Baxter v Commissioners of Taxation (NSW),. and Flint v Webb, were the last of a series of cases concerning whether the States could tax the income of a Commonwealth officer which had resulted in conflict between the High Court and the Privy Council. The two cases were heard together, however two separate judgments were issued with Baxter v Commissioners of Taxation (NSW) addressing the substantive issues, and Flint v Webb addressing the applications for a certificate to appeal to the Privy Council. The judgement of Griffith CJ in Flint v Webb suggested two ways in which that conflict could be resolved. Both suggestions were adopted by the Commonwealth Parliament by legislation that permitted the States to tax the income of a Commonwealth officer, and gave the High Court exclusive appellate jurisdiction on such constitutional questions. The constitutional foundation of the decision was overturned by the subsequent decision of the High Court in the 1920 Engineers' case..

Background The ability of a state to tax the income of a Commonwealth officer was one of the "constitutional loose ends" about the nature of the federal system and the legislative powers of the new Commonwealth that remained unresolved following the debates in the constitutional conventions.

The High Court and the Privy Council One of the issues debated in the drafting of the Constitution was the respective roles of the High Court and the Privy Council. The draft constitution that was put to voters in the various colonies was that there was to be no appeal to the Privy Council in any matter involving the interpretation of the Constitution or of the Constitution of a State, unless it involved the interests of some other dominion.See for example This was not acceptable to the British, who insisted on a compromise. Section 74 as ultimately enacted by the Imperial Parliament provided that if the dispute was between the Commonwealth and a State as to the extent of their respective powers under the Constitution, there could only be an appeal from the High Court to the Privy Council if the High Court granted a certificate "that the question is one which ought to be determined by Her Majesty in Council".. It was anticipated that this may give rise to conflict between the High Court and the Privy Council because the Privy Council could still hear an appeal directly from a state court. The view that was supported in the House of Lords was that the view of the Privy Council would prevail "as it was the decision of Her Majesty herself as the fountain of justice, administering justice throughout her Empire at home and abroad. p 1365-72.

One of the consequences of the concurrent appellate jurisdiction of the High Court and the Privy Council was that it was the unsuccessful litigant in the Supreme Court who had the choice of jurisdiction and the Commonwealth had no direct power to limit appeals from a State Supreme Court as the Constitutional limitation only applied to appeals from the High Court. The way in which the Commonwealth dealt with this issue in the Judiciary Act 1903, was by section 30 which gave the High Court "original jurisdiction in all matters arising under the Constitution or involving its interpretation", sections 38 and 39 then removed the jurisdiction of the State Courts on such matters, but then gave it back to them in section 39 under the guise of Federal jurisdiction in which there was no appeal to the Privy Council and instead only an appeal to the High Court.

Wollaston's case in the Supreme Court of Victoria The Full Court of the Supreme Court, Madden CJ, Williams & à Beckett JJ, had held in 1902 that Dr Harry Wollaston was required to pay Victorian income tax in relation to the salary he received as the Commonwealth Comptroller-General of Customs.. The Court considered and rejected the applicability of decisions of the Supreme Court of the United States in the interpretation of the Constitution of Australia, in particular the decision in McCulloch v. Maryland,McCulloch v. Maryland 4 Wheat. 316; Instead the Supreme Court applied the Privy Council decision in The Bank of Toronto v Lambe,. holding that the Privy Council had refused to apply the principle from McCulloch v Maryland and that it cannot govern the construction of the Australian Constitution.

D'Emden v Pedder in the High Court The High Court held in D'Emden v Pedder that the salary receipts of federal government employees were not subject to state stamp duty. Wollaston's case was cited in argument,D'Emden v Pedder (1904) 1 CLR 91 at p 98-100. as that the applicability of the principle in McCulloch v Maryland, to the Constitution was negatived by the decision of the Privy Council in The Bank of Toronto v Lambe. In response Griffith CJ stated "The decision in the case of The Bank of Toronto v Lambe merely amounts to this-that under sec. 92 [of the Constitution of Canada] the Provinces have the power of direct taxation". The judgement of the Court, delivered by Griffith CJ, did not refer to Wollaston's case nor The Bank of Toronto v Lambe and instead held that "some, if not all, of the framers of that Constitution were familiar, not only with the Constitution of the United States, but with that of the Canadian Dominion and those of the British colonies. When, therefore, under these circumstances, we find embodied, in the Constitution provisions undistinguishable in substance, though varied in form, from provisions of the Constitution of the United States which had long since been judicially interpreted by the Supreme Court of that Republic, it is not an unreasonable inference that its framers intended that like provisions should receive like interpretation."D'Emden v Pedder (1904) 1 CLR 91 at p 113. The Court subsequently described the Constitution as "framed in Australia by Australians, and for the use of the Australian people".Peterswald v Bartley (1904) 1 CLR 497 at 509. The three inaugural judges of the High Court had been leading participants in the Constitutional Conventions and all are properly seen as among the framers of the Constitution, at -. thus when the Court spoke of what was framers of the Constitution knew or intended their Honours are referring to their personal experience in that process, and not to the intention or knowledge of the Imperial Parliament in passing the Commonwealth of Australia Constitution Act 1900.

