Federal Commissioner of Taxation v Munro; British Imperial Oil Co Ltd v Federal Commissioner of Taxation

38 CLR 153
1926 - 0825A - HCA

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(Judgment by: Higgins J)

Between: Federal Commissioner of Taxation
And: Munro
Between: British Imperial Oil Co Ltd
And: Federal Commissioner of Taxation

Court:

Judges: Knox CJ
Isaacs J

Higgins JRich J
Starke J

Subject References:
Taxation and revenue
Income tax
Judicial power
Appeal
High Court
Judicial power of Commonwealth
Validity of constitution of Board of Review
Deductions
Interest on mortgage debt

Legislative References:
Constitution (Cth) - s 55; s 71
Income Tax Assessment Act 1922 (Cth) - the Act
Income Tax Assessment Act 1923 (Cth) - the Act
Income Tax Assessment Act 1925 (Cth) - the Act

Hearing date: 10 May 1926; 11 May 1926; 12 May 1926; 14 May 1926; 17 May 1926; 25 August 1926; 31 May 1926; 25 August 1926
Judgment date: 25 August 1926

MELBOURNE

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Judgment by:
Higgins J

Federal Commissioner of Taxation v Munro

The Commissioner in this case has appealed from a decision given by a Board of Appeal constituted under the Income Tax Assessment Act 1922-1924. The decision of the Board on an appeal to it from the Commissioner's assessment was given in favour of the taxpayer on 21st January 1925; and the Commissioner on 17th February 1925 gave notice of appeal to this Court. The decision was to the effect that interest paid by the taxpayer on a bank overdraft should be deducted from rents received by the taxpayer from Melbourne city property, which are treated by the Commissioner as income from property. The money was borrowed by the taxpayer on overdraft for the purpose of a Sydney enterprise. The procedure until the notice of appeal to this Court was in conformity with the directions of the Income Tax Assessment Act 1922-1924.  

There are in fact two appeals; but they relate to two successive financial years, 1921-1922 and 1922-1923, and involve the same points.  

But before the appeals to this Court came on for hearing, a judgment was given by this Court on 9th April 1925 in a case of British Imperial Oil Co Ltd v Federal Commissioner of Taxation, ^[F40] to the effect that the Board of Appeal was an invalid body under the Australian Constitution, that it had no legal existence, and that a special case stated by the Board for the opinion of this Court must be struck out of the list. Subsequently, and no doubt in consequence of this decision of the High Court, Parliament passed an Act which became law on 26th September 1925 (No. 28 of 1925) amending the Assessment Act of 1922-1924, substituting a "Board of Review" for the Board of Appeal, and making other changes.  

The ground on which the Court declared the Board of Appeal to be an invalid body was that the members had not a life tenure in their office (s. 41 of the Assessment Act 1922-1924), and that none but persons having a life tenure can exercise any of the judicial power of the Commonwealth. This Court held that the decision of the Board was an exercise of the judicial power of the Commonwealth, and that for the exercise of the judicial power a life tenure is necessary. It was, indeed, expressly decided in Alexander's Case ^[F41] that s. 72 of the Constitution requires the Justices of all the Courts created by the Federal Parliament to have a life tenure. Personally, I was one of the dissentients in Alexander's Case, but I am bound by the decision. Counsel for the Commissioner has intimated that he disputes the correctness of the decision, but he has not thought fit to adduce any arguments on the subject to our Bench.  

But when the present case came up for argument before us, counsel for the taxpayer contended that the new Board of Review was also an invalid body, as well as the Board of Appeal; and for the same reasons. This question has to be settled before we can decide on the merits as to the deduction made by the Board. But, so far as I can see at present, if the Board-whether Board of Appeal or Board of Review-has no legal existence, the assessment of the Commissioner must hold good, without the deduction claimed (s. 39 of Act 1922-1924; s. 16 of Act No. 28 of 1925).  

I must add here, merely as a summary statement of ss. 16-22 of Act No. 28 of 1925, that all assessments, decisions, objections, pending cases, etc, are to be treated retrospectively as if they were under this new Act No. 28 of 1925.  

