KIRBY J: But that is - you go the member into the judge of an equivalent office at the particular time vis the time when the member retires and, therefore - - -

MR NETTLE: No, it is from time to time. I mean, you keep on getting 60 per cent of whatever the Supreme Court judge is getting from time to time.

KIRBY J: So you say the referent is the office holder, not the member?

MR NETTLE: Not the member. Lest that be thought to be a cute point, look to paragraph (b) of the definition of "defined benefit member" which speaks in terms of "a stated amount". Now, a stated amount is undoubtedly a lump sum but it is not either the amount which is referable to this particular member or to the holder of the office from time to time. I should say that the same point concerning the Victorian judges' pension is dealt with in paragraph 18 of the case stated at page 59 at line 20.

May I also ask your Honours to look at the explanatory memorandum which is in the defendant's materials volume 2, tab 23 at page 9, about five lines into paragraph 2.10:

A `defined benefit member' is a member who is entitled to a benefit based on:

* the amount of the member's salary at a particular date or the average of the member's salary over a period; and/or

* an amount stated in the constituent document for the superannuation fund or scheme.

So it is submitted it is clear it is directed to the salary of the member and not to some formula ranging from time to time by reference to an office holder or otherwise.

KIRBY J: What does the second limb mean? An amount - - -

MR NETTLE: Lump sum. $50,000 or an amount calculated by multiplying five times average salary by the number of years service or the last five years of service or whatever it might be under the various arrangements which exist. A vast number of funds, as your Honour may know, in the private sector still have stated amounts albeit, no doubt, that the providers will be endeavouring to get rid of them now because of the imposition of surcharge. I will be quicker with the other two construction arguments.

GAUDRON J: Well, I do not encourage that.

MR NETTLE: If your Honour pleases.

GAUDRON J: And that leads me to ask a question about this: what you are, in effect, saying is that there is no surchargeable amount, is that right, under section 8(1)?

MR NETTLE: Yes, that is exactly right, your Honour.

GAUDRON J: Yes, and I ask that question because I do not think it is necessarily a good idea to hurry.

MR NETTLE: If your Honour please. The consequence of that, as I say, is applicable under both Acts. If a man or a woman, either under the Assessment Act or under the members Constitutionally Protected Fund Act, is entitled to receive a pension, which is not an amount calculated by reference to their salary, they are not entitled to a defined benefit, they are not a defined benefit member. The amount of surcharge therefore applicable to them under section 8 of that Act or under section 7 of the Assessment Act is zero.

GAUDRON J: Yes.

MR NETTLE: And that will be true of a State judge or the State Governor-General or the Federal judge, to whom the Assessment Act is made to apply by means of the assessment application to the Commonwealth Act.

If your Honour please, the fourth construction argument, which is dealt with in the written submission at paragraphs 53 to 60, turns upon the meaning of the words "accrued to". Again, the argument is equally applicable to the Assessment Act as it is to the members Constitutionally Protected Fund Act.

GLEESON CJ: Just before you move away from that last argument, I would like to ask you a question that is raised by it, but relates not to this point, but to your later arbitrariness argument, but it concerns the actuarial method by which calculations are, in fact, made.

MR NETTLE: Yes.

GLEESON CJ: Bearing in mind that their actuarial calculations directed towards amounts that are likely to be paid in the future to people who are eligible to receive retirement benefits, those amounts are affected, amongst other things, presumably by salary levels after retirement.

MR NETTLE: Yes, they are.

GLEESON CJ: Are those actuarial calculations based on any assumption such as, for example, that salary levels at a future time will never do anything other than keep pace with inflation?

MR NETTLE: Yes, they are, or at least in the examples which have been given. As the point is there made, other assumptions apparently are open to be made within the confines of SCR 71.

GLEESON CJ: How do they go about making assumptions as to what levels of judicial remuneration will be in the year 2010?

MR NETTLE: I do not know. It does not extend that far, because if you go to the case stated - I will look at this later - but if you go to the case stated where the assumptions are set out at page 79 under tab 9 in volume 1 of the case stated book, you will see the assumptions which were made by the New South Wales Government Actuary in calculating the 30 June 1999 and 30 June 2000 - - -

KIRBY J: Which paragraph?

MR NETTLE: Paragraph 75, your Honour.

GLEESON CJ: But am I right in thinking that what they are making assumptions about in the case of the first of your clients is the amount that he will be entitled to receive in the first year, for example, after he retires?

MR NETTLE: Yes.

GLEESON CJ: When does he turn 72?

MR NETTLE: In 2009 - I am sorry, 2019 - nine.

GLEESON CJ: 2009?

MR NETTLE: Yes.

GLEESON CJ: So they are making assumptions about what levels of judicial remuneration will be at in the year 2010?

MR NETTLE: No, they do not. The assumptions are based upon increases up to the point of retirement.

GLEESON CJ: They make an assumption then about what judicial salaries will be in the year 2008?

MR NETTLE: Correct, and they assume an increase which is dealt with in paragraph 85 at page 85 of the case stated book of 4.5 per cent.

GLEESON CJ: That is my point.

McHUGH J: This Judge is 2019, is not he?

MR NETTLE: 2019, yes, your Honour.

GLEESON CJ: All right. Well, in 2018, do they assume that judicial salaries will keep pace with inflation or do no more than keep pace with inflation?

MR NETTLE: Well, they just make an assumption which is set out there of 4.5 per cent which is demonstrated in the table at page 102. It is an assumption open to be made by the actuary in accordance with the general precepts of SCR 71, and his assumption is it will increase 4.5 per cent every year. If I may say so, I think that your Honour's question to me which I failed to answer was this: is it calculated by reference to the salaries after retirement or by reference to the salaries up to retirement? The answer is the latter. It is almost imposing a private-type fund calculation where the pension is calculated by reference to final salary of the member rather than a calculation by reference to the salary of the office holder from time to time after retirement.

GLEESON CJ: And the calculations could be thrown out if there was any significant change in the principles according to which judicial remuneration is set.

MR NETTLE: Yes, because - and this is another reason - could I ask you to look, perhaps to better answer this, to page 102 which really does make the point. Page 103 is even better because this shows the point right up to retirement. The point is this, under these so-called actuarial calculations, it is assumed, for reasons which I do not understand, that all of the entitlement to the pension accrues within the first 10 years of judicial service, so that all of the surcharge must be brought - is exigible in the first 10 years of service because it is only - - -

GLEESON CJ: I am not encouraging you to quarrel with that assumption.

GAUDRON J: Well, for some of us who were appointed at a younger age - - -

GLEESON CJ: That is a brutal comment.

GAUDRON J: - - - the assumption may not be correct.

MR NETTLE: If your Honours please. But looking down that table at page 103 - - -

GAUDRON J: I do not encourage you to pursue either of the propositions.

MR NETTLE: Looking down that table, your Honours will see, looking to the middle column, the "Surchargeable contributions" column, that there is only surchargeable contributions actuarially calculated for the first 10 years of service, and they have been calculated - looking two columns left - by reference to a judicial salary which has been assumed to increase up to the point of retirement at the rate of 4.5 per cent per annum. Then it is all over. Regardless of what happens to judicial salaries after that day, that year is locked in place, and the surchargeable contributions have been brought to account.

GLEESON CJ: Yes, but one of the points you make in your submissions, as I understand it, is that if a person remains in office after having served 10 years and reached the age of 60 - - -

MR NETTLE: Yes, and the longer he - - -

GLEESON CJ: - - - not only do they cease to receive what the Americans call "compensation" for remaining in office a longer time, by reference to this factor, but the amount of pension that will ultimately be paid to them between the date of their retirement and the date of their death necessarily diminishes.

MR NETTLE: Well, your Honour, exactly the point. Can I demonstrate that by a comparison of pages 102 and 103. If your Honour starts with 102, bottom right-hand corner, if one assumes that the first-named plaintiff resigns after 10 years, or retires after 10 years - as soon as he becomes entitled to receive a pension - bottom right corner, "commuted value" of pension: $498,000. Whereas over the page, if he continues to serve to age 75, he has a commuted value of pension of $544, 841. So that his surcharge, albeit limited to 15 per cent of the so-called employer contribution at the date of the retirement, is greater if he goes to age 72, serving the Crown, than if he knocks off at age 60, as soon as it falls in.

