In November, the Morrison government passed legal changes to override state donation laws, including Queensland’s developer donation ban. The finance minister, Mathias Cormann, offered one rationale for the change: to clarify whether state or federal laws applied to donations.

That commonwealth power grab has now become central to former Liberal National party president Gary Spence’s challenge to Queensland’s ban, heard by a full bench of the high court this week in Canberra.

In the hearings, the solicitor general Stephen Donaghue revealed two further purposes for the new law that the Coalition had been less keen to shout from the rooftops.

The changes also ensure federal political parties are “not starved of funds” they need to influence voters and facilitate “participation” in public debate through the making of donations, Donaghue submitted on behalf of the commonwealth.

It was, as chief justice Susan Kiefel noted, a law directed at “freeing up the flow of funds” from otherwise prohibited donors.

With the federal election due in May, the case will determine whether prohibited donors have been given immunity by the changes proposed and passed by the Coalition government.

Evidence from four days of hearings revealed concerns that Queensland’s developer donation ban may have been rendered almost totally ineffective, even before one gets to the prospect the court could strike or read the ban down.

The Queensland LNP challenge against ‘discriminatory’ ban

When he filed the case in July, Spence’s primary argument was that the developer donation ban was unconstitutional because it infringed the implied freedom of political communication.

Spence quit as LNP president in December because the Queensland law meant his former role as a director of companies involved in property development prevented him soliciting donations.

The implied freedom argument relies on the eyebrow-raising proposition that developer donations are less of a corruption risk in Queensland than in New South Wales, where the high court upheld a similar ban in the case of McCloy.

Spence also argued the law was discriminatory because it deprived the LNP of a “materially greater amount of donations” than Labor.

In the four days of hearings the implied freedom argument has almost completely fallen away.

First there was the wry smile from the chief justice when Spence’s lawyers noted the lack of corruption in Queensland in the last three or four years, then her suggestion that Queensland “might have had some confidence” the court would decide the case in the same way as in NSW.

By Thursday the game was up. Kiefel informed the Queensland solicitor general Peter Dunning the court required no oral submissions on whether the developer donation ban was justified, and nothing more on the precedent case of McCloy.

Challenge given ‘hand up’ by surprise federal changes

It is Spence’s second argument – that the Queensland developer donation ban is inconsistent with commonwealth laws – which is likely to decide the case. This plank has brought greater scrutiny to the commonwealth takeover of donations law inserted into the bill to ban foreign donations.

In April Labor and the Coalition had reached agreement on the bill, but the bipartisan consensus was threatened by surprise amendments presented by the government in September.

Under the changes, donors would not be in breach of state laws if their donations “may be used” for commonwealth electoral purposes.

Academics noted the amendments would override state bans on political donations from developers and stricter caps on donations, expenditure and disclosure of donations, including where funds were not explicitly tied to federal or state campaigns.

The bill passed in November, despite the Greens’ opposition, after some amendments negotiated with Labor. Those amendments stipulate that federal law will not override a state donation law if the state requires donations be kept in separate bank account, or donations are identified separately or are subsequently spent on state campaigns.

On Tuesday Spence’s counsel Jeremy Kirk suggested his case had “got a bit of a hand-up” from the Coalition bill, because the new immunity provisions make clear that Queensland law should not govern donations to be spent on federal campaigns nor the “unallocated middle” – donations that could be used for either state or federal campaigns.

Kirk told the court the Morrison government had intended to exclusively and exhaustively regulate the field of political donations that could affect the federal sphere, while leaving state law to regulate donations that could only be spent on state campaigns.

By contrast, Queensland had shown “no recognition” that political parties operate across both state and federal levels and had made “no attempt” to leave the regulation of federal elections to the commonwealth, he said.

Kiefel noted the Coalition’s changes appeared to provide an “area of immunity for donors and donees”.

While the Queensland developer donation ban has a “protective purpose” to prevent the distortion of politics or the perception of corruption, the commonwealth law is directed at “freeing up the flow of funds” from otherwise prohibited donors, she said.

Kiefel suggested the federal government could have “more simply” legislated rules for money spent in federal campaigns, but appeared as a matter of policy to be “looking for that middle”, to regulate donations that could be spent in either state or federal campaigns.

On Thursday Dunning argued that if the “bare possibility” money could be spent in a federal election was allowed to stand as the test for the commonwealth law’s validity, then the state would be stripped of the ability to legislate on a range of topics at the core of its function.

Flow-back of developer funds and loopholes questioned

At several points in Wednesday’s hearing Kiefel questioned whether the commonwealth law was sufficiently linked to the regulation of federal elections, noting that it provides an immunity for donations made for “any purpose”.

Justice Patrick Keane observed that if developers can make donations for any purpose other than a state election campaign, they could be used to defray the cost of overheads and “free up” resources for other purposes.

Western Australia – one of six states and territories to intervene – through its solicitor general Joshua Thomson argued that providing an immunity to otherwise prohibited donors would cause “flow-back” consequences.

Parties could use untied donations from developers in the federal arena to free up other untied donations for state elections, they could hire common facilities, or promote their party brand or issues common to both the federal or state sphere – all activities of enormous help to a state campaign made legal by the federal law.

Much time in argument was spent grappling with the question of what would happen if a developer donation is subsequently used in a state election and the federal immunity no longer applies.

There are two possibilities: either the immunity is removed retrospectively and the Queensland donation ban bites donor and donee at the point money is identified for use in a state campaign; or the immunity is only lifted prospectively, meaning the property developer donor and political party donee would be in the clear.

Three times Kirk said the commonwealth laws are “not pellucidly clear” on that point, meaning it’s possible the changes have just poked a huge loophole in Queensland’s ban.

There are difficulties of enforcement. Tracing money to determine where it came from and where it ends up can be difficult – as illustrated by the New South Wales Icac’s investigation to determine whether the Free Enterprise Foundation was used by the Liberal party to wash developer donations back into NSW, where they are also banned.

The Queensland law also has a mental element, meaning the donor must know of acts or omissions that render them liable. On Wednesday, Donaghue conceded it was a “large question” whether that element could be met in circumstances where the donee used funds for a state campaign in breach of the law. Prosecutors may never be able to bring charges even if funds were unlawfully spent on a state campaign.

Depending on the outcome of the case, further legislative fixes may be needed. Both the commonwealth and Spence suggested Queensland could remedy any loophole by also banning the use of developer donations, not just their payment or receipt.

But in the meantime the federal parliament has quietly opened a path for developer donations back into political parties aiming to win elections in Queensland, a fact highlighted by the case to quash the ban entirely given a “hand up” by the commonwealth.