Perpetual Executors and Trustees Association of Australia Ltd v Federal Commissioner of Taxation

(1948) 77 CLR 1

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(Judgment by: Dixon J)

Between: Perpetual Executors and Trustees Association of Australia Ltd
And: Federal Commissioner of Taxation

Court:

Judges: Latham CJ
Starke J

Dixon JMcTiernan J
Williams J

Subject References:
Estate Duty

Judgment date: 22 September 1948

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Judgment by:
Dixon J

The substantial question for our decision is whether a payment made to the executors of a deceased person by the Commonwealth by way of refund of income tax paid by the deceased in her lifetime forms part of her estate for the purpose of estate duty. The question depends upon the peculiar nature of the refund. It did not arise from an amendment made in an assessment pursuant to s. 170 of the Income Tax Assessment Act 1936-1944 so as to effect a reduction in the liability of the taxpayer. It was therefore not a refund authorized by s. 172. In fact it was not made by the Commissioner but by the Treasurer. It arose from the decision of this Court in Magrath v. The Commonwealth (1944) 69 CLR 156 . Like the plaintiff in that case the deceased had held gold dollar bonds forming part of the issue made by the Commonwealth in the United States in 1927. Like him she was a resident of Australia and had been assessed as such upon the interest derived from the bonds which had been included in her assessable income. Like him she was not a person to whom the bonds had originally been issued, but she had purchased them from a previous holder. She had purchased them in 1938; 133 bonds each of a face value of $1,000 with interest coupons attached. For the years of income extending from 1st July 1938 to 30th June 1943 the amounts received for interest had been included in her assessable income and she had been regularly assessed accordingly by assessments which still stand. The tax ascribed to the inclusion of the interest amounts in all to 6,814 pounds and it is this amount that has been refunded. (at p24)

In Magrath's Case (1944) 69 CLR 156 an action was brought by the taxpayer to recover from the Commonwealth an amount equivalent to the income tax which he had been compelled to pay because the interest he had received in respect of his gold dollar bonds had been included in his assessable income upon which his assessments to income tax had been based. He rested his cause of action upon the contract evidenced by the bonds. They were bearer bonds dated 1st September 1927 containing a promise to pay principal and interest in New York without deduction for any taxes then or at any time thereafter imposed by the Commonwealth of Australia or by any taxing authority thereof or therein. (at p24)

A case was stated in the action for the opinion of the Full Court. Two questions were asked. The first related to the contract of loan. The plaintiff contended that upon its proper interpretation it amounted to a promise that the interest received from the bondholder would not be liable to income tax and that by imposing the tax on the income of residents from all sources the Commonwealth had broken the terms of the contract. The defendant contended that the bonds meant only that there would be no deduction of tax at the source, not that no bondholder would have his interest included in his assessable income. (at p24)

The decision of the majority of the Court upon this matter of interpretation favoured the plaintiff. As expressed in the answer to the question, the decision was that by the bonds the Commonwealth promised the plaintiff as holder that interest, after having been paid to him in full, would not form part of his assessable income for the purpose of Federal income tax within the meaning of the Assessment Act of 1922 or of 1936 as respectively amended or any other Income Tax Assessment Act thereafter to be enacted although he was a resident of Australia and liable as a taxpayer within the meaning of those Acts. (at p25)

The second question in the case stated was asked on the assumption that the Court did so construe the contract and it related to the existence on that footing of a right in the plaintiff to recover from the Commonwealth the tax he had paid in respect of interest either by way of indemnity or as damages. That question the Court was relieved from answering by counsel for the Commonwealth, who informed the Court in effect that if the bond was interpreted as promising that the interest would not be included in the plaintiff's assessable income, the Commonwealth would honour its promise as so interpreted. But both Rich J. and Williams J., who with McTiernan J. formed the majority adopting the plaintiff's interpretation of the bonds, emphasized the legal impossibility of the contract tying the hands of Parliament or relieving the plaintiff of a tax the legislature decided to impose, if it covered the interest. Williams J., however, suggested that the exemption or immunity conferred by the bonds, which were issued under s. 3 of the Loans Securities Act 1919, might not be destroyed by the general provisions of the Assessment Act and Tax Act, because the latter might receive a construction avoiding that result, in consonance with the maxim generalia specialibus non derogant. (at p25)

After that decision an application was made to the Commissioner on behalf of the deceased with the liability of whose estate the present case is concerned. She was then living. It took the form of a communication inquiring whether, in view of the attitude of counsel for the Commonwealth in Magrath's Case (1944) 69 CLR 156 , it was the intention of the Commonwealth to repay to her the income tax she had paid by reason of the inclusion of the interest on the bonds in her assessable income. The inquiry elicited no reply from the Commissioner, but after the deceased's death her executors received a cheque from the Treasurer for 6,814 pounds described as a refund of the income tax on interest received upon the bonds. Though the executors reported the receipt of this sum to the authorities assessing estate duty on the deceased's estate they contended that it formed no part of the estate and should not be included for the purpose of duty. This contention was rejected by the Commissioner, but apparently he found some difficulty in designating the payment. It was first included in the assessment to estate duty under the description "refund of income tax." An objection to this assessment was formally allowed but an amended assessment was issued describing the same sum as "Right of action for recovery of unliquidated damages valued at the sum paid to the administrators by the Treasury." (at p26)