GLEESON CJ: And the amount of pension that will be paid to him is reduced by - - -

MR NETTLE: The number of years for which he has worked.

GLEESON CJ: - - - 12 years.

GAUDRON J: Mathematically, that cannot be correct. I do not care what the actuaries have said. Mathematically, that cannot be correct.

MR NETTLE: Your Honour, we submit, that is right, and it brings us to the fourth construction point - this word, "accrued to". Herein lies the mistake. If one goes to the Superannuation Contributions Tax (Members of Constitutionally Protected Funds) Act, in section 7(4) - - -

GAUDRON J: Can I interrupt you and go back? I am sorry - - -

MR NETTLE: Not at all.

GAUDRON J: I am finding you a little bit too quick for me. The value of one's pension after 10 years and at age 62 must be greater than the value of one's pension at age 72 after 20 years.

MR NETTLE: Yes.

GAUDRON J: Mathematically, that must be so.

McHUGH J: I do not think that is right, is it? Because what has happened is that your life expectancy is further ahead when you are aged 60, and therefore - - -

MR NETTLE: There is no doubt, on the materials, that the value of the pension at retirement age 60 is a great deal more than the value of pension at retirement 70.

McHUGH J: Yes.

GAUDRON J: So what is the value we are talking about in the right-hand column, at pages 102 and 103? We must be talking about the value of the contributions, are we?

MR NETTLE: Can I put it roughly, before I take you to the detail? What the actuary does - put aside whether or not it is sanctioned by the Act - is this. He says: "I know that after 10 years' service and aged 60 or 62", whatever it is - - -

GLEESON CJ: Sixty.

MR NETTLE: "Sixty, the judge becomes entitled to receive a pension. I will therefore assume that his or her pension entitlements accrue in those 10 years. As an actuary, I will ask myself this question. If there really were a fund there, and the employer had to put into it the money to fund a pension which begins at age 60, how much would the employer have to put into it each year?" Those are the contributions. Having worked that out by a whole lot of assumptions about how long the chap will live, and whether he has a wife, and the rest of it, he works out - - -

GAUDRON J: Or a chapess.

MR NETTLE: Or a chapess - the actuarial calculated value of that contribution for the year.

GLEESON CJ: But it is not all that strange an exercise, is it, Mr Nettle?

MR NETTLE: No, it is not, your Honour.

GLEESON CJ: It is exactly the same exercise that an insurance company would go on if approached by a judge and the judge said to the insurance company, "I want to buy an annuity on the following terms and conditions."

MR NETTLE: I said to your Honours this morning it is a calculation which is frequently done in private funds and also in insurance.

GLEESON CJ: There are some governments in the world that have abolished judicial pensions altogether - and I think New Zealand is one of them - and it would be possible for a government to say, "We will increase your salary by a certain amount and you can go to a life insurance company and buy an annuity on terms and conditions identical with the judges' present pension arrangements or you can take it out and put it on a race horse. You can please yourself."

MR NETTLE: Yes.

GLEESON CJ: So the exercise that they are going through is a fairly standard actuarial exercise and involves making assumptions that may not be valid in relation to an individual, although if an individual judge went to a life insurance company to buy an annuity, presumably they would, as it were, personalise the exercise a little more.

MR NETTLE: Yes, they would. They would not take it on a fund. Indeed, they would subject you to a searching medical examinations and interrogatories pages long to find out exactly what your circumstances were so they could load up your premium. In reverse here, someone who is not subject to the detriment or burden, as it were, of having a spouse or another pension to be made later, still is afflicted with the fact of the general average which brings those things to account.

GAUDRON J: What my question really is, is this. Column 1, "15% of commuted value" of what? It is obviously not the pension. Of what?

MR NETTLE: Just come across to the middle to the "Judicial salary", then there is the "Notional Surchargeable Contribution" calculation and then there is the "contributions". But there is a limit of 15 per cent of what is the employer contribution and the employer contribution is calculated, roughly speaking, as being the amount of money which would have to have been put in in order to fund a pension payable as at and from the date of retirement of the particular judge.

GAUDRON J: So, if I write in my first-hand column 15 per cent of commuted value of State's contribution or of State's obligation - "contribution" sounds a silly word in this context - am I right?

MR NETTLE: No, not really. The right-hand column is what is called "the cap", that is to say, although one has a surcharge liability imposed upon her or him, or in respect of her or him, each year which is worked out under the "Surchargeable contributions" column by reference to the actuarial notional surchargeable contribution factor, when the judge finally retires the Act applies to say that despite the account being in debit by reference to all of those surcharged contributions and interest the surcharge debt will be limited to 15 per cent of the employer contributions and the employer contributions are then a further actuarial calculation to determine what it is that would have to have been paid to fund a pension from there on to death.

GLEESON CJ: Look at the amount of "$100,434" and the amounts under that. Are those rather like the amounts that an individual judge might have to pay to a life insurance company each year in order to buy an annuity?

MR NETTLE: At age 60.

GLEESON CJ: On the same terms and conditions as the judge's pension.

MR NETTLE: Roughly speaking, yes.

GAUDRON J: Which annuity may not fall due for payment at the age of 60.

MR NETTLE: That is right but it is a case of the annuity - - -

GAUDRON J: I am sorry, I am being a little mathematical here and I do apologise.

MR NETTLE: Your Honour is right. The actuary, rightly or wrongly, calculates the surcharge on the assumption that by age 62 and 10 years service a pension will begin to be paid. He asks himself how much must the employer put in each year in order to fund such pension, as if there were a fund there. That notional exercise gives rise to the contributions or the benefits said to accrue - - -

GAUDRON J: And it may have nothing to do with the facts.

MR NETTLE: No, nothing at all.

GLEESON CJ: It is age 60 actually.

MR NETTLE: But in this case 62 because he must serve 10 years. It is a double condition.

GLEESON CJ: Was he 52 when he was appointed?

MR NETTLE: Correct, whereas in the case of the second plaintiff it is straight up 60 because 10 years had elapsed.

GAUDRON J: So this is a fictional calculation in a sense that has nothing to do with the value of the pension as it might ultimately turn out to be either in the individual case or in the average case or the mean case if there is a difference?

MR NETTLE: That would be overstating it, your Honour, I must say. This is an actuarial exercise which assumes that a pension will begin to be paid at the first opportunity that the judge could possibly begin to take one.

GAUDRON J: Which we know, however, is not the assumption upon which the calculations proceed.

MR NETTLE: Correct. In reaching that view, a number of assumptions are made about ages of retirement, the age at which the general fund will retire, so the decrement rates, the rates of mortality, the rates of retirement are taken on the basis of general assumptions which are set out in great detail in the case stated and also in the written argument at paragraphs 89 to 96.

GAUDRON J: The reason I am asking this - and I am sorry to take up your time - is because ultimately the proper characterisation of this impost may be a tax on death or retirement and it may not be properly capable of any other characterisation.

MR NETTLE: It is payable, your Honour, in respect of events which occur before death or retirement.

GAUDRON J: I am not too sure. It may well be like the excise that was considered in Ha. If you cannot in truth relate it to the individual case or to the mean or the average case - this is all assuming you lose the construction points - what can you say other than it is a tax on death in the case of judges who die in office and on retirement in the case of those who do not?

MR NETTLE: Your Honour, I do say that but as your Honour says, it is a little bit overstated to say that you cannot wholly relate it to that. When the actuary sits down he says, "I will assume that the pension accrues in the minimum period which must elapse before the judge could take a pension." However, in deciding how much accrues by way of benefit, he makes assumptions not that the judge will necessarily retire at the first available date but that he or she will retire at the average date for that group of judges.

GLEESON CJ: Is that because the exercise that the actuary is going through here is rather like the exercise the actuary would have to go through if asked by a State government to advise on what financial accounting arrangements the government should make if it decided to fund its judicial pension scheme?

MR NETTLE: The answer is yes, your Honour.

GLEESON CJ: And there would be prudential assumptions built into that.

MR NETTLE: Yes.

