Posted on February 15, 2012 by

Commonwealth grant funding, Councils and the Constitution

In a pragmatic final report by the Federal Government’s Expert Panel on the Constitutional Recognition of Local Government published in December 2011 (Report), the panel recommends a minimalist change to the Constitution at a referendum in 2013 which would overcome a potential problem for Councils created by the High Court decision in Pape v The Commissioner of Taxation (2009) 238 CLR 1 (Pape).

The proposed change to section 96 of the Constitution would put grants to councils on the same legal footing as grants to the States, overcoming any difficulties which the Federal Government may have due to Pape in giving councils direct financial assistance.

Background to the Constitutional Question

In 1944 the Commonwealth enacted the Pharmaceutical Benefits Act, a proposed scheme of free medicine paid for by the Commonwealth.  The legislation was challenged as being beyond the Commonwealth’s power in Attorney General (Vic); Ex rel Dale v Commonwealth (1945) 71 CLR 237. (Pharmaceutical Benefits Case) by the Medical Society of Victoria.

The High Court upheld the challenge ruling that the Commonwealth had no power to appropriate under section 81 of the Commonwealth Constitution. (The Commonwealth overcame the problem by putting forward a referendum question in 1946 which was decided in the affirmative, giving the Federal Government the power to legislate on a wide variety of social services, including pharmaceutical benefits).

The grounds upon which the Pharmaceutical Benefits case were decided were varied, however it opened a question which has not been answered until the Pape decision.

Section 81 of the Constitution empowers the Federal Parliament to appropriate money from Consolidated Revenue “for the purposes of the Commonwealth”.  What are these “purposes”?  The case did not turn on the question, but McTiernan J, with whom Latham CJ agreed, stated that “the purposes of the Commonwealth are, I think, such purposes as the Parliament determines.” (at 273).  Thus was born the “wide” interpretation, which Federal Governments have assumed for 65 years.

Even this early there was another view, that of Williams J who was of the view that the appropriation would be invalid unless the purposes for the expenditure found a source “within the four corners of the Constitution”. (at 28).  This is the heart of the “narrow” or Constitutional interpretation.

The question of whether the “wide” or the “narrow” approach is correct has not been finalised in any of the later section 81 cases of Victoria v Commonwealth and Hayden (1975) 134 CLR 338 or Davis v Commonwealth (1988) 166 CLR 79 (Davis).  In both cases the Commonwealth’s powers were upheld in split decisions where the question “wide” or “narrow” definition was not central to the determination.

The Pape decision

In response to the Global Financial Crisis (GFC) in 2009, the Commonwealth enacted the Tax Bonus for Working Australians Act (No 2) 2009 (the Act).  Under the Act many Australian tax payers would receive a one off payment of up to $900.00 in a bid to stimulate the economy.

Bryan Pape, a former barrister and academic, challenged the Commonwealth’s power to make the appropriation on the basis of section 81 of the Constitution, citing the “narrow” interpretation of the Section as a key argument.

Mr. Pape’s challenge was rejected by a 4 to 3 majority in the High Court.  While the seven judges’ reasoning varies, one question has now been determined definitively: the “narrow” approach to the interpretation of section 81 is the law.  That is the view of all seven High Court judges.  As French CJ put it (at 7):

“The provisions of ss 81 and 83 do not confer a substantive “spending power” upon the Commonwealth Parliament.  They provide for Parliamentary control of public moneys and their expenditure.  The relevant power to expend public moneys, being limited by s 81 to expenditure “for the purposes of the Commonwealth” must be found elsewhere in the Constitution or the statutes made under it”.

“Nationhood” as the source of a Power

The narrow majority found the Constitutional validity of the stimulus package in a combination of the executive power under section 61, combined with the incidental powers found in section 51 (xxxix) of the constitution.  “The Nationhood” power had been discussed in many previous cases including Davis.  The minority were dismissive of the power, but it is, nonetheless, the basis of the Pape decision majority.

Significance for Councils

If the Commonwealth makes a grant to a Council, that grant will be invalid unless a power within the Constitution can be found.  Professor George Williams, barrister, has expressed the view that “the Commonwealth may find now that it’s made what could amount to millions of dollars in illegal payment” (Kate Hannon, The Age, 8 July, 2009).  In Professor William’s Opinion of 12 August 2009, made public since, he expresses the view that the “Roads to Recovery” program and the “Community Infrastructure Program” may be struck down as a result of Pape.

Councils may argue that grants to them fall within the “nationhood” power.  This argument provides false hope.  The nationhood power was upheld by a narrow margin, and what any individual Judge would view as falling within the national interest would vary on a case by case basis.

Overcoming the Problem

One potential way around the dilemma is to give all Commonwealth monies meant for Councils to the relevant State government, with the intention that they will hand the funding on to the relevant Council or Councils.  The Report makes this same observation, and notes that this is already done in many cases.

However the Report recommends an amendment to section 96, which would put councils on the same footing as State Governments.  The amendment would be:

“the Parliament may grant financial assistance to any State or to any local government body formed by State or Territory Legislation on such terms and conditions as the Parliament sees fit.” (amendment in bold)

Such a change would allow the Commonwealth to make grants directly to Councils without reference to a State.  Victoria, Western Australia and New South Wales have already indicated their opposition.

The Federal Government is yet to decide what action will follow from the Report’s proposed referendum question.