It was objected on the part of the executors that the Commissioner could maintain his inclusion of the 6,814 pounds in the assessment only by justifying this description. In other words he could not fall back upon some other description or category of recoverability and say that the refund fell within it, so that the right to recover the money formed part of the deceased's estate transmitted to the executors. In particular the Commissioner ought not, so it was said, to be allowed to fall back upon the idea that it was just a refund of income tax improperly exacted. He must show that a right to recover the sum as damages was vested in the deceased or else fail. It is suggested that under s. 20 the Commissioner could not himself again amend the assessment in the particular in question. The answer or, at all events an answer, to the objection appears to me to lie in the very wide powers which the Court possesses under s. 27 (5) of the Estate Duty Assessment Act 1914-1942. If the Court is of opinion that all that is wrong with the assessment is that it attributes the payment or refund to an erroneous legal category, the Court may vary the assessment. Sub-section (3) of s. 27 does not qualify this power. It is the objector, not the Commissioner or the Court whom it limits to the issue raised by the objections. (at p26)

I therefore return to the substantive question whether under any legal description the deceased had such a right to recover in respect of taxation of the interest upon her bonds or to receive a refund that it formed part of her estate transmitted to her executors. (at p26)

Section 8 (1) of the Estate Duty Assessment Act 1914-1942 provides that duty shall be levied and paid upon the value as assessed under the Act of the estates of deceased persons. Sub-section (3) states what, for this purpose, the estate of a deceased person shall comprise. The relevant part of the sub-section is contained in paragraph (b) and consists in the simple expression "his personal property." (at p26)

No doubt this expression is of the widest character and covers every form of personal property recognized at law or in equity, every possible interest including all choses in action. But it cannot be satisfied unless some right cognizable at law or in equity exists in the deceased. An expectation, however well founded in fact, and however well warranted by political or business considerations, will not do, if it is devoid of legal title. That is shown by the case relating to the distribution by the Central Wool Committee of 1916- 1920 of the priority wool certificates and shares in Bawra representing the Australian share of profits arising under the arrangement for the purchase of wool by the Imperial Government: Commissioner of Stamp Duties (N.S.W.) v. Perpetual Trustee Co. (Watt's Case) (1925) 25 SR (NSW) 467, affirmed in this Court (1926) 38 CLR 12 . The antecedent certainty that the deceased in that case or his estate would participate in the profits in question could not have been greater if it had rested on legal right, but it did not, and as the distribution was made after his death the share received by his executors formed no part of his dutiable property. (at p27)

No doubt if there is a claim of right, it would not matter that in the deceased's life time it had been disputed, assuming that after his death the claim is paid. But an application for an ex gratia payment stands on quite a different footing. It is, I think, clear that a voluntary payment made to executors as such does not form part of the personal property of the deceased merely because it is the outcome of circumstances existing in his life time which warranted an expectation that it would be made. It must be in respect of some accrued or accruing right or claim of right. There are of course rights cognizable at law which, under the distinction English law draws between the existence of a right and the existence of a remedy, may not be enforceable. But that distinction has no relevance to the present case. (at p27)

The question upon which the dutiability of the sum depends appears to me to be whether it was a mere voluntary payment made by the Crown or on the contrary represented a right or claim of right existing in the deceased to a refund of tax or compensation for a violation of the contract contained in the bonds. (at p27)

It is to be noticed that the inquiry or request made in her life time was not based on any legal ground, but upon the position adopted by counsel for the Commonwealth in Magrath's Case (1944) 69 CLR 156 . But that is not decisive, because independently of the readiness of the Commonwealth to act upon whatever construction might be placed upon the provision in the bonds, a liability to refund the tax or pay its equivalent may have subsisted. (at p27)

The case now made for the Commonwealth is that s. 3 of the Loans Securities Act 1919 authorized the issue of the bonds even with a term bearing the meaning placed upon the bonds by the Court in Magrath's Case (1), that it was binding when issued, that a subsequent statute imposing a tax inconsistent with the bond would amount to a breach of contract sounding in damages and that it would not be excused by operation of law. Section 3 empowers the Governor-General in Council to authorize the Treasurer to borrow the moneys for which Parliamentary sanction has been given in such amounts and manner and at such prices and on such terms and conditions and issue such securities in such form as the Governor-General approves. I am not prepared to hold that this provision warrants a term or condition promising immunity from a present or future Act of Parliament applicable according to the true intention of the legislature. But even if it did, a subsequent Act of Parliament inconsistent with the immunity promised would operate as a paramount law destroying the obligation of the promise. Neither the passing of such an Act nor the doing of anything under it which it authorized, as for instance the levying of a tax, could amount to an actionable breach of contract. All the trouble in Magrath's Case (1944) 69 CLR 156 and in this arises from the adoption in 1930 in residence as a criterion of liability to income tax in addition to the source of the income within Australia: s. 4 of No. 50 of 1930. By that provision every resident of Australia became for the first time liable to tax upon his income from all sources, whether in Australia or elsewhere. At the time when the bonds were issued income tax was imposed only in respect of income derived from sources in Australia. The income consisting of interest on the bonds was derived from a source out of Australia, because both principal and interest were payable in New York and the bonds had been issued in New York under a contract of loan made there. (at p28)