GLEESON CJ: To ensure the actuarial viability of a funded arrangement.

MR NETTLE: Yes, exactly so. Now, these calculations are not made for that purpose. Different calculations are made for that very purpose - not that the funds are set aside, but to keep an eye on the liabilities which are there, or at least contingently, for the future. They are dealt with at some considerable length in the New South Wales Government Actuary's Report, which is included in the materials. This exercise is a different one.

McHUGH J: Not only is it different but it is differently applied in Victoria and New South Wales, is it not?

MR NETTLE: Yes it is.

McHUGH J: Because the Victorian actuary assumed that judges would retire at age 72 whereas the New South Wales actuary assumed - - -

MR NETTLE: Several peaks.

McHUGH J: - - -that a certain per cent of judges would retire as soon as they could.

MR NETTLE: As a.....at first opportunity and then none in the middle and another towards the end, yes. Different assumptions. What is more, it is said a different actuary next year could make different assumptions about that, albeit that he is confined in part by reference to the assumptions made on some parameters for the previous year of operation.

GAUDRON J: But, Mr Nettle, do we not have to at least come to grips with what the actuary is measuring?

MR NETTLE: You do, your Honour.

GAUDRON J: So as to characterise this tax.

MR NETTLE: We do, and I was going to direct you, if I may, to the Contributions Tax Assessment Act of section 8(4).

GAUDRON J: But bearing in mind it is imposed - this is on the assumption that you lose the construction point - it is imposed on a judge, or somebody who was a judge. So we have to add that in when we determine what is being taxed.

GUMMOW J: You took us to 8(4)?

MR NETTLE: I wanted to go over to 8(4) or to - - -

GUMMOW J: There is a cloud of definitions in 8(4).

MR NETTLE: If we go to section 9(4) of the Constitutionally Protected Funds Act, which is like 8(4) of the Assessment Act, surcharge is calculated on the actuarial value of what is said to be the benefits that accrued.

GAUDRON J: Actuarial benefits that accrued, when?

MR NETTLE: Now, 9(5) provides a - - -

GAUDRON J: When? I am sorry.

MR NETTLE: In the year of income to which the surcharge relates, your Honour.

GAUDRON J: But we know that they did not.

MR NETTLE: Quite. Therefore, there is a definition which might or might not be adequate to deem them to accrue - in our submission it did not - in section 9(5). You will see there is a formula: "Annual salary" for that year, times the "notional surchargeable contributions factor". If you turn the page, the "notional surchargeable contributions factor" is defined by reference to what either the Commissioner says it is or, alternatively, what is prescribed by regulations. Now, the Commissioner has said that it will be the methodology set out in SCR71 and the regulations now say the same. So that if one goes to SCR71, one can see the methodology which is in case stated book volume 2 at tab 9.4, attachment D.

I will direct you briefly if I may to some passages in here. First at page 306, at line 20, the heading "background" where reference is made to:

Subsection 8(3) of the Act provides that the surchargeable contributions -

Secondly, paragraph 5:

The Australian Government Actuary has prepared a method to assist actuaries who have been asked to prepare -

the relevant calculations. Then to page 311, to paragraph 1.2, just above line 10:

Subsection 8(3) of the Act defines the "surchargeable contributions -

They are set out as:

annual salary x notional surchargeable contributions factor"

where the notional surchargeable contributions factor is defined in section 43 of the Act as "the factor applying to the member for that year as certified by an eligible actuary . . .

This Attachment is provided -

to guide the eligible actuary as to how to do it.

Now, over the page, there are a number of definitions of some relevance, the first of which is at page 312, non-accruing members. May I ask you just to note it in passing. Then if I could direct your Honours' attention to page 314 to paragraph 3.1. You will note paragraph 3.1.1:

The intention is for NSCF to be calculated in a manner consistent with Professional Standard 402 -

That is the standard, your Honour Chief Justice, which is applicable to superannuation funds generally for the calculation of funds.

GAUDRON J: Well, let me interrupt you there. Applicable for working out the contribution or the amount that should be paid in to enable it to be a fully funded scheme or something of that nature?

MR NETTLE: Yes, correct.

GLEESON CJ: And to work out whether they are actuarially viable at - - -

MR NETTLE: Then if I can direct you to 3.1.2:

It is intended that the NSCF be calculated as the present value of employer provided benefits accruing in the year using the actuarial assumptions determined in accordance with Parts 4 and 5 of this Attachment.

Your Honour Justice Gaudron, there you see how one gets the calculation for the relevant year, paragraph 3.1.2.

GAUDRON J: Yes. Well, I see that, so I go back to my question.

MR NETTLE: You need to go to 4 and 5 as well to see how it is done.

GAUDRON J: Yes.

MR NETTLE: If you go to paragraph 4 at page 318, you see a discount rate is assumed in paragraph 4.2.1 of "the 10-Year Commonwealth Government Bond Rate". Then, if you go please to paragraph 5 at page 320. In paragraph 5.2 assumptions are made about "decrement and other parameters". It is provided in 5.2.1. that they should be the rates used for "those adopted" and "prepared for SIS purposes", and in 5.2.2:

should be those adopted at the most recent actuarial valuation (as defined in paragraph 5.2.1.)

GAUDRON J: Can I go back and annoy you a little bit. Looking at these general parameters, one comes to the conclusion that one is not taxing a judge - assuming you have lost your construction point - by reference to the benefit he or she receives on retirement.

MR NETTLE: Your Honour, there is no doubt about that and it is confirmed by what the New South Wales' Government Actuary says in the report which is attached to the case stated materials - - -

GAUDRON J: Yes. Well, just wait for a little while. There is nothing, is there, at least so far as I can see - but tell me if I am wrong - which would enable you to conclude that judges are being taxed by reference to the average benefits or the benefits that the average judge receives?

MR NETTLE: No, that is not quite right. I mean, allowing - - -

GAUDRON J: Well, is there something that tells me the average benefit in this formula that says, "You will go and work out a sum and tell me what is the average value of the pension to judges who die or retire"?

MR NETTLE: Your Honour, I can do that, but by remembering this: sections 8(4) and 8(5) require the surcharge to be calculated as the annual salary times the notional surchargeable contributions factor. The notional surcharge contribution factor is then required to be calculated by the methodology determined by the Commissioner through regulation. What he has decreed through regulation is that the methodology which be followed is that which is set out in SCR 97/1. What SCR 97/1 provides is, as I endeavoured to show you in section 3 is, that the actuary is required to calculate:

the present value of employer provided benefits accruing in that year -

and then in section 3.2, there is an explanation that the actuarial calculation of the benefits said to accrue is carried out in accordance with Professional Standard 402, by reference to the assumptions made in sections 4 and 5. The assumptions, if you go to those in greater detail than I did, are assumptions, to some extent, predicated upon the position of the particular judge being the average for the scheme and in other extent differently.

GAUDRON J: Yes, but that is not my question.

MR NETTLE: I see.

GAUDRON J: At a certain point the average is factored in to work out what would be a prudential course for a government to take if it were to set up a fund or if it were to make proper provision for unfunded contingencies.

MR NETTLE: Yes.

GAUDRON J: That is what it seems to me the SCR 97/1 does and perhaps the standards. The question I am asking is a different one. Can it be said from all of that - and at the moment I do not see how it can - but can it be said from all of that that albeit that the calculations and the assumptions are differently expressed, at the end of the day, you are measuring the benefit of the pension to the average judge or the value of the average pension that a judge will receive, if there be a difference?

MR NETTLE: I suspect they are probably the same, but the answer is it is attempted to be calculated subject to assumptions in errors by reference to an average. I can give you no better explanation of why that is so - - -

GAUDRON J: But it is a different average, is it not?

MR NETTLE: Yes and no, your Honour. Can I ask you to go to tab 9.14 to the New South Wales Government Actuary's report where he explains the working of it a little.

GLEESON CJ: This is volume 3 of the case stated book?

