Australian Federalism and Intergovernmental Relations

Introduction

Australian federalism is the system of divided governmental power established by the Commonwealth of Australia Constitution Act 1900 (Imp). The Constitution distributes legislative, executive, and financial powers between the Commonwealth (the federal government) and the six States (New South Wales, Victoria, Queensland, Western Australia, South Australia, and Tasmania), with self-governing territories exercising powers delegated by the Commonwealth. Over more than a century of constitutional development, Australian federalism has evolved from a system of coordinate federalism toward one of cooperative federalism, characterised by significant fiscal imbalance and increasing intergovernmental coordination.

The Constitutional Distribution of Powers

The Australian Constitution establishes a system of enumerated Commonwealth powers with residual powers remaining with the States. This structure differs from the Canadian model of enumerated provincial powers and more closely resembles the United States approach.

Section 51 of the Constitution lists the concurrent legislative powers of the Commonwealth Parliament — powers that may be exercised by both the Commonwealth and the States. These include:

• Trade and commerce (s 51(i))
• Taxation (s 51(ii))
• Corporations (s 51(xx))
• External affairs (s 51(xxix))
• Defence (s 51(vi))
• Marriage and divorce (s 51(xxi)–(xxii))
• Immigration and emigration (s 51(xxvii))
• Conciliation and arbitration (s 51(xxxv))

Where Commonwealth and State laws conflict on a concurrent matter, s 109 provides that Commonwealth law prevails and the State law is invalid to the extent of the inconsistency.

The Commonwealth also possesses exclusive powers — powers that only the Commonwealth can exercise:

• Exclusive power over customs and excise duties (s 90)
• Power over the seat of government (s 52(i))
• Defence (s 114 — States cannot raise military forces)
• Coinage (s 115)

All powers not conferred on the Commonwealth remain with the States as residual powers, including criminal law, property law, torts, contracts, education, health, and land management.

The Engineers’ Case and Constitutional Interpretation

The early High Court adopted the “implied immunity of instrumentalities” and “reserved state powers” doctrines, which limited Commonwealth power by implying restrictions from the federal nature of the Constitution. In D’Emden v Pedder (1904) 1 CLR 91, the Court held that Commonwealth and State instrumentalities were immune from each other’s laws.

These doctrines were swept away in Amalgamated Society of Engineers v Adelaide Steamship Co Ltd (1920) 28 CLR 129 (the Engineers’ Case). The High Court (Knox CJ, Isaacs, Rich, and Starke JJ) overruled the earlier doctrines and adopted a “text-based” approach to interpretation: courts should look at the “natural and ordinary meaning” of the constitutional text and should not imply limitations on Commonwealth power from the “federal nature” of the Constitution.

The Engineers’ Case fundamentally altered the federal balance. It allowed the Commonwealth to legislate on matters that had previously been considered within the exclusive domain of the States, provided the legislation could be connected to a head of power in s 51.

Characterisation of Commonwealth Laws

The High Court’s approach to characterisation — determining whether a Commonwealth law falls within a head of power — has been crucial to the development of federal power.

In Leask v Commonwealth (1996) 187 CLR 579, the High Court confirmed the “sufficient connection” test: a law will be valid if there is a “sufficient connection” between the law and the subject matter of the head of power. The Court will not inquire into the reasons for the law or its practical effect on the States.

The incidental power extends Commonwealth authority to matters that are not directly within a head of power but are “incidental” to its effective exercise. In Grain Pool of Western Australia v Commonwealth (2000) 202 CLR 479, the High Court held that the incidental power extends to “matters that are reasonably necessary for the effective exercise of the principal power.”

Financial Federalism and Vertical Fiscal Imbalance

Australian federalism is characterised by a pronounced vertical fiscal imbalance (VFI) — the Commonwealth raises far more revenue than it needs for its own functions, while the States raise far less than they need. This imbalance has its origins in the wartime centralisation of income taxation.

During World War II, the Commonwealth enacted uniform income tax legislation, effectively excluding the States from income tax. In the First Uniform Tax Case (South Australia v Commonwealth (1942) 65 CLR 373), the High Court upheld the scheme, including provisions requiring taxpayers to pay Commonwealth tax before State tax and providing grants to States that did not impose their own income tax. The Second Uniform Tax Case (Victoria v Commonwealth (1957) 99 CLR 575) confirmed that the Commonwealth’s scheme was constitutionally valid.

The result is that the Commonwealth collects approximately 80% of all tax revenue in Australia, while the States are responsible for delivering most public services (health, education, transport, policing). The States rely on:

• Commonwealth grants under s 96 of the Constitution
• Their own revenue sources (payroll tax, stamp duty, land tax)
• GST revenue, which is distributed through the Grants Commission

The Grants Commission and Fiscal Equalisation

Section 96 of the Constitution empowers the Commonwealth to grant financial assistance to any State “on such terms and conditions as the Parliament thinks fit.” This provision has been the constitutional basis for Commonwealth grants with attached conditions — the “tied grants” that have significantly influenced State policy.

The Commonwealth Grants Commission makes recommendations on the distribution of GST revenue among the States, applying principles of horizontal fiscal equalisation — the idea that each State should have the capacity to provide a comparable standard of services if it makes a comparable effort to raise revenue.

Cooperative Federalism

Australian federalism has increasingly operated through cooperative rather than coordinate mechanisms. Key institutions include:

• COAG (Council of Australian Governments): Established in 1992, COAG brought together the Prime Minister, state premiers, territory chief ministers, and the President of the Australian Local Government Association to coordinate policy. During the COVID-19 pandemic, COAG was replaced by National Cabinet — a more streamlined intergovernmental forum.

• Intergovernmental Agreements (IGAs): Formal agreements between the Commonwealth and States on policy coordination, including the National Reform Agenda and the National Partnership Agreements.

• Harmonisation: Efforts to achieve uniformity in areas such as corporations law (the Corporations Act 2001 (Cth)), competition policy, and consumer protection.

The Separation of Powers in the Federal System

The separation of judicial power under Chapter III of the Constitution operates distinctly from the federal division of power. The High Court has held that the judicial power of the Commonwealth can only be exercised by Chapter III courts (the Boilermakers’ doctrine), and that state courts must maintain their “institutional integrity” as independent and impartial tribunals (the Kable doctrine). These principles constrain both Commonwealth and State legislatures in their dealings with the judiciary.

Contemporary Federal Challenges

Australian federalism faces several contemporary challenges:

• Overlap and duplication: The proliferation of Commonwealth involvement in traditional State areas (health, education, infrastructure) through tied grants has created complexity and duplication.

• Horizontal fiscal equalisation: The distribution of GST revenue is a perennial source of political tension, with donor States (particularly Western Australia) arguing that the equalisation system is unfair.

• Climate change: The division of power over environmental regulation has led to conflict between Commonwealth and State governments over climate policy.

• COVID-19: The pandemic demonstrated both the strengths and weaknesses of cooperative federalism, with the National Cabinet enabling rapid coordination but also revealing tensions over border closures and vaccine distribution.

Conclusion

Australian federalism is a dynamic and evolving system. The trajectory from coordinate federalism, through the centralising effects of the Engineers’ Case and the uniform tax system, to the contemporary emphasis on cooperative federalism reflects the adaptability of the constitutional framework. The financial dominance of the Commonwealth, balanced by the constitutional autonomy of the States, creates a system of shared governance that continues to evolve in response to changing circumstances.