Australian High Court invalidates Victoria's tax on electric and hybrid vehicles

The High Court decision questions the constitutional validity of Victoria’s Zero and Low Emission Vehicle Distance-based Charge Act 2021 (ZLEV Act) and the state governments’ authority to impose such levy duties. The court found the ZLEV Act unconstitutional as it “imposes a duty of excise within the meaning of section 90 of the Constitution”.

Jim Hunwick of Pinsent Masons said: “This is a landmark decision reshaping EV taxation in Australia. The ruling means that the power to impose ZLEV charges is shifted away from the states and the federal parliament is expected to determine revenue generation from EV operators and implement the country’s net-zero policies.”

The case, known as the Vanderstock decision, was commenced in 2021 by several EV owners (the plaintiffs) in Victoria against the State of Victoria, which is responsible for enacting the ZLEV Act. Reflecting the significance of the case, the Commonwealth Attorney General joined the proceedings in support of the plaintiffs, while various state Attorney General, including those from New South Wales, Australian Capital Territory, Western Australia, South Australia, Northern Territory, Tasmania, and Queensland, have intervened in the case in support of the defendant, with intentions to introduce EV taxes from 2027.

Under the ZLEV Act, registered operators of electric, plug-in hybrid electric, or hydrogen vehicles became obligated to pay a charge, defined as the ‘ZLEV charge,’ under Section 7(1) of the ZLEV Act, for using specified roads. The charge stands at 2.6 Australian cents per kilometre for EVs, whether driven within or outside Victoria, and 2.1 cents per kilometre for plug-in vehicles. EV operators are also required to submit odometer readings to state authorities.

The plaintiffs contended that the ZLEV charge constitutes a duty of excise, which is regarded as an inland tax on the production, manufacture, sale, or distribution of goods, but that the exclusive power to levy such duties is reserved for the federal government under section 90 of the Commonwealth Constitution. They also relied on the established purpose of section 90 of the Constitution, which was to provide the Commonwealth with genuine control over the taxation of commodities, ensuring that state actions would not hinder the execution of federal policies.

They said the ZLEV charge effectively functioned as a tax on the consumption of goods and that excluding it from section 90 is inconsistent with both the definition of excise and the original intent behind the constitutional provision.

The State of Victoria, however, argued that the ZLEV charge is not a duty of excise, or a tax on goods, but rather an activity tax. It maintained that even if the charge were regarded as a tax on goods, it would still fall outside the scope of a levy excise duty.

The court ruled against the Victorian ZLEV Act. A central reason for the decision relates to section 7(1) of the ZLEV Act, which mandated registered operators of zero and low emission vehicles to report odometer readings and pay a 'per-kilometre' charge for the use of their vehicles on specific roads, a fee found to apply to all public roads in Australia.

The majority of the judges concluded that the charge under section 7(1) was a tax on the use of a ZLEV, and states are barred from imposing any duty that falls within the ambit of section 90 of the Constitution.

“The decision hinged on whether the charges were a tax on the consumption of ZLEVs as 'goods' or whether they were a tax on the activity of driving ZLEVs, which would place them outside the scope of section 90,” said Hunwick. “In a controversial move, the majority broadened the Commonwealth's powers under section 90 to encompass taxes on the use or consumption of goods once they were in the consumer's possession and utilisation.”

Yuliya Chis of Pinsent Masons added that the decision has far-reaching implications, as it aligns with national initiatives to boost EV adoption and drive a transition to a net-zero economy.

“Traditionally, distance-based levies on EVs were explored to replace the conventional fuel excise that funds road maintenance,” Chis said. “Since it has been decided that the power to impose ZLEV charges does not lie with the states, all eyes are now on the federal parliament as to how revenue will be raised from EV operators, and what policies will be enacted to facilitate the country’s transition to a net-zero economy. While the Commonwealth, as outlined in its April 2023 national electric vehicle strategy, has not yet detailed a response to potential fuel excise reductions, it closely monitors the situation within budgetary deliberations.”