MR NETTLE: Yes, your Honour, thank you. As is noted, this is the first report to be produced after the inception of the scheme. I will need to pass over this very quickly, I am conscious, but towards the bottom of 468, just after line 30, reference is made to the scheme being "Constitutionally Protected". Over at page 469 in section 4, line 15, reference is made to the introduction by the Commonwealth of the surcharge. The next paragraph is of some assistance:

The amounts of surcharge are determined each year and a 15% tax is charged in respect of members with income above the threshold. The method of calculation is specified by the Commonwealth but includes use of the demographic assumptions from the previous actuarial review or other appropriate basis. The use of demographic assumptions has two consequences. Firstly the results will be right only on average and in some instances the tax will be too much and in some instances it will be too little.

GAUDRON J: That is what I am saying, on average, what? You can have various averages. On average - - -

MR NETTLE: On average, the assumptions made in sections 4 and 5 - - -

GAUDRON J: Will be right on average if one is valuing the notional contribution of the State or right on average if one is valuing the benefit that a judge will receive?

MR NETTLE: Your Honour, both. They make assumptions that the particular judge - - -

GAUDRON J: That is not what they say.

MR NETTLE: I will show why. They make assumptions the particular judge will live as long or have as many spouses as and other decrement factors as all of the other judges in the pool and they make an assumption that the judge will retire and receive a pension for the same period as the average or mean calculated for all the other judges in the pool. Having made those assumptions, they then by actuarial means determine how much would have to be contributed by the employer if there really were a fund to fund a pension of that kind beginning at the assumed average retirement date and extending for - - -

GAUDRON J: Yes, but that is the point I have been trying to make. The calculation of the value of the contributions that a employer would have to make is not the same thing as the calculation of the value to the Judge.

MR NETTLE: Your Honour is absolutely right. There is no necessary connection between the two.

GAUDRON J: And there are a lot of passive voices and unidentified predicates in these statements and if they are not the same thing I am quite happy to accept - I think there is no doubt that these assumptions calculate the value of the employer's contribution if such were made.

MR NETTLE: Yes.

GAUDRON J: What I am not satisfied is that there is anything in that methodology which reflects a calculation of the value of the pension to an individual judge, to the average judge or to the mean, if you were to throw judges over a normal distribution curve, which may not be a bad idea.

MR NETTLE: No, I follow. I am not here to argue the logic of the methodology but there is some sense to it, albeit that it produces irrational and unacceptable results.

GLEESON CJ: Even so, one result it certainly produces is that if Justice Austin and his wife are killed in a car crash a week after he retires - - -

MR NETTLE: Full surcharge debt with no benefit.

GLEESON CJ: Exactly.

MR NETTLE: Correct. And there is more than that. If I could just go on a little in this government actuary's report because the points are made far better than I can.

McHUGH J: Can I just follow this in trying to understand this concept of the average judge. Am I right in thinking in New South Wales it is really a hypothetical average because of the weighting, that it is weighted in terms of 30 per cent retiring at 60, 6 per cent between 60 and 72 and 64 per cent between 72 - - -

MR NETTLE: Yes, it is hypothetical, for just that reason, amongst others.

KIRBY J: That might be what has been the pattern in recent years in New South Wales. New South Wales judges may be less conservative than Victorian judges. Victorian judges might like to stay and be members of the clubs and all the other things that they have in Victoria, and New South Wales judges want to go out there and become arbitrators at very high fees.

MR NETTLE: Your Honour, I know nothing about either subject.

KIRBY J: It is always possible that you could have a difference - there is a difference in the culture of the legal profession in different States, so presumably the actuaries have taken that into account.

MR NETTLE: Your Honour is right.

HAYNE J: One wonders how.

GLEESON CJ: It is actually 6 per cent a year between 60 and 72, is it not?

MR NETTLE: Yes, it is.

GLEESON CJ: So the final figure is not 64 per cent?

MR NETTLE: No.

HAYNE J: But the focus, Mr Nettle, on the position of the provider rather than the beneficiary appears from SCR 97/1 at page 314, does it not, 3.1.2?

MR NETTLE: Yes, your Honour, that is right.

HAYNE J: Identifies employer provided benefits. When you go to 3.1.4 through to .7 you understand that the actuarial value of accrued benefits is focusing on the cost to employer, and if there were doubt about that, page 436, which is part of Professional Standard 402, and the definition of accrued benefit, which underpins, does it not, some of Chapter III of SCR 97/1, is looking to-if you see the second dot point in "accrued benefit":

the proportion of a prospective benefit entitlement based on current salary or average salary, which may be considered to have accrued in respect of membership -

one wonders how -

"actuarial value of accrued benefits" means the present value of all accrued benefits -

but it is the employer focus, not the employee focus, if I can slip into that language.

MR NETTLE: Of course it is, because it is all in terms of what would have to be contributed and what are the contributed amounts or the equivalent. Your Honour, to take up your point, could I come back to what was said by the government actuary at 469 in the middle of paragraph 4 at approximately line 24:

The use of demographic assumptions has two consequences. Firstly the results will be right only on average and in some instances the tax will be too much and in some instances it will be too little. Secondly, because the choice of demographic assumptions affects the amounts of tax payable by individuals, there is a greater requirement on actuaries to adopt demographic assumptions that reflect expected experience for individuals rather than assumptions that may be suitable for the scheme as a whole.

Then to line 35 to make up your Honour Justice Hayne's point:

The surcharge amounts are calculated based on a concept of benefits accruing during the period until a judge has qualified for a pension.

There you see the point that all the accruing is supposed to take place in the first 10 years of service up to age 60.

The surcharge amounts are high in this period and nil thereafter -

as you saw at page 102 in the tables -

The value of a 60% pension to a judge at age 60 -

Justice McHugh's point -

is twice as much as the value of a 60% pension to a judge at age 72 and the surcharge amounts are based on an average age of retirement, so judges who retire at 60 will pay too little surcharge and those who retire at age 72 will be assessed for too much surcharge. Judges whose surcharge is too high are protected by a 15% cap -

I interpolate, but only partly, as you have seen from the tables -

Very roughly the reduction in pension due to surcharge for judges who retire at 60 will be about 10%, and this reduction will increase -

up to 15 per cent at age 72. It would be more but for the cap. Then the next paragraph just below line 10:

Judges who retire at older ages have always received a lower value of benefit since payments will on average be paid for shorter periods. The effect of the surcharge is that in future they will also receive lower amounts of pension payments, which is a perverse outcome for longer service.

That is to say they pay more surcharge the longer they work.

GLEESON CJ: Tell us about it.

KIRBY J: They opt for job satisfaction.

GAUDRON J: Let me get this right. I am asking you these questions because I think at the end of the day if you lose the construction point, one has to say what in substance this taxes.

MR NETTLE: You are right. It attacks as the actuarial value of the benefits accrued and there are none. What the actuary has done is to make up an actuarial conception of what has accrued.

GAUDRON J: If there are none, does it not simply tax death and retirement of judges?

MR NETTLE: Yes, it does.

GAUDRON J: That is all I am asking, albeit calculated by reference to what the value of the employer's contribution would have been had a fund been established.

MR NETTLE: And had that judge retired at the average age calculated by reference to whatever experience and lived for the average period after retirement and received the pension for the whole of it, yes.

Your Honours, it may be of some interest or of assistance, at page 471 in the middle there is the profile of the judges which this actuary has used. Just below line 10:

profile of judges at the valuation date . . . summarised below. It is evident that while the number of serving judges has remained fairly steady, the proportion of female judges has increased.

Happily, no doubt:

Salaries increased by 17% over this period of just over 3 years.

These factors are to some extent fed into the calculation as you will see later.

GAUDRON J: Why is it thought that one should segregate men and women?

MR NETTLE: Different decrement rates, your Honour, different life expectancy, different marital experience.

GAUDRON J: Is there any evidence that women judges live longer than male judges? I mean, it may be that women live longer but I have not noticed that they were women judges that support that - - -

MR NETTLE: There is real force in the point, if I might say so. When you bring it down to the relatively small number of women that are judges, it makes the point that because they work as hard they probably die just as fast as male judges, as opposed to women in other sectors.

GAUDRON J: Because they work twice as hard they probably die twice as fast.

MR NETTLE: Your Honour puts it far better than I could hope to do.

GLEESON CJ: There is a related point too, is there not? You are dealing with a very small statistical population.