It is clear that when, at the request of a dissatisfied taxpayer, a decision of the Commissioner was referred (as in this case) to the Board of Appeal, power was conferred on the Board to make such order as it thought fit and to either reduce or increase the assessment (Assessment Act 1922-1924, s. 51 (1)); and a similar power has been conferred on the Board of Review by the Act No. 28 of 1925 (s. 51 (4)); but the question remains, was the Board of Appeal, or is the Board of Review, for that reason necessarily to be treated as a Federal Court or body exercising the judicial power of the Commonwealth. If the Board must be so treated, then according to Alexander's Case ^[F42] it was invalid as a Federal Court, because the members have only a seven years' tenure (s. 41 (4)). On the other hand, if the existence of the Board can be justified as an administrative aid to the Commissioner, as a piece of machinery devised to guide the Commissioner to a correct conclusion in giving the very responsible decisions which he has to give, ss. 71 and 72 of the Constitution do not apply to the Board at all.

Now, Parliament has been given power, by s. 51 of the Constitution, to make laws "with respect to ... taxation"; and who is to set bounds to that power? The power extends even to making laws with respect to "matters incidental to the execution of any power vested by this Constitution in the Parliament" (s. 51 (xxxix)); and Parliament can, prima facie, provide any precautions that it thinks fit, can devise any machinery that it thinks fit, can give the Commissioner the assistance of other persons for the discharge of his functions in respect of taxation. The Acts do not call this Board a "Federal Court"; though, if in substance it be given functions which are inconsistent with anything but a Federal Court exercising the judicial power of the Commonwealth, the name would matter little. It certainly is not a Court of Record. It has no power of enforcement-no power to enforce its decisions. It has no general jurisdiction-no jurisdiction over civil or criminal controversies-no jurisdiction except to deal with the decisions of the Commissioner under the specific Acts as to income tax. The Board cannot function unless the Commissioner or the taxpayer invoke its aid. Under s. 51 (2) of the Assessment Act 1922-1924, the order of the Board of Appeal on questions of fact is final and conclusive on all parties; under s. 12 of the Act of 1925 (s. 51 (6) of the Act 1922-1925), the decision of the Board of Review is not subject to appeal to the High Court unless it involves a "question of law," and then the whole order both as to facts and law appears to be subject to the High Court's power. But there are similar provisions in favour of the Commissioner's assessment (s. 39); and the Commissioner is not a Court exercising the judicial power (Cornell v Deputy Federal Commissioner of Taxation ^[F43] at p. 47). The proper presumption to be applied is that Parliament intended to obey the decision in Alexander's Case, ^[F44] and that, however freely Parliament has used words familiar in legal procedure, such as "decision," "appeal," etc, it merely provided the Board as auxiliary to the Commissioner in his administrative functions. The Commissioner has the "general administration" of the Act (s. 6). The fact that the Commissioner has to consider the law as well as the facts of each case presented to him does not make him a judicial officer. The fact that a policeman has to consider the law as well as the facts in exercising his power to arrest does not make him a judicial officer; and if Parliament provide the Commissioner with a Board to assist him as to law or facts it does not thereby make him or the Board a judicial officer; much less does it make the Commissioner or the Board into a Court or judicial body, exercising the judicial power under Chapter III. of the Constitution.  

In my opinion, the Board, whether it be called a Board of Appeal or Board of Review, cannot properly be treated as a Federal Court of the kind contemplated by s. 71 of the Constitution, and s. 72 of the Constitution does not apply to it. The Board ought to be treated as a mere piece of administrative machinery. My opinion applies to the Board of Appeal as well as to the Board of Review; for my learned colleagues have, on the second argument, permitted counsel to discuss the propriety of the decision in British Imperial Oil Co v Federal Commissioner of Taxation. ^[F45] I concur with Mr. Dixon that no substantial distinction can be drawn between the Board of Appeal and the Board of Review as to validity.  

It is reassuring to find that this view of the Board of Appeal or Board of Review, that it is a mere administrative tribunal not exercising the judicial power of the Commonwealth, is confirmed by numerous cases under the United States Constitution. Under that Constitution no Federal Court can be created if the members have not a life tenure-a tenure "during good behaviour."

