Victorian independents’ potential High Court challenge to political donations laws has merit

A prospective constitutional challenge to Victorian campaign finance laws may have flow-on consequences for Commonwealth campaign finance reforms, which have currently stalled in the Senate.

Four independent candidates, who were defeated at the last Victorian election, have banded together to threaten a challenge to aspects of campaign finance laws they regard as seriously disadvantaging independent candidates and new parties in state elections.

The Andrews Labor government introduced these reforms in 2018. They imposed a very low cap on political donations, but no cap on electoral expenditure. Instead, electoral expenditure is limited to money that comes out of a special campaign account, into which all the capped political donations are deposited.

This would seem fair, if electoral expenditure were limited to the amount of capped donations a party or candidate can raise. The broader the party’s or candidate’s support, and the greater the number of capped donations received, the more can be spent on the campaign. But this is not how it actually works, as the system has been manipulated to favour the major political parties.

The mysterious ‘nominated entity’

Parties can appoint a “nominated entity”, which can then transfer amounts, no matter how large, into the party’s campaign account. The Labor, Liberal and National parties have all appointed nominated entities, which hold extensive assets. These bodies transfer millions of dollars to the campaign accounts of the relevant party, to spend on political advertising.

Independents are denied this advantage, as they are not permitted to have a nominated entity.

While other parties theoretically could appoint a nominated entity, the law applies differently to them, because they did not appoint nominated entities under earlier, more lax requirements.

Any new nominated entity must be controlled by, and operate for, the sole benefit of a registered political party. This means any new entity could only receive capped donations and could not build up the type of wealth held by the nominated entities of the major parties. It also stops new parties from appointing bodies, such as Climate 200, as their nominated entity. Two or more parties cannot nominate the same entity.

How does this play out in practice?

The system significantly favours major parties and incumbent MPs over independents and new parties. An independent can only spend campaign funds that come from their own pocket or capped donations they have received. Each of their donors can donate no more than an aggregate amount of $4,670 over a four-year electoral cycle.

In contrast, political parties can also spend uncapped amounts transferred from their nominated entities as well as advance payments of public funding. The latter is calculated according to the number of first-preference votes won at the previous election. This advantages major parties, which receive large amounts from both advance funding and nominated entities, while new parties miss out.

The major parties also have the advantage that they can shift the bulk of their funds to spend on campaigns in marginal electorates, swamping the campaign of any independent or new party that relies on capped donations.

What is the constitutional argument?

The High Court, when it first identified an implied freedom of political communication in the Constitution in 1992, was dealing with a federal law that prohibited paid political advertising on the electronic media. The law provided for free political advertising time to be allocated among parties and candidates on the basis of their success at the previous election. Even though measures were included to secure 10% of the free advertising time for new and independent candidates, a majority of the High Court did not think that was sufficient.

The fact that 90% of free advertising time was to be allocated to parties already represented in parliament because of their proportion of first-preference votes at the previous election favoured incumbents. As Justice McHugh pointed out, one cannot seek to justify a law as levelling the playing field if it “favours the sitting members and their political parties at the expense of the views of those who do not hold political power”.

The High Court has previously accepted that limits imposed on political donations and campaign funding burden the implied freedom of political communication. This is because they restrict the funds that can be used on political communication during election campaigns. The court has also accepted that laws burdening the implied freedom can still be justified if they are for a legitimate purpose and proportionate in their operation.

The Andrews government claimed this law was enacted to ensure “a level playing field” and provide “equal participation in the electoral process”. While the High Court would regard these as legitimate purposes, it is hard to imagine that a law that so clearly and deliberately favours incumbents and major parties over independents and new parties could be accepted as being for such purposes, let alone proportionate in achieving them.

Even the body established to review the campaign finance reforms recommended, by majority, that the use of nominated entities be removed from the Electoral Act. It regarded the law as not treating all parties equally and significantly advantaging those parties that were able to establish a nominated entity under previous laws. It also pointed out that the rules allow parties with nominated entities to spend significantly more on their campaigns, with the risk they will drown out other voices.

What is the potentially wider impact of this challenge?

The idea of a nominated entity has also caught on elsewhere. South Australia introduced it with its reforms that ban political donations. However, nominated entities in SA can only support the administrative expenditure of parties – not their campaign spending. This reduces the risk of a successful constitutional challenge.

The Commonwealth’s proposed law also permits political parties to have nominated entities that can make unlimited transfers of funds into their campaign expenditure accounts.

While expenditure caps (albeit quite high ones) are proposed at the Commonwealth level, a political party could still shift large amounts of money into marginal electorates for campaign spending. It could do this by using money from nominated entities, as long as all expenditure above the electorate cap was used for ads about the party and its policies, which do not mention or show the candidate or the electorate, and it didn’t exceed a party expenditure cap of $90 million.

An independent, however, must stay under the electorate expenditure cap of $800,000, as he or she does not have a party to advertise, a higher party cap or the use of money from a nominated entity.

If the Commonwealth’s bill were passed, the playing field would slope heavily in favour of the major political parties. While it is not quite as biased as the Victorian law, it would still be vulnerable to constitutional challenge. Any success in the mooted Victorian challenge would likely have an impact on the validity of the proposed Commonwealth provisions too.