MR NETTLE: Yes, you are.

GLEESON CJ: And when you are dealing with a tiny statistical population, average assumptions become even more unrealistic.

MR NETTLE: The distortions are immense.

HAYNE J: Well, Mercers, the actuaries for Victoria, have regard to the parliamentary experience because they knew about it.

MR NETTLE: That is right, had no other experience apparently from which to work except the parliamentary fund. How that could be possibly thought to be relevant to judicial pension scheme, only one could say.

Your Honours, page 473, "Valuation Assumptions", paragraph 7:

Both economic and demographic assumptions are required in order to estimate the amounts . . . I have examined their suitability in relation to the expected experience of the JPS and to each other. They have been chosen to reflect the long-term experience of the Scheme.

Then at line 30:

In making projections of future salaries, payments and accrued liabilities -

Chief Justice:

I have assumed salaries will increase at 4% per year.

There is just a couple more. At page 477, line 34, "Vested benefits":

Vested benefits are those that would be payable if all members were to withdraw from the scheme . . . Vested benefits are therefore pension benefits for all judges over age 60 with at least ten years of service, and the withdrawal benefit for other serving judges.

KIRBY J: How does a judge withdraw from the scheme?

MR NETTLE: The only way he can is to retire or to resign, your Honour.

KIRBY J: If he has served his time, he cannot withdraw. The statute descends on him or her.

MR NETTLE: He or she can leave voluntarily, unless they are removed. If they retire having qualified for a pension, they will receive it. If they resign before receiving a pension they will, in the case of the first plaintiff, receive a lump sum benefit calculated by reference to his salary multiplied by a small factor under the SIS regulations, but to reference to which is different for the purposes of calculating surcharge.

At page 490, line 28:

Any members who have reached age 60 with ten years' service, or who have subsequent to reaching age 60 attained ten years service, are defined as non-accruing members -

Therefore, no surcharge, just interest accumulating:

The accrual of pension has been assumed to occur over the minimum qualifying period for surcharge apportionment purposes, and therefore it is appropriate to exclude further service from surcharge accrual calculations.

GUMMOW J: Now, you were dealing with your last construction point, "accrued to", which started at paragraph 53 of your submissions.

MR NETTLE: I really have done it, for better or for worse. The point is this, what the Act requires in section 8(4) of the Assessment Act, or in section 9(4) of the Constitutionally Protected Funds Assessment Act, is that the value of the benefits accrued be "the actuarial value of the benefits that accrued to". Now, in working out what these actuaries have done, they have not worked out the benefits that accrued. They have worked out some sort of actuarial conception of contributions made by a provider.

KIRBY J: But is this a criticism of the actuaries, rather than of the statute?

MR NETTLE: No, it is more than that. It is to say that because of the nature of a judges' pension scheme, there are no benefits accrued at any point before retirement. Nothing comes home and is vested. There is no entitlement which cannot be removed. All that happens is that he or she gets one day closer to the date on which, if they qualify, a pension might begin to be paid.

GAUDRON J: That may not be right. It may be that they do accrue, at least, in New South Wales, once a judge has served 10 years and reached 60. It may be that you can then properly say they have accrued.

KIRBY J: And even before then, it is - shall we put it this way - something of a comfort to a judge to know if I am hit by a car, if I go down with cancer, then there is a benefit for my spouse or partner - some partners - and my children.

MR NETTLE: Your Honour, there is no - - -

KIRBY J: And that has an economic value. An economist would tell you that has an economic value.

MR NETTLE: He might, but no benefit accrues to you as a judge if, God forbid, tomorrow you die without receiving any pension. You have had nothing for it, and yet the surcharge contributions have been assessed. It is in that sense, it is submitted, there is no benefits accrued. Nothing begins to accrue until you begin to qualify and take pension, and even then, as a matter of statute, it accrues only from day to day.

GLEESON CJ: It is really a reflex of the approach that is taken towards calculating the value of remuneration packages, which are on a cost to employer basis - - -

MR NETTLE: Correct.

GLEESON CJ: - - - rather than a benefit to employee basis.

MR NETTLE: Your Honour, the point is either a good one or it is not. If one takes the view that, despite the infelicity of the language, what is being provided for in section 9(5) is an actuarial calculation of what the Commissioner determines by regulation, then the point is of no substance. If, however, you take the view which we would urge upon you, that what was intended, at least by the legislature, was that there should be an actuarial calculation of such if any thing that actually accrued, then the point is one of substance, because nothing actually accrues until the pension begins to run, and then only accrues from day to day.

GLEESON CJ: Well, that depends on what you mean by the word "accrue", does it not?

MR NETTLE: It does. Can I go to the second question, your Honours, conscious of the time. If, contrary to our submissions, you were to take the view that the first and second named plaintiffs' schemes are schemes which are constitutionally protected funds within the meaning of Part IX of the Income Tax Assessment Act and thus within the meaning of the Constitutionally Protected Funds Act, and if you are against us on all of the other construction points, of whether or not they are defined benefit members and whether they are accrued, so that the Constitutionally Protected Funds Act does apply in terms, then it is submitted that it must follow that it evidently has so singled out and discriminated against members as to be an exercise which is unconstitutional.

I am repeating a point which I made this morning or endeavoured to a couple of times in answer to a question of your Honour Justice Kirby. It is not the case that the members of the constitutionally protected funds which ex hypothesi are affected by this Act have been put on the same plane as others. If they were, perhaps there might be no complaint. The complaint is that they are being put on a wholly different and more adverse plane than any other relevant taxpayer and they are being on that wholly different and more adverse plane because, unlike any other relevant taxpayer, they do not have the surcharge liability paid by the provider. They are saddled with a liability of in excess of $500,000 in the case of the first plaintiff and $400,000 in the case of the second on day one or day 90 of retirement, whether or not they receive anything substantial in pension.

GAUDRON J: Do you not have to add into that that they are discriminated against because private sector employees in the same category, that is to say, unfunded schemes do not get any surcharge at all?

MR NETTLE: That is exactly right. Under the Assessment Act, section 16(6), in the case of a private unfunded employee it is paid by the provider. In the case of the Constitutionally Protected Funds Act in the case of a member, it has to be paid by the member and by day one, regardless of the benefit that actually finally comes home.

GAUDRON J: No, but there is no surcharge for some at all.

MR NETTLE: There is no surcharge for some at all.

GAUDRON J: Yes, for the private sector unfunded person, there is simply no surcharge.

MR NETTLE: Correct, no surcharge at all.

GAUDRON J: The employer may have find that there is no deduction for the amount he, she or it pays out, but it seems to me there are two levels of discrimination in this case.

MR NETTLE: With great respect, I agree, but the essence of it is this. Time and again the Commonwealth say in their submissions that what has been done here is to place members of constitutionally protected funds in a position which is relevantly the same as other taxpayers. Nothing could be further from the truth because the comparison is as Justice Gaudron says. On the one hand, the private defined benefits member or non-constitutionally protected defined benefits member, in which case the surcharge is paid by the employer or provider and, on the other hand, the member of the constitutionally protected fund who has a defined benefit who must himself or herself pay the surcharge on day one of retirement, regardless of benefits actually coming home.

GLEESON CJ: A problem which has been addressed and solved by States or some of the States by the States' scheme of partial commutation which, on your argument, puts the legislation out of the frying pan into the fire.

MR NETTLE: Yes, it does, your Honour. Even before going to that, may I say solved only in part because if you look through the pass-through legislation which is in the materials in the case of the first-named plaintiff, the New South Welsh judge, the actuarial calculation for reduction of the pension is wholly at large. One assumes good will and so forth and proper principles being applicable, but there is no guarantee that the reduction in pension is going to measure something which is equivalent to whatever benefits have been surcharged. Nor is it for the moment necessarily the case that whatever political persuasion gets in or out of power next year or whichever year it might be is going to maintain it. The point is that the Commonwealth Act is in no way predicated on there being a commutation regime in the State to which the judge - has the Act apply.

