The Federal Government is proposing a new tax affecting the statutory pension entitlements of Commonwealth and Territory judges, which has triggered resounding objections from the Australian Judicial Officers Association, the Law Council of Australia, the Australian Bar Association and retired and active judges.
The financial impact of the new tax will significantly affect judges’ financial security post-retirement and has the potential to seriously undermine the independence of the judiciary.
As the High Court has said[1] (footnotes omitted):
“…if attempting to state comprehensively the measures that have been taken to support judicial independence, it would be necessary to take account of not only the arrangements for remuneration of judges while in office but also the provision made for payment of pensions on retirement. The “remuneration”, which s 72(iii) of the Constitution states shall not be diminished during continuance in office, includes non-contributory pension plan entitlements which accrue under the federal judicial pensions statute.
Provision is made for judicial pensions for a number of reasons. One not insignificant reason is to reduce, if not eliminate, the financial incentive for a judge to seek to establish some new career after retirement from office. As was pointed out in argument, it may otherwise be possible to construe what a judge does while in office as being affected by later employment prospects.
No doubt the provisions that have been made to govern the security of both the tenure and remuneration of judges are important in securing judicial independence and impartiality. But those provisions take their place in a much wider setting of principles that have been established or enacted and which also contribute to the maintenance of both the fact and the appearance of judicial independence and impartiality…the courts, and in particular the Supreme Court, of a State must be, and be seen to be, institutionally independent and impartial. Indeed, this statement of the relevant premise is no more than the particular application of a more general premise identified in Bradley: “that a court capable of exercising the judicial power of the Commonwealth [must] be and appear to be an independent and impartial tribunal”.
The proposed new Division 296 legislation[2], which the Senate Economics Legislation Committee has endorsed[3], imposes additional tax on total superannuation balances exceeding $3 million, said to be consistent with the Government’s proposed objective of superannuation to “preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way”[4].
The Senate Report noted that the Explanatory Memorandum for the bills provided that the “changes would improve the equity and sustainability of the superannuation system while maintaining the concessions which assist Australians to save for retirement through their superannuation”[5].
While these may be laudable objectives, the desire that the changes “apply equally to all taxpayers”[6] has led to undesirable effects when it comes to the pensions of Commonwealth and Territory judicial officers, as to which “special rules” will apply[7], involving calculations of a notional superannuation balance.
The proposed legislation imposes an additional 15% tax (on top of the existing 15%) on investment earnings of a super account where the “total superannuation balance” exceeds $3 million at the end of the financial year. The additional 15% is only applied to the amount that exceeds $3 million. To calculate the tax, it seems that there will be calculation of a “notional” capital amount sufficient to produce the pension.
As was pointed out in submissions to the Senate Committee, judicial pensions do not involve a “superannuation balance” and recipients do not have any right to a “notional” capital amount, they cannot elect to receive any of that “notional” capital amount and are not set to receive any discount in the calculation of that notional amount[8]. In other words, judicial pensions, which are unfunded, non-contributory and cannot be commuted, do not involve the mischief which the bills seek to address, namely, the ability afforded by Commonwealth tax laws for some people to set aside capital well in excess of $3 million in a superannuation fund to produce income at a concessional rate. Those pensioners have access to the capital in that fund; a judicial pensioner does not[9].
Nevertheless, the proposed tax will be applicable to the pension entitlements of Commonwealth and Territory judges payable to retired judges and their surviving partners, which can be significant. For example, Commonwealth judges who reach at least 60 years of age and retire after 10 years of service receive a pension of 60 per cent of the salary of sitting members.
According to a representative committee of retired Federal Court judges, the effect of the bills is that the judicial pension, which is already taxed in the hands of pensioners at the top marginal tax rate, will be subjected to an additional tax, causing “retired judges to be more highly taxed on their judicial pensions than any of the superannuants who fall within the mischief for whom the laws are directed”[10].
“As a result of the way the new tax discriminates between Commonwealth, Territory, and State judges, of particular concern is the impact upon the calibre of persons applying to be appointed a judge in the Commonwealth and Territory spheres.”
The Australian Judicial Officers Association (“AJOA”) summarised the effect of the legislation on State, Commonwealth and Territory judges in its submission to the Senate Economics Legislation Committee dated 23 February 2024, as follows[11]:
“For all such judges, the notional capital value of their Statutory Pension Entitlements would be aggregated with their private superannuation entitlements in determining their “total superannuation balance” to determine if the balance exceeds the $3 million threshold; and, if it does, Div 296 tax would be imposed on “earnings” in respect of any private superannuation interests.
For State judges, Div 296 tax would not be imposed on “earnings” in respect of superannuation interests in constitutionally protected funds.
For Commonwealth judges:
- Div 296 tax would not apply to “earnings” in respect of accruing pension entitlements under the Judges’ Pension Act (Cth) of currently serving Commonwealth judges who were appointed prior to 1 July 2025;
- Div 296 tax would apply to “earnings” in respect of pension entitlements of currently serving Commonwealth judges who were appointed prior to 1 July 2025, once they retire;
- Div 296 tax would apply to “earnings” in respect of accruing pension entitlements of Commonwealth judges appointed from 1 July 2025 while they are serving (but will not be payable until they retire) and will also apply to “earnings” in respect of pension entitlements after they retire; and
- Div 296 tax would apply to “earnings” in respect of pension entitlements of already retired Commonwealth judges.