By art. III., s. 1 -

"The judicial power of the United States shall be vested in one supreme court, and in such inferior courts, as the Congress may, from time to time, ordain and establish. The Judges, both of the supreme and inferior courts, shall hold their offices during good behaviour."

These words are very clear; and yet it has been held that Courts of special jurisdiction may be created by Congress although the members of the Courts have a mere tenure for years. This principle has been applied to Courts created by Congress for the Territories (American Insurance Co v 356 Bales of Cotton). ^[F46] It has been applied to special tribunals for the settlement of claims against the United States to lands derived by the United States from Mexico (United States v Coe; ^[F47] United States v Ferreira; ^[F48] United States v Ritchie ^[F49] at p. 534). It has been applied to commissioners and examiners of patents (Butterworth v Hoe; ^[F50] United States v Duell). ^[F51] It has been applied to the Inter-State Commerce Commission (Kentucky and I. Bridge Co v Louisville and N. R. Co; ^[F52] Willoughby's Constitutional Law of the United States, vol. I., p. 369; vol. II., pp. 970, 1276). In my dissenting judgment in Alexander's Case ^[F53] at p. 476 I referred to these cases in the discussion as to the exercise of judicial power. I infer, also, that in the United States the judicial power would not be regarded as exercised by a tribunal if the tribunal has not been given the power to enforce the results of its decisions.

"That judicial power essentially involves the right to enforce the results of its exertion is elementary" (Virginia v West Virginia ^[F54] at p. 59]).

Neither Board of Appeal nor Board of Review has been given this power of enforcement under our Assessment Acts. The assistance of some legitimate Federal Court is necessary for the execution of any decision of the Board of Appeal or Board of Review; and although the decision of the Board of Appeal is made final and conclusive as to facts (s. 51 (2) of the Assessment Act 1922-1924), that is mere rule of evidence for the Court. I should infer that the decision of the Board of Review has the same conclusive effect where no question of law is involved (s. 51 (6) of the Act 1922-1925); but this does not make the Board of Review a tribunal exercising the judicial power of the Commonwealth. In a very recent article in the Harvard Law Review written by Professor Frankfurter (March 1926) there is an interesting account of the increasing pressure for tribunals of special jurisdiction for the purposes of commerce, customs, patents, land claims, etc; and it is not difficult to imagine the extreme disaster to efficient administration if Congress, in creating such tribunals, were bound by all the conditions applicable to Federal Courts exercising the judicial power.  

Even in England, where Parliament is omnipotent, the distinction between bodies such as justices, when exercising administrative duties as distinguished from judicial duties, is well recognized. In Royal Aquarium etc Society v Parkinson ^[F55] it was held that neither a justice of the peace nor a member of the London County Council was entitled to absolute privilege for his words on applications for music and dancing licences, although he would be entitled thereto in an exercise of judicial power; on such applications his office is consultative for the purposes of administration and not judicial, although he has to decide both law and facts.  

In my opinion the power to make laws "with respect to ... taxation," conferred by s. 51 of our Constitution, can be reconciled with the power conferred by s. 71 to create Courts for the exercise of the judicial power of the Commonwealth.  

Even in this High Court it has been held, on a similar line of reasoning, that another section in the judicature part of the Constitution, Chapter III. (s. 80), which provides for trial by jury on indictment for any offence against a law of the Commonwealth does not apply to trials on indictment for offences under laws made by the Commonwealth for Papua, a territory (R. v Bernasconi). ^[F56] According to Griffith C.J., "Chapter III." of the Constitution "is limited in its application to the exercise of the judicial power of the Commonwealth in respect of those functions of government as to which it stands in the place of the States, and has no application to territories". ^[F57] (See also Buchanan v Commonwealth; ^[F58] and Mitchell v Barker ^[F59] at p. 367.)  