Arguably it might be different if it said where there is a State Act which has the effect of commuting so that there is then an entitlement to pass through, it will be taken that there is a benefit, but no such thing is provided. The reason is because the Commonwealth legislation in the Constitutionally Protected Funds Act is not seeking to place the Judge and other members in the same position as those who are not constitutionally protected. The concern is really not with the members at all. What the Commonwealth is seeking to do is to get up front and out of the Judge what it gets up front and out of the providers under the Assessment Act but apparently thinks on this leg of the argument it cannot get up front out of the State.

So it discriminates against the members of the constitutionally protected fund not because of any design benefit, as it is said by the Commonwealth, of the judges, or because of any particular circumstance of the Judge, but solely because ex hypothesi it cannot levy the State in the same way that it levies the provider in the case of the Assessment Act.

KIRBY J: But that is only so in the Commonwealth's thinking because of the perceived constitutional impediment of section 114, but the object of the legislation, as it were, taking a detour because of that provision, is to levy the tax equally upon all people.

MR NETTLE: No, that is just the point I was seeking to get to. Your Honour said that to me before. The answer is no, that is not the case because this legislation by design does not seek, nor does it put the - - -

KIRBY J: That is your point and I understand that, but I have in mind what Justice Holmes and Justice Brandeis said in the US Supreme Court that there is no reason why judges should not pay the same as all citizens.

MR NETTLE: The same as all.

KIRBY J: Exactly.

MR NETTLE: But they do not pay the same as all; they pay much more, more than anybody.

KIRBY J: Well, they pay it up front but in some contingencies they will pay less; in some contingencies they will pay more, depending upon how life works out for them.

MR NETTLE: Here is the point. If the Judge's liability came about as a result of legislation which applied generally to the relevant class, perhaps one could have no complaint, but it comes about not because of that. If it did, they would be in the Assessment Act. It comes about because the Commonwealth has refused to levy the State and because it cannot get from the State what it wants to get from the State as it does from other providers, it turns around and goes discriminately against the Judge.

KIRBY J: What is this principle of non-discrimination? How is it expressed and what is its foundation?

MR NETTLE: Can I take your Honours first to the Queensland Electricity Case [1985] HCa 56; (1985) 159 CLR 192.

KIRBY J: In terms of concept, is it founded in the nature of taxation or is it founded in the nature of certain high office holders of the State or is it both?

MR NETTLE: Your Honour, there are a number of jurisprudential views about it. One of them is that it is a vestigial remain of the implied immunities doctrine, which was referred to, if I may so characterise it, by his Honour Justice Gummow in the.....Case. Another view of it is that if in the apparent guise of exercising a head of constitutional power the Commonwealth enacts legislation which evidently discriminates against the State, it cannot be an exercise of the constitutional power but must be an exercise of something else.

But whichever of those two juridical bases it derives from, or perhaps from both, the position, it is submitted, is clear after this Court's decision in Melbourne Corporation and followed by Queensland Electricity, and it is that wherever an Act singles out and discriminates against the agencies of the State by singling them out and imposing on them some special burden or disability which it does not impose upon persons generally then the law will be unconstitutional, unless there is some relevant and sufficient justification for the discrimination, be it either in the essential nature of a head of power relied upon or something else less defined.

In this case, our case, the case before your Honours, it is clear, because it is obvious, that there is discrimination. This legislation treats the members of the constitutionally protected funds differently and imposes upon them a special burden and disability which it does not oppose upon anyone else, generally speaking. There is the discrimination. There is the starting point. Now, according to the doctrine under Queensland Electricity and Melbourne Corporation, unless in doing so the Commonwealth is exercising a head of power, the essence of which concedes of discrimination of the kind engaged in or, alternatively, unless there is some other sufficient justification, that legislative exercise will be unconstitutional. Just before I move - - -

GAUDRON J: Now, Mr Nettle, I am sorry I am giving you a bad time. There is a very signified notion of discrimination in your submissions.

MR NETTLE: Yes.

GAUDRON J: The jurisprudential notion of discrimination has moved along a little bit since SEQB, since the Queensland Electricity Commission cases.

MR NETTLE I had in mind your Honour's own observations and Castlemaine Tooheys as being still, with respect, the appropriate test. That is, on all fours if I may say so, with what was said QEC. Unless either it is - that is to say the exercise in discrimination, is justified by the nature of the head of power relied upon, or otherwise by relevant reference to some relevant consideration of the kind to which your Honour referred in Castlemaine Tooheys with Justice McHugh, then you have discrimination - - -

GAUDRON J: No, I think there is another qualification that is not in Queensland Electricity.

MR NETTLE: Can I take it in turn? Let us start with the head of power relied upon. Here it is the tax power. Of itself obviously it does not have within it the right to discriminate against the States. Indeed, the taxing power is the antithesis of discrimination. So one cannot say that it is inherent in the nature of the tax power that there will be discrimination. Quite the contrary. Come then to what is a sufficient justification. Could I go, your Honours, first to what was said by Chief Justice Gibbs in the Queensland Electricity Case at 207 to 209. Just below the top, about eight lines in, next to the reference to the "Commonwealth" in the side note:

Further, notwithstanding the reference by Dixon J. in the passage cited from Melbourne Corporation v The Commonwealth and elsewhere, to "the restriction or control of a State in the exercise of its executive authority", there is no reason to limit the doctrine to laws which interfere only with the executive power of a State. A Commonwealth law which is directed at the exercise by a State of any of its governmental powers - legislative, executive or judicial - will fall within the ban. Stephen J recognized this when he said in Koowarta v Bjelke-Peterson . . .

The limitation prevents the Commonwealth from making laws directed at agencies of the States as well as at the States themselves; otherwise the principle would be a futility.

I emphasise the word "agencies" because it was one I used this morning when answering a question of Justice Gummow as to how precisely the discrimination must be directed against the State before it will be regarded as unconstitutional. At the next paragraph down:

I have already said that the provisions of the Act are directed at the electricity authorities in Queensland; the Act singles them out for attention and subjects them to disabilities to which other employers are not subjected. The electricity authorities are agencies of the State of Queensland - they perform public functions, under the authority of legislation of the State, and are substantially controlled by the government of the State in the performance of their functions. The fact that some other employers may incidentally be affected by the provisions of the Act does not mean that it does not fall within the implied limitation of Commonwealth power.

Reference is then made to what was said in Melbourne Corporation and then if I can - - -

McHUGH J: Well, it should not be forgotten that in Melbourne Corporation section 48 was directed to the banks, not to the States, but it prohibited the banks from acting for the States.

MR NETTLE: And that gives rise to this debate about whether or not the basis of the doctrine lies in whether the power which is being used is an abuse of the power or whether there is a more general discrimination doctrine.

McHUGH J: Yes.

MR NETTLE: But, your Honour, it is submitted that it emerges, unanswerably really from this case and from subsequent authorities, that there is a doctrine that unless the head of power relied upon is one which intrinsically supports discrimination, discrimination will be unconstitutional unless there is a relevant and sufficient justification of the kind identified in Castlemaine Tooheys.

McHUGH J: Yes. Well, in the ACTV Case I used this doctrine to invalidate certain parts of that legislation and I think Justice Brennan too - if I remember rightly, I think we both - - -

MR NETTLE: Yes. Here, if the Queensland Electricity Authority is sufficiently an agency of the State to attract the operation of the doctrine, then a fortiori must be the judges. So much indeed is conceded properly and in the Commonwealth submissions.

There are similar observations in Justice Mason at 217, the first full paragraph, just above his Honour's name in the sidenote:

This review of the authorities shows that the principle is now well established and that it consists of two elements: (1) the prohibition against discrimination which involves the placing on the States of special burdens or disabilities; and (2) the prohibition against laws of general application which operate to destroy or curtail the continued existence of the States -

Justice Wilson at 226, equally, said the doctrine is of general application, in the middle paragraph, noting that on its face the Act would appear to single out the agencies for special treatment. Justice Deane at 248 to 249. Perhaps most helpfully of all, Justice Brennan at pages 234 and 235.

McHUGH J: Well, you jumped over a passage at 251 and 252 in Justice Deane's judgment, I think it is, where he says that the rationale of the restriction on the Commonwealth power is the preservation of the Federal system.

MR NETTLE: Although his Honour was, it is submitted, there referring more to the second leg, which is to say an exercise of the power calculated to destroy the operation of the function of the State as such, rather than the first.

