High Court takes an axe to Victoria’s political donations laws

The High Court has taken an axe to the Victorian Electoral Act, chopping out the entirety of Part 12.

It deals with election spending, caps on political donations, three different types of public funding (for election campaigns, party administration and policy development), along with the disclosure regime for donations.

The Victorian parliament will be scrambling to reconstruct and reenact it in a constitutionally valid manner in the lead up to the Victorian election in November this year.

What was the problem with the law?

Part 12 was struck down due to the constitutional invalidity of a seemingly obscure provision setting differential rules for “nominated entities”. But it was really about the constitutional validity of a law allowing the three main political parties to spend more on election campaigns than anyone else.

The High Court had previously held that legislative limits on political donations and electoral expenditure can reduce the amount of money a political party or candidate can spend on political communications during an election campaign.

This means such a law can breach the constitutionally implied freedom of political communication – unless the law is made for a legitimate purpose, such as reducing the risk of corruption and undue influence, and the law is reasonably appropriate and adapted to achieving that purpose.

In Victoria, the parliament passed amendments in 2018 that put a very low cap on political donations. A person could only make donations to a political party or any of its candidates or elected members, up to a cumulative maximum of A$4,000 (since raised to $4,970) over the entire four-year period between elections.

The law did not, however, place any cap on electoral spending, as long as the spending came out of a special campaign account. In effect, the limit on spending depended on what was paid into that campaign account. All donations and electoral public funding had to be paid into that account.

But what else could be deposited in it?

This is where “nominated entities” first appeared. The main political parties each had a separate body, which held major income-producing capital assets. It would transfer funds to the party. The new law allowed the party to register the body as a “nominated entity”. It could then make uncapped transfers into the party’s campaign account. But an independent candidate could not establish a nominated entity, so the candidate had no chance of competing with the spending of a political party, funded by its nominated entity.

The Labor, Liberal and National parties each registered a nominated entity prior to July 1 2020. After that date, this funding route was effectively cut off for small or new parties. Greater restrictions were imposed on the control and operation of any nominated entity subsequently established. They could not build up a capital fund because a nominated entity was restricted to receiving only capped donations over the four year parliamentary term. It was also an offence to deposit money into a fund held by a body and then later register it as a nominated entity, if the amount deposited would otherwise have breached the donation caps.

The upshot was that three parties – Labor, Liberal and National – could use nominated entities to make uncapped donations into their campaign accounts. This meant they could spend vastly greater amounts on campaigns than an independent or a candidate from any other political party.

The challenge

The validity of this law was challenged by two former candidates, Paul Hopper and Melissa Lowe, who ran as independents at the 2022 state election and lost. They argued the law concerning nominated entities was unfair and undemocratic, and there should be a level playing field for elections. Hopper said the donation laws were rigged and unfairly biased to the major parties.

The ground of the challenge was that the law about nominated entities breached the implied freedom because it unfairly disadvantaged independents and small or new political parties in their ability to spend on political communications. Conversely, it advantaged the three main parties.

The High Court accepted the law capping donations burdened the implied freedom of political communication. It also found the law about nominated entities affected independents and smaller parties differently from the major parties.

It noted three kinds of differential operation. First, the law gave advantages to political parties but not to others, such as independents.

Second, it treated nominated entities differently depending on whether they were registered before or after July 1 2020.

Third, it favoured the major political parties by allowing the bodies holding their existing capital funds to become nominated entities when the law commenced, but prevented new funds from being built up by other parties by restricting them to the receipt of capped donations.

The court didn’t need to decide if each of these three differential applications resulted in the constitutional invalidity of the relevant section or the whole part. This was because the Victorian solicitor-general conceded there could be no constitutional justification for the second differential treatment, based on the July 1 2020 date.

Victoria was hoping the court would strike down that minor distinction, keeping the rest of the provisions alive. But the court concluded the invalid provision that imposed the differential treatment was too dependent on a web of other provisions in Part 12. This meant it could not be disentangled without the court effectively redrafting the law. So the entire part was struck down.

What are the ramifications for Victoria?

Victoria now has a massive hole in its electoral act. It has no valid system for disclosing political donations, or requiring parties and candidates to make annual reports on donations and expenditure, or even for banning overseas and anonymous donations.

More importantly, all the money paid in public funding to political parties, whether for campaign funding or slush funds for “administrative” and “policy development” purposes, was unlawful, and has been since 2018. One can imagine some legislation validating that funding with retrospective effect will be introduced pretty quickly.

The writing was on the wall that Victoria was going to lose this case. The solicitor-general’s concession showed the government was trying to salvage what it could.

The Victorian government even introduced legislation to make the nominated entity provisions fairer, but it dropped the provisions about nominated entities before the bill was passed in March this year. The excuse was it was awaiting the High Court’s judgment. It will now have to engage in far more extensive amendments than it had envisaged.

What are the ramifications for the Commonwealth?

The Commonwealth parliament also enacted legislation about political donations in February last year, which is to come into force on July 1 2026. It includes provisions about nominated entities, which have been alleged to tip the playing field unfairly in favour of the main political parties, to the disadvantage of new parties and independents. A challenge to it has been commenced by former senator, Rex Patrick, and former MP, Zoe Daniel.

The Victorian case will not directly affect the Commonwealth challenge. This is because the Commonwealth law does not contain an equivalent provision that treats nominated entities differently by reference to the date they were registered. But it does raise other concerns about differential treatment that were also noted by the High Court in the Victorian case.

While the Victorian law was by far the worse of the two, the Commonwealth law remains vulnerable. In both cases, major parties tried to manipulate the electoral campaign funding laws to their advantage, and the High Court has a history of not taking kindly to such action. Political apparatchiks in Canberra will be feeling more nervous tonight.