If the view which I have stated is right-that the Board of Appeal of the Act 1922-1924 is just as valid as the Board of Review of the Act of 1925, it becomes unnecessary to consider the argument that ss. 18 and 19 of the Act of 1925 are invalid, which purport to make a decision given by the Board of Appeal as valid as if given by the new Board of Review. But if the Board of Review is to be treated as valid and if the Board of Appeal is to be treated as invalid, it is to my mind clear that ss. 18 and 19 are invalid. For if Parliament was forbidden by the Constitution to create the Board of Appeal, and if the decision of the Board was therefore void in law, Parliament cannot make valid retrospectively that decision which it could not make valid prospectively (Williams v Supervisors of Albany). ^[F60]  

For the reasons given in my judgment in British Imperial Oil Co Ltd v Federal Commissioner of Taxation this day, I am of opinion that there has been no breach of s. 55 of the Constitution.  

As for the merits of this appeal, I am of opinion that the Commissioner was right and that the Board of Appeal was wrong. Where rents are received from property, and an overdraft is obtained by the taxpayer on the security of the property for the purposes of another enterprise or speculation, the interest paid by the taxpayer cannot be treated as a deduction from the rents for the purpose of the Income Tax Acts. The position is, to my mind, so obvious that I should serve no useful purpose by amplifying my reasons. I have read the judgment of the Chief Justice as to the merits, and I respectfully concur therewith, both as to reasoning and as to result.  

British Imperial Oil Co Ltd v Federal Commissioner of Taxation

This is a case stated by the Supreme Court of Victoria for the opinion of this High Court as to law. It is stated under s. 51A sub-s. 8, of the Assessment Act 1922-1925. By permission, the case has been argued with Munro's Case; but the position is very different.  

On 28th March 1925 the Commissioner sent to the Company a notice of assessment as under s. 28 of the Act 1922-1924; on 4th May following the Company lodged its objections (under s. 50 (1)). on 26th September following, the amending Assessment Act No. 28 of 1925 was passed; on 1st December 1925 the Commissioner disallowed the objections; on 24th December the taxpayer requested the Commissioner to treat the objections as an appeal and to forward them to the Supreme Court (s. 50 (4)). On 29th April 1926 the Commissioner forwarded the objections to the Supreme Court under s. 51A(1); and on 7th May 1926 the Supreme Court stated this case in writing for our opinion.  

The objections taken by the Company under s. 50 (1), through its public officer, are 10 in number: they have to be closely scrutinized.

"I claim that the assessment herein should be based upon the ordinary taxable income of the said Company ascertained by reference to actual income received according to the provisions of the Income Tax Assessment Act other than s. 28. If contrary to my contention the provisions of s. 28 of the said Act be applied, then assessment should be upon a lower percentage than 10 per cent.

My reasons for claiming that the assessment is objectionable are:

(1)

That the said assessment is wrong in law and excessive.

(2)

That the business of the said British Imperial Oil Co Ltd is not controlled principally by persons resident outside Australia.

(3)

That the said business produces taxable income.

(4)

That the said business does not in fact produce less than the ordinary taxable income which might be expected to arise from that business or from such a business as that carried on by the said Company and does not or should not appear to the Commissioner so to do.

(5)

That, by reason of objections 2, 3 and 4, s. 28 cannot or ought not to be applied.

(6)

That if s. 28 is applied the percentage (10 per cent) of the total receipts of the said business on which the said Company through me its public officer has been assessed and charged with income tax is not a proper percentage and/or is not a percentage which the Commissioner in his judgment properly exercised thinks proper.

That if s. 28 is not applied the said percentage is not and does not represent the actual income of the said Company.

(7)

That s. 28 of the Income Tax Assessment Act 1922-1924 is ultra vires of the Parliament of the Commonwealth of Australia and is void.

(8)

That the Income Tax Assessment Act 1922-1924 and the Income Tax Act 1924 are ultra vires of the Parliament of the Commonwealth of Australia and are void.

(9)

That the assumed or fictional income upon which the assessment is based is not income arising from sources in Australia.

(10)

That the assumed or fictional income aforesaid is extra-territorial."

The assessment in question is for the financial year 1924-1925, and is based on income received in 1923-1924; and it will be seen from the form of these objections that the Commissioner, as under s. 28 of the Assessment Act 1922-1924, has assessed the Company for income tax on 10 per cent of the total receipts of the business carried on in Australia. The first six objections go to the merits, that is to say, to the application of s. 28, and its meaning; but the objections 7 to 10 attack the validity of the section and of the Act itself.  