KIRBY J: But is it an answer to these contentions that the burden here does not fall on the State; it falls on individual judicial officers of the State. They are the ones that have to - - -

MR NETTLE: No, not really or at all, because here one has what might be described as an agency of the State in the sense which that expression is used in Queensland Electricity, and indeed it is conceded to be so, and here, if it is necessary to show some effect upon the State, then it is manifest. I mean, so much discriminates against the members of the executive branch of the government of the State, that it has put in risk the continued operation in terms of continuing to attract appropriately qualified candidates and, as the Chief Justice observed this morning, it is borne out by the fact that there has had to be commutation legislation passed.

GAUDRON J: Judicial arm.

MR NETTLE: I beg your pardon, the judicial arm.

McHUGH J: If it had an income tax which was directed only to State public servants, then arguably it would just fall within the Melbourne Corporation doctrine?

MR NETTLE: Yes, it would, as opposed to payroll tax or to fringe benefits tax biting on State public servants, who are treated no differently to other members of the class, generally which is the point, your Honour Justice Kirby, I come back to.

KIRBY J: I think you make a very naïve assumption about what attracts people to judicial office. In my experience, it is not generally, and certainly not only, money. Anybody who was in the world for money would not become a judge. They would stay in the legal profession.

MR NETTLE: No, your Honour, I make no assumptions about its - - -

GAUDRON J: Well, money may not be the carrot but a tax may well be a poison in the well. A special tax may well be a poison in the well.

MR NETTLE: You would not have to be too solipsistic an individual to be concerned that, on day one of retirement, you would be facing a $500,000 liability after 25 years on a judge's pension.

KIRBY J: I take that point, which is effectively two years of your pension. You have to live more than two years or more.

HAYNE J: Or worse, get rolled over by a bus leaving your estate to pick up the bill.

MR NETTLE: Your Honours, we endeavour to make the point that here, unanswerably, there is singling out and discrimination. That brings us squarely within the Melbourne Corporation/Queensland Electricity doctrine. Unless there is a head of power relied upon which of its nature means discrimination - that is not the case - or unless there is some relevant justification. When you look to the justifications which are put forward, they are woeful, it is submitted. The first of them is in paragraph 77 of the Commonwealth's submissions - - -

GAUDRON J: Could I just stop you there. There seem to me to be two points that need to be addressed and to which I was referring earlier. It is not just that there must be a justification for different treatment for there not to be discrimination but the different treatment must be appropriate and adapted to that difference.

MR NETTLE: Exactly so.

GAUDRON J: That is what I was adverting to in telling you that the law had moved on a bit.

MR NETTLE: Your Honours, may I take up your point, thank you, by going to Castlemaine Tooheys [1990] HCA 1; (1990) 169 CLR 436 at 478.

GUMMOW J: It is taken up in Street, too, I think.

GAUDRON J: Yes.

MR NETTLE: Street, yes. This is where Justice Gaudron and Justice McHugh picked up from what has been said before. At page 478 in the joint judgment, second paragraph:

In Street v Queensland Bar Association, Gaudron J made reference to the general considerations which, statute aside, result in particular treatment being identified as discriminatory. By reference to those considerations it is possible to identify general features of a discriminatory law. A law is discriminatory if it operates by reference to a distinction which some overriding law decrees to be irrelevant or by reference to a distinction which is in fact irrelevant to the object to be attained; a law is discriminatory if, although it operates by reference to a relevant distinction, the different treatment thereby assigned is not appropriate and adapted to the difference or differences which support that distinction. A law is also discriminatory if, although there is a relevant difference, it proceeds as though there is no such difference, or, in other words, if it treats equally things that are unequal - unless, perhaps, there is no practical basis -

Now, pausing there, it is submitted that here there is discrimination and there is no distinction which is relevant or adapted to support it. Here the distinction is not that judges are any different relevantly to other persons entitled to receive retirement benefits. Here the distinction is that they receive their benefit from a provider which is perceived ex hypothesi by the Commonwealth to be one which it cannot subject to tax. Now, it cannot be a relevant distinction to single out the judicial arm of State Government and discriminate against it.

KIRBY J: Why not?

MR NETTLE: Section 114 of the Constitution prohibits the Commonwealth from attracting from the provider what it would have.

KIRBY J: It is part of the legal environment in which the Commonwealth, the Federal Parliament, has to adapt its legislation in order to do this equity as between different income earners.

MR NETTLE: Your Honour, it is submitted au contraire. If you take this, for example, if the Commonwealth set about levying land tax on properties throughout the State, as perhaps it might, surely it could not levy land tax on the judges that sit in a State court because it cannot levy it on the State that owns the court.

KIRBY J: No, no, that is not to the point. We are talking about tax in the nature of tax upon income.

MR NETTLE: No, we are not. We are not talking about tax on income.

KIRBY J: When the pension falls in it becomes income.

MR NETTLE: But that is not what is taxed. What is taxed is what is said to be the contribution or contributed amount which is made each year by the employer.

KIRBY J: This is the notional and it is a fiction. It is true it is - - -

MR NETTLE: It is a pretence.

KIRBY J: Well, it is not - - -

GLEESON CJ: When the pension falls in it becomes assessable income, does it not?

MR NETTLE: Quite, and full rates of tax are paid upon it, as we make the point - - -

KIRBY J: This point is constantly made but that is, it seems to me, a detail. That is a deduction that is lost. Fair enough, it is a good point but it is a merits point. It is not a point on legality.

MR NETTLE: No, it is not. I am sorry, your Honour, I have failed to convey to you the fundamental distinction which is here involved. I would be in great difficulty if I were here before you saying you ought to find unconstitutional an Act which treats the judges the same as other people in society with reference to their employment - their superannuation benefits or pension benefits. But I am not here saying that because you have before you an Act which treats them differently to all of the other relevant taxpayers.

KIRBY J: Because their source of income is different.

GUMMOW J: If just look at page - - -

GAUDRON J: Well, if it is different to - - -

MR NETTLE: No, because their provider is one that the Commonwealth assumes it may not tax.

McHUGH J: The judge, when he gets his pension, has to pay income tax on it.

MR NETTLE: Yes, he does.

McHUGH J: The ordinary superannuant who has a pension has to pay income tax on that, but the big difference is that the judge gets hit with this, in this particular case, $500,000 lump sum payment.

MR NETTLE: That is the point, and the others do not.

GAUDRON J: Which neither happens in, in the case of private people, private superannuation funds, nor in the case of Federal judges or other Federal bodies who are treated as though they were in the same category and for whom the Commonwealth agencies have to set aside a sum of money.

MR NETTLE: Exactly.

McHUGH J: So, it is the State judges - - -

GAUDRON J: Of all the people in Australia it is only State judges and State office bearers whose pensions are governed by the listed statutes in Regulation 177.

MR NETTLE: Can I take this thing one step further by asking your Honours - - -

GAUDRON J: This is assuming you have lost the construction argument.

MR NETTLE: One happy thought, your Honour. If I could just pick up on what you have said by asking the Court to turn to the decision of the Supreme Court of the United States, America v Hatter, it makes the point well, based upon what your Honour Justice Gaudron says about the needing to be a distinction which is relevant and adapted in order to justify an exercise in discrimination.

KIRBY J: Well, it applied what Justice Holmes and Justice Brandeis had said. It said, "If it is Medibank, Medicare, that is on everybody, you can deduct that" but in so far as something special, particular, targeted on them as a judges, you cannot do that.

MR NETTLE: In part, your Honour, but more importantly and relevantly for present purposes, what it went on to say was that in the second aspect where there was discrimination against the judges, picking them out and subjecting them to a liability to pay contributions towards the social service benefit, there was an unconstitutional act because the reason it was done was because it was prohibited constitutionally to take away from the benefits that were already vested. Now, that is so here, not because the Judge has a constitutional right not to be taxed. I do not for a moment suggest that.

What I do say, however, is clear. Section 114 of the Constitution prohibits the Commonwealth taxing an estate. If I lose the construction argument, and if it be correct that the imposition of tax on the State would contravene section 114, then it follows that the only reason that the State judges and other members of these funds have been singled out and discriminated against is because the Commonwealth knows that it cannot tax the State superannuation provider in the way that it would tax private or others.