For all Territory judges, current, future and retired, Div 296 tax would apply in respect of all of their pension entitlements as per (c) and (d) above, regardless of the dates of their appointment.”
The differential application of the proposed tax disadvantages both Commonwealth and Territory judges, but Territory judges will be the most disadvantaged by the changes. It was put this way by the AJOA[12]:
“The effect of Div 296 tax is harsh in its effect on Territory judges (both ACT and NT) because, unlike for State and Commonwealth judges, it will apply to judges who are currently serving.
In respect of Territory judges, the imposition of Div 296 tax would be particularly egregious. The accruing Statutory Pension Entitlements of Territory judges are already subject to tax under Div 293 and their pensions are subject to income tax.
Div 296 tax would be the third form of tax imposed on their Statutory Pension Entitlements. In contrast, State and Commonwealth judges are not subject to Div 293 tax.
The Bills would override s 73(3A) of the Australian Capital Territory (Self- Government) Act 1998 (Cth) and s 41(3) of the Supreme Court Act (NT) which make provision to the effect that the remuneration and allowances to which a judge is entitled, shall not be diminished while the judge holds office.”
The tax may also disadvantage female judicial officers. The AJOA canvassed three reasons why[13]:
“First, female barristers appointed to judicial office (past, present and future) are likely to have accumulated less in assets than their male counterparts, thereby amplifying the impact of a substantial tax payment at retirement based on their notional pension earnings. This is a consequence of the historical discrepancy between the earnings of male and female barristers in Australia, which continues to the present day. This is demonstrated in, for example, the Law Council of Australia, Equitable Briefing Policy Annual Report: 2022-2023 Financial Year. The Law Council further notes that, “the data about the remuneration of barristers that is publicly available, such as that published by the ATO, suggests a gender pay gap at the Australian Bar that is significantly higher than Australia’s total remuneration gender pay gap of 22.8%.” Additionally, women tend to take longer periods of unpaid parental leave.
Secondly, an actuarial assessment of the total superannuation balance value for the purposes of Div 296 tax for women judges will likely exceed that of their male counterparts because of the greater life expectancy rates for women in Australia.
Thirdly, there is a tendency to offer appointments to outstanding female candidates at an earlier age than male candidates, as one means by which to address the historical gender disparity on superior courts. However, this means that women appointed after 1 July 2025 or on Territory courts would, if they accept early appointment, accrue Div 296 tax for a longer period of time resulting in a greater tax liability on retirement.”
As a result of the way the new tax discriminates between Commonwealth, Territory, and State judges, of particular concern is the impact upon the calibre of persons applying to be appointed a judge in the Commonwealth and Territory spheres. Talented candidates could be deterred from pursuing or remaining in judicial roles, ultimately affecting the quality and diversity of the (federal) judiciary[14].
“Most importantly, echoed in all of the objections from the legal community, was that subjecting judges’ superannuation balances to higher taxation would compromise judicial independence, an essential principle of the rule of law.”
The AJOA put it this way[15]:
“This will have the unintended effect of making an appointment to a State Supreme Court a financially more attractive proposition than appointment to the Federal Court or Territory courts, with the following consequences:
- First, many experienced, skilled, and talented lawyers will choose appointment to State courts over Commonwealth and Territory courts.
- Secondly, some persons in private practice are likely to decline judicial appointment, even to the High Court.
- Thirdly, some judges of Commonwealth and Territory courts are likely to move to State courts, causing a drain of talent.
Consequences of this kind are not merely speculative but are demonstrated by history. The legislation considered in Austin & Anor v Commonwealth, which introduced a superannuation contributions surcharge for judges’ pensions, continued to apply to Commonwealth judges. There are well-known examples of talented judges who left Federal courts for State courts as a result. Division 296 tax would operate to dilute the quality of Commonwealth and Territory courts in favour of State courts when it is desirable to maintain parity of quality between the courts.
This will adversely affect Commonwealth and Territory courts and, indeed, the Commonwealth and the Territories themselves. It would be contrary to the public interest for the courts responsible for administering Commonwealth and Territory laws to become regarded as second-rate in comparison to State Courts.”
Most importantly, echoed in all of the objections from the legal community, was that subjecting judges’ superannuation balances to higher taxation would compromise judicial independence, an essential principle of the rule of law. For this very reason, subsection 72(iii) of the Australian Constitution provides that Parliament may not diminish the remuneration of a federal judge during their continuance in office. Such ‘remuneration’ includes non-contributory pension plan entitlements which accrue under federal judicial pensions statutes[16].
Peter Dunning KC wrote to the relevant Government ministers on behalf of the Australian Bar Association[17]:
“Judges — Commonwealth, State and Territory — stand between the State and the citizen and also quieten controversies between citizens. Judicial officers embody the third and indispensable arm of government in a civil society.