Taking objection 7, it is argued that when the objections were lodged (4th May 1925), s. 28 included a sub-section, sub-s. 3, which has been declared by this Court to be ultra vires in British Imperial Oil Co Ltd v Federal Commissioner of Taxation, ^[F61] and that, this sub-section being ultra vires, the rest of the section is not severable, and the whole section is invalid.

My opinion - as I have just stated in my judgment in Federal Commissioner of Taxation v Munro - is that sub-s. 3, providing for a reference to a Board of Appeal, is not invalid; and therefore the question of severability does not arise, and the section with sub-s. 3 is not invalid because of sub-s. 3. Sub-s. 3 said:

"A taxpayer who is dissatisfied with the decision of the Commissioner under this section may require the Commissioner to refer his case to a Board of Appeal, and the Commissioner shall refer the case accordingly."

It is true that after the objections were lodged the amending Act No. 28 of 1925 was passed, substituting a Board of Review for a Board of Appeal; but this fact does not affect the question with which I am dealing. In my opinion s. 28 is not ultra vires of the Parliament, and is not void.  

As for objection 8, that the Assessment Act 1922-1924 and the Taxing Act 1924 are ultra vires and void, it rested on the same ground of alleged invalidity of the Board of Appeal, and the consequent invalidity of the whole taxing scheme as unseverable; and the same opinion applies.  

As for objections 9 and 10, the point taken is that the assumed or fictional income based on gross receipts is not income "derived from sources in Australia" within the meaning of s. 4 of the Assessment Act (definitions). But Parliament in taxing income derived from sources in Australia is entitled to adopt any methods, even rough-and-ready methods, for ascertaining the income so derived; and Parliament is entitled to give such powers and discretions to the Commissioner for this ascertainment as it thinks fit.  

Counsel for the Company have supplemented the objections by argument as to the effect of s. 55 of the Constitution. They urge that the Assessment Act is a law imposing taxation; that it contains matters other than the imposition of taxation; and that it deals with more than one subject of taxation. There is no reference in the objections to s. 55; and there is no ground of objection taken that covers the points now taken as to s. 55. Clearly, objection 7 does not cover these points. Objection 7 is that s. 28 of the Assessment Act is ultra vires of the Parliament and "is void"; whereas if s. 55 of the Constitution be disobeyed, s. 28 would not be void, though all the other provisions would be of no effect. The objection is obviously directed to the point that Parliament has no power at all, in any form of legislation, to enact s. 28; but no one denies that Parliament has power to impose any taxation. The only restriction is that the Act must not deal with anything but taxation. As for the second branch of s. 55, forbidding a law which deals with more than one subject of taxation, the effect of disobedience is not expressly stated; but even if the effect be similar to that of disobedience to the first branch, objection 7, that s. 28 is "void," is also inapplicable. Section 55 of the Constitution does not deal with the limits of powers of the Parliament; and no one denies that the Parliament has power to impose taxation, or to tax more than one subject. Section 55 in its first branch, if disobeyed, would leave s. 28 operative, but would make all the other sections inoperative; whereas objection 7 is that s. 28 is "void." The effect of disobedience to the second branch of s. 55 is not certain; but whatever be the effect the objections do not cover the question.  

Now, by s. 51A (3), the taxpayer whose objections are forwarded to the Court is limited, on the hearing of the appeal, to the grounds stated in his objections; and the two questions asked by the learned Judge are therefore to be limited to these grounds. The questions are:

"(1)

Did the said assessment cease to be operative upon the arising of the dissatisfaction of the appellant therewith?

(2)

Is the assessment appealed against good in law?"

These questions must be confined to the objections lodged. For the purpose of carrying out the procedure prescribed in s. 51A of the Act 1922-1925, the opposing party-in this case the Commissioner-has, as it were, a vested interest which entitles him to hold his assessment as to all grounds not stated in the taxpayer's objections. The procedure here chosen by the taxpayer limits him to the grounds of objection which he has stated. There is nothing in the Act forbidding other procedure; and, though it is not necessary for my decision in this case, I may say that I am not at all satisfied that a person assessed wrongly (e.g., a charitable institution) could not wait till he be sued and then defend the action.  