Now that means that whilst the whole of its legislative exercise otherwise has been to get out of the provider, be it private or public, a surcharge - - -

KIRBY J: This particular class of "employees" cannot do that and therefore they have gone straight to the employer?

MR NETTLE: And it is just like therefore, if I may say so, "I cannot tax the State for land tax on its land, so I will tax the employees of the State that use the land to get it back."

KIRBY J: Yes, but this is equal tax upon all employees.

MR NETTLE: No, it is not, because no other employees are taxed upon the property of their State - of their employer.

KIRBY J: Yes, but it comes out of the - - -

MR NETTLE: Put aside what it comes out of. Those people do not feel it. Other employers, or more accurately superannuation providers, are subjected to a surcharge tax by reference to a formula, however it be described. That imposition cannot, ex hypothesi, be loaded upon the State, therefore the judges are singled out and discriminated to get from them what cannot constitutionally be got from the State.

KIRBY J: But is not the result of your submission that at the end of the day the State judges would not be subjected to this tax, whereas Federal judges will be? That is a discrimination in itself.

MR NETTLE: Well, that lays out three things. First of all, I did submit that they would not be subject to the Constitutionally Protected Funds Act. The second point is that having got them into the Assessment Act neither they nor the Federal judges would be subject to that because they are not defined benefits members and there are no accrued benefits. But failing all of that - - -

KIRBY J: That is your construction point.

MR NETTLE: They are all construction arguments, but failing all of that we get to the point that these Judges, unlike the Federal judges who are treated like others under the Assessment Act, are singled out and levied for tax for the sole reason that their provider cannot constitutionally be levied in the same way that other providers are.

GAUDRON J: Or more accurately, because the Commonwealth assumes - - -

MR NETTLE: Quite. It is on the assumption that all that is correct.

GLEESON CJ: But is not the big difference that constitutes what you say is the disproportionate discrimination that when the provider or the employer is taxed, the provider will pass on to the employee the tax by taking it out of benefits to which the employee is entitled?

MR NETTLE: It might or might not, but if it does, that is what will happen.

GLEESON CJ: Whereas what happens here in the case of the first plaintiff, for example, is that a tax is imposed on the employee directly by Commonwealth legislation that is unrelated to any benefits that the employee actually gets.

MR NETTLE: Exactly.

GLEESON CJ: That produces the result that the employee may have a tax liability to the Commonwealth of half a million dollars in circumstances where the employee never gets any significant benefit.

MR NETTLE: Correct, that is the discrimination and then one asks what is the justification for it? Justice Kirby suggests that - - -

KIRBY J: I just do not accept that it is not related. It is imperfectly related in some cases, unfairly related, it is imprecisely related, but it is related; it is related to the pension.

MR NETTLE: But is it relevantly and appropriately adapted and calculated - - -

KIRBY J: I hate that expression.

MR NETTLE: I have done poorly, your Honour, but - - -

KIRBY J: I know it is used all the time in Marbury v Madison and we are stuck with it, but it is just a horrible expression. What business is it of ours to be concerned about "appropriately"? That is for the Parliament, not for us.

GAUDRON J: Because it has been held that for the purposes of the Constitution it is discrimination not to accept relevant differences and, where there are relevant differences, not to treat them appropriately.

MR NETTLE: Your Honour Justice Kirby, I do not need to go to and I did not want to go to the Marbury v Madison doctrine, but simply back to what Justices Gaudron and McHugh had said in - - -

KIRBY J: I know it is said all the time and I was provoked. I withdraw what I said.

MR NETTLE: No, I am sorry.

KIRBY J: It is the formula that is used for proportionality of connection with a federal power.

MR NETTLE: It is my fault. What I should have said is it is not a distinction which is calculated by reference to appropriate and properly adapted to the difference or differences which support the distinction. Now, the distinction here - - -

KIRBY J: No, I am sorry I even raised the point.

MR NETTLE: No, please do not be because - - -

KIRBY J: There are more important things to debate here.

McHUGH J: But the discrimination formula does not come out of Marbury v Madison; that is a different formula.

MR NETTLE: Yes, it is.

KIRBY J: "Appropriate and adapted" comes out of Marbury.

McHUGH J: It comes out of the human rights jurisprudence in Europe.

GAUDRON J: And in India.

GLEESON CJ: But do you not have to face up to a question related to this discrimination: is there any other way the Commonwealth could have done it? Is the Commonwealth confronted with a choice between throwing up its hands and saying, "There's no way we can make State judges or States directly or indirectly bear a burden of the kind that we are imposing on other high income earners"?

MR NETTLE: But, your Honour, of course there are hundreds of ways in which it could be done. You could increase the rate of taxation because you know that you are getting a special benefit on retirement, you could increase the rate of taxation upon salary to make them equivalent to other - there are all sorts of things that could be done if the object were truly to put the Judge in the same position as the private member. But that is not the object and that is why I keep harping, your Honour Justice Kirby, on the point that this is not an exercise in generally treating them the same.

GLEESON CJ: It would assist me, Mr Nettle, if overnight you and your junior could just put on paper a list of practical alternative possibilities that were open to the Commonwealth to achieve the same result.

KIRBY J: Do you want to help the Commonwealth with these ideas?

MR NETTLE: Not very much, your Honour.

KIRBY J: I know you are a very helpful advocate.

MR NETTLE: It is not an invitation that I find especially attractive, if I may say so, your Honour the Chief Justice, because from now on, no doubt, it will be said against those whom we represent that the ideas which have been suggested are ones which can be implemented without any sort of recourse.

KIRBY J: We have explored today one which is the assumption that section 114 applies. I mean, it may not apply.

MR NETTLE: If I may say so, what I would submit to your Honour the Chief Justice is this: first, it is not part of the function of he who challenges the constitutionality of legislation that has been enacted to devise ways in which it might otherwise have been done. Secondly, but nevertheless any one, that is to say any competent lawyer and therefore certainly a Judge of the High Court must be able to conceive of myriad ways in which the Commonwealth legislature could move in order to extract an exaction from a State judge if the object were truly to equate the financial position of the judge with someone else. Further than that, it is submitted we should not be required to, or indeed even be invited to go.

HAYNE J: The equation asserted against you is an equation dependent, is it not, on economic equivalence rather than legal incidence?

MR NETTLE: Yes, it is, your Honour. Indeed, the whole of the Commonwealth's submission is on that basis.

HAYNE J: That is that there is economic equivalence between what is done under the law as it applies to judges with what is asserted to be, without evidence, the practical consequence or economic consequence that is likely to follow from the operation of the law differently in respect of other taxpayers.

MR NETTLE: Yes, it is.

HAYNE J: No doubt we will hear tomorrow why economic equivalence is a sufficient answer to legal discrimination when the issue in this Court is the legal sufficiency of that which is done and its constitutional sufficiency rather than some broad notion of economic policy.

McHUGH J: This Court has always rejected the notion of economic equivalence in the context of income tax.

MR NETTLE: Yes, it has, your Honour.

McHUGH J: It has said it more than once.

MR NETTLE: I have now run out of time, but might I invite your Honours' attention, if you have any time before tomorrow, to pages 572 and 573.

GUMMOW J: You have not dealt with section 55.

MR NETTLE: I have run out of time today, your Honour. I have not dealt with section 55 and I wanted to. I have now blown the time limit completely, and I have breached the arrangement of which I spoke earlier.

KIRBY J: A sad, sad advocacy at the end of your day suggesting, I fear, that we should give you a bit more time.

GLEESON CJ: We have a special arrangement for you, Mr Nettle.

MR NETTLE: I am becoming conscious of that, your Honour.

HAYNE J: You are about to be treated equally, Mr Nettle.

GLEESON CJ: We will sit tomorrow at 10 o'clock and we will adjourn at 12.45, then we will sit again at 2.00 pm and adjourn at 4.15. Counsel might be able to rearrange their agreement in the light of that.

AT 4.13 PM THE MATTER WAS ADJOURNED

UNTIL THURSDAY, 20 JUNE 2002.