The Court held that, consistent with McCulloch v Maryland the Australian Constitution contained an implied immunity of instrumentalities, where neither the Commonwealth nor State governments could be affected by the laws of the other. (2003) 31 Federal Law Review 507 at p 508.

Deakin v Webb in the High Court In Deakin v Webb the High Court adhered to what it had said D'Emden v Pedder, that the principles to be applied in interpreting the Australian Constitution, as to the respective powers of the Commonwealth and the States, were substantially the same as those laid down in McCulloch v Maryland. Their Honours rejected the assertion that there was a preference for American decisions, or any disregard for British decisions, instead holding that the distinction was based on the deliberate adoption by the framers of the Australian Constitution of the language of the United States Constitution and a rejection of the scheme of the Canadian Constitution. Each of the Judges rejected an application for a certificate to appeal to the Privy Council, finding that the determination of Constitutional questions was the responsibility of the High Court.Deakin v Webb (1904) 1 CLR 585 at p 619-31.

Webb v Outtrim in the Privy Council

The Victorian Commissioner of Taxes did not accept the decision of the High Court and assessed the taxable income of Mr Outram as including the salary he received from the Commonwealth as the Deputy Postmaster-General. The Supreme Court of Victoria followed the decision of the High Court in Deakin v Webb. As the unsuccessful litigant, the Commissioner of Taxes sought leave to appeal to the Privy Council rather than the High Court. Hodges J held that the Supreme Court of Victoria had power under the Order in Council of 9 June 1860 to grant leave to appeal to the Privy Council, and that the Commonwealth Parliament had no power to take away this right of appeal..

The Privy Council held in Webb v Outtrim that a State government could tax Commonwealth officials and criticised the decisions of the High Court in D'Emden v Pedder and Deakin v Webb. Their Lordships held that the relevant question was not the intention of the Australians who framed the Constitution, but rather what the British Parliament had in mind when it passed the Constitution Act.; .

Baxter v Commissioners of Taxation (NSW) The question returned to the High Court in May 1907. The two cases were heard together, however the judgment in Baxter v Commissioners of Taxation (NSW) addressed the substantive issues. The decision of the Privy Council in Webb v Outtrim had been followed by Murray DCJ in the NSW District Court, finding that Baxter was liable to pay NSW income tax in respect of his salary as a Customs officer. Similarly the Court of Petty Sessions of Victoria had followed the Privy Council and had found that Flint was liable to pay Victorian income tax in respect of his salary in the Postmaster-General's Department. Both Baxter and Flint appealed directly to the High Court. The Commissioners of Taxation objected to three of the Justices hearing the case as the decision would directly affect their interests as residents of NSW. Griffith CJ overruled the objection, holding it was a case of necessity as every Justice would have the same interest.Baxter v Commissioners of Taxation (NSW) (1907) 4 CLR 1087 at p 1090.

An appeal direct to the High Court The Court held that District Court and Court of Petty Sessions were exercising federal jurisdiction pursuant to section 39 of the Judiciary Act, such that section 73 of the Constitution,Commonwealth of Australia Constitution, section 73. gave the High Court jurisdiction to hear the appeals.Baxter v Commissioners of Taxation (NSW) (1907) 4 CLR 1087 at p 1136 per Griffith CJ.

Which court is the ultimate arbiter The High Court held that it was, in the absence of a certificate under s 74 of the Constitution, the ultimate arbiter on all questions concerning the respective powers of the Commonwealth and the States such that it was not bound to follow the decision of the Privy Council in Webb v Outtrim. The High Court reconsidered the position, but reaffirmed its decision in D'Emden v Pedder. Griffith CJ delivered the "rather pugnacious judgment" of the majority as follows :