The attributes of independence, integrity, skill and experience are required to fulfil that difficult task. The Australian judiciary overwhelmingly has those attributes. The acceptance of judicial office nearly always involves material financial sacrifice by the judge from the career the judge leaves behind.
For a very long time, and for obvious reasons, those qualities, most particularly independence, have been secured by ensuring that the remuneration of judges, and necessarily former judges, cannot be imperilled by the State.
Under Australia’s constitutional arrangements, that is not just an article of faith, but an article of our ultimate governing document: Australian Constitution, s 72(iii). The prospect that the Draft Bills, if enacted, provoke a constitutional challenge would produce invidious circumstances at many levels.”
The President of the AJOA, the Honourable Justice Michael Walton, in a further submission on 2 May 2024, urged the Senate Economics Legislation Committee to exclude Federal and Territory judiciaries from the tax[18]:
“With respect to those involved in the design of the Div 296 tax, and giving full recognition to the objectives of the division of that tax, the amendments must give way in the case of the Federal and Territory judiciaries because of the substantial adverse implementations of the tax for Federal and Territory courts. This is particularly so where there is no adequate justification for the tax extending to that group in the first place. The Federal and Territory judiciaries should be treated in this light as a legitimate exception.”
That urging fell on deaf ears, as the majority of the Committee considered that it would be “inequitable” and “inconsistent with the policy intent” to exempt “former judges and their spouses”, giving no real attention to the issues discussed above. As to the likely challenge to the constitutionality of the bills, the Committee accepted Treasury advice that the bill was “drafted according to and consistent with legal advice provided by the Australian Government Solicitor”. That advice was not part of the Committee report.
“A constitutional challenge also raises the likely scenario where the High Court is asked to rule on the constitutionality of the legislation where each High Court justice has a pecuniary interest in the outcome.”
The very real possibility of a constitutional challenge to the legislation, should it be passed, was raised by a number of parties in their submissions to the Senate Committee. In particular, the AJOA has identified that a proposed exemption in the bills to sever and nullify the imposition of taxation, if that imposition would exceed the legislative power of the Commonwealth, reveals ‘substantial doubt’ about the accuracy of the proposition that the constitutional restrictions in s 72(iii) do not apply to retired justices and judges[19]. Relying on advice from Nicholas Owens SC, the AOJA asserted that the Government should, at the least, seek the advice of the Solicitor-General as to all of the constitutional points raised by the bills, including additional concerns as to whether they are within the Commonwealths’ taxing power (s 51(ii)) and whether it amounts to acquisition of property otherwise than on just terms contrary to s 51(xxxi) of the Constitution[20].
A constitutional challenge also raises the likely scenario where the High Court is asked to rule on the constitutionality of the legislation where each High Court justice has a pecuniary interest in the outcome[21]. Undesirable as that might be, there is unlikely to be any constitutionally valid way out of that difficulty and necessity would require the High Court to rule.
[1] Forge v Australian Securities and Investments Commission (2006) 228 CLR 45 at [76]-[78] (Gummow, Hayne and Crennan JJ)
[2] The Treasury Laws Amendment (Better Targeted Superannuation Concessions and Other Measures) Bill 2023 andthe Superannuation (Better Targeted Superannuation Concessions) Imposition Bill 2023
[3] Report by the Senate Economics Legislation Committee dated May 2024 (Senate Report), [2.144]
[4] The Hon Stephen Jones MP, Assistant Treasurer and Minister for Financial Services, House of Representatives Hansard, 30 November 2023, p 8930; Senate Report, [1.7]
[5] Senate Report, [1.8]; Explanatory Memorandum, p11
[6] Senate Report, [2.132]
[7] Senate Report, [1.26]; Submission of a representative committee of retired Federal Court judge to the Senate Committee, dated 19 February 2024
[8] Submission of a representative committee of retired Federal Court judge to the Senate Committee, dated 19 February 2024, paragraph 9
[9] Submission of a representative committee of retired Federal Court judge to the Senate Committee, dated 19 February 2024, paragraph 6; Submission of Susan Crennan KC, dated 18 April 2024, paragraph 7
[10] Submission of a representative committee of retired Federal Court judge to the Senate Committee, dated 19 February 2024, paragraph 10
[11] AOJA submissions dated 23 February 2024, paragraph 9
[12] AOJA submissions dated 23 February 2024, paragraph 68
[13] AOJA submissions dated 23 February 2024, paragraph 30
[14] Austin v Commonwealth (2003) 215 CLR 185 at [159]-[160] (Gaudron, Gummow and Hayne JJ)
[15] AOJA submissions dated 23 February 2024, paragraph 20
[16] Austin v Commonwealth (2003) 215 CLR 185 at [72] (Gaudron, Gummow and Hayne JJ)
[17] Letter from the Australian Bar Association to the Attorney-General, the Treasurer and the Assistant Treasurer, dated 10 May 2024
[18] AOJA submissions dated 2 May 2024, paragraph 9
[19] AOJA submissions dated 23 February 2024, paragraph 58
[20] AOJA submissions dated 23 February 2024, paragraphs 60-67
[21] Senate Report, [1.80] citing oral submissions from the former Chief Justice of the Federal Court, the Hon Michael Black AC KC