In my opinion there is no substance in the objections numbered 1 to 6. Even if one should regard the course taken by the Commissioner as harsh and autocratic, it is the course authorized by the Parliament, and validly authorized; and Parliament has power to act unjustly.  

But, as my learned brothers are of opinion that it is our duty to answer the arguments based on s. 55 of the Constitution, it is my duty, I think, to answer also in order that the views of the Full Bench may be complete.  

In my opinion-

(1)

The Assessment Act 1922-1924 is not a law imposing taxation within s. 55; nor is the Assessment Act 1922-1925.

The law which imposes income tax for 1924-1925 is the Tax Act No. 50 of 1924.

(2)

The Tax Act No. 50 of 1924 "deals only with the imposition of taxation," and there is no provision therein dealing with any other matter.

(3)

The Tax Act No. 50, by s. 2 thereof, incorporates the Assessment Act 1922-1924, which is to be read as one with the Act No. 50; yet the conjoint Act "deals only with the imposition of taxation."

(4)

The Tax Act No. 50 deals with one subject of taxation only-income.

(5)

Section 28 of the Assessment Act does not introduce a new subject of taxation-gross receipts.

It merely provides an exceptional standard by which the Commissioner may fix taxable income in an exceptional case where the ascertainment of the taxable income is exceptionally liable to abuse or evasion. All receipts are income; and they are taxable after the authorized deductions (if any) are allowed.

(6)

It is not correct to say that s. 28 purports to allow income tax where there is no income; in effect, it says merely that the Commissioner may assess for income tax a percentage of the total receipts from the business in Australia where the evidence before him is insufficient to show the true income or any income of that business-where "it appears to the Commissioner that the business produces either no taxable income or less than the ordinary taxable income."

A firm that carries on business in London as well as in Australia can easily hide the profits of its Australian business by increasing the invoiced prices of the goods sent to Australia.

 

I need not expatiate at length on these conclusions. But (1) it is the Act No. 50 that expressly "imposes" the tax. If there were no such Act applicable to the year 1924-1925, if Parliament failed to pass such an Act, there would be no income tax. As I have said already in the recent case of Commissioner of Stamps (W.A.) v West Australian Trustee, Executor and Agency Co ^[F62] at p. 69, the explosive is laid ready by the Assessment Act, but it is the yearly Tax Act which communicates the spark.

(2) and (3) It is a mistake to treat the first part of s. 55 as if it said "Laws imposing taxation shall only impose taxation." The words used allow much freer scope-such laws must "deal only with the imposition of taxation." I am still of the same opinion on this point as I expressed in Osborne v Commonwealth ^[F63] at p. 373. So far as I see, there would be nothing to offend against the Constitution if all the provisions of the Assessment Act were actually inserted in the Taxing Act; but the present course is, no doubt, more convenient. In National Trustees, Executors and Agency Co of Australasia v Federal Commissioner of Taxation ^[F64] at p. 371 the late Griffith C.J. said as to the Estate Duty Act and the Estate Duty Assessment Act:

"The two Acts read together are, as was pointed out in Osborne v Commonwealth, ^[F65] a law imposing taxation."

 

But although this statement is, no doubt, the logical result of the express incorporation of two such Acts, it is clear from the words of s. 53 of the Constitution as to "proposed laws," that the one and only Bill which is excepted from the Senate's power to amend is the taxing Bill, the Bill that purports to impose the tax; and similarly, it is only the Act that imposes the tax, the taxing Act, which is subject to the prohibition in the first part of s. 55. Yet even if all the provisions of the Assessment Act were actually incorporated in the one Taxing Act No. 50, I am of opinion that the conjoint Act would not offend against the prohibition.  

In my opinion, our answer to the two questions asked in the case as stated should be confined within the limits of the objections taken by the taxpayer, and should be, as to question 1, No; as to question 2, Yes.