I do not think that s. 3 authorized a term guaranteeing that the change would not be made by Parliament. But, assuming interest upon the dollar bonds to be included in the expression "income from all sources," the change in the law could not amount to a breach of contract for which the Commonwealth would be liable in damages or otherwise. A statute destroys all contracts which stand in the way of its operation. (at p28)

The imposition of a tax necessarily involves an intention that when levied it shall not become repayable. Any liability ex contractu to repay it in substance, whether as damages, indemnity or recoupment, must be dissolved by force of the statute. On the two assumptions, first that what the bonds promised extended to an immunity to the bondholder from the inclusion of the interest in his assessment to income tax on the ground of an Australian residence, and, second, that the provision enacted for the first time in 1930 applied to such interest, the case seems "to be determined by the elementary proposition that if further performance of a contract becomes impossible by legislation having that effect the contract is discharged," to borrow the language of Lord Atkin in Reilly v. The King [1934] AC 176 , at p 180. The second of these assumptions, however, is inconsistent with the suggestion made by Williams J. in Magrath's Case (1944) 69 CLR 156 that, by an application of the principle expressed in the maxim generalia specialibus non derogant, the general Assessment Act requiring the inclusion in the case of residents of income from all sources should be read subject to an exception in favour of the immunity which the bonds granted or purported to grant by a condition adopted as under s. 3 of the Loans Securities Act 1919. It remains to consider this possible solution of the case. The rule of construction which is invoked was stated by Coke in terms which restrict it to the operation of one statute upon another. "Only it must be known, that forasmuch as Acts of Parliament are established with such gravity, wisdom and universal consent of the whole realm, for the advancement of the commonwealth, they ought not by any constrained construction out of the general and ambiguous words of a subsequent Act to be abrogated" - Dr. Foster's Case (1615) 11 Co Rep 56b, at p 63a ( 77 ER 1222, at p 1232). Sir Orlando Bridgman stated it too as if it was a principle relating to implied repeal by subsequent enactment. "The la w will not allow the exposition to revoke or alter, by construction of general words, any particular statute, where the words may have their proper operation without it": Lyn v. Wyn (1662) O Bridg 122, at p 127 ( 124 ER 502, at p 505). But the rule has been used in relation to the abrogation by statute of a charter or custom and to the interpretation of a single statute containing a special and a general provision. (at p29)

The principle was expounded by Lord Sumner when he was a judge of the King's Bench Division: -

"The grounds upon which the courts have construed general words in statutes so as not to interfere with prior special words or special Acts or prior rights publicly granted to bodies corporate or politic rest upon the theory, and (as I think) the fact, of the continuity and justice of English legislation. It is not to be supposed that the mind of the legislature continuously deliberating and expressing itself in statutes will, after full special deliberation at one time, subsequently alter the result of that deliberation by mere general words not so expressed as to bring the special matter within their purview. It is not to be supposed that the mind of the legislature so operating and expressing itself will take away the rights previously granted to subjects without compensation and without specific statements to that effect. This is the effect of the cases cited in argument though some possibly would not now be followed, as for example where an Act of Parliament was read as not interfering with a local custom": Attorney-General v. Exeter Corporation [1911] 1 KB 1092 , at p 1100. (at p30)

The principle has been applied not infrequently with reference to general taxing or rating Acts and earlier special or private Acts containing privileges or exemptions from taxation or rating: see, for example, London Corporation v. Netherlands Steamboat Co. [1906] AC 263 ; Duke of Argyll v. Inland Revenue Commissioners (1913) 109 LT 893; Associated Newspapers Ltd. v. City of London Corporation [1916] 2 AC 429 ; Pole-Carew v. Craddock [1920] 3 KB 109 ; Cadbury Bros. v. Sinclair (1933) 149 LT 412; United Towns Electric Co. Ltd. v. Attorney-General for Newfoundland [1939] 1 All ER 423 ; Wiltshire County Valuation Committee v. Marlborough and Ramsbury Rating Authority [1948] 1 All ER 694 . It is not an easy question whether the principle of interpretation should be applied to the series of dollar bonds issued in the United States in 1927 from which the bonds of the deceased came. But I have come to the conclusion that it is inapplicable.

There are three considerations which lead me to that conclusion.

(1)

The exemption claimed is not contained in a statute. So far as the principle rests upon the conception that the legislature ought not to be taken to intend to repeal or vary a prior particular statute by the use of general words this case lies outside it. The exemption depends entirely on the contract. The Loans Securities Act is not one which contemplates the grant of exemptions from existing taxation laws, still less from future taxation laws. No doubt the issue of the bonds and the terms of the contract constitute public facts knowledge of which may be imputed to the legislature. But it was a foreign loan. The provision relied upon was directed to assure the lenders, who were out of reach of any direct operation of Australian law, that tax would not be collected by deduction. The state of the law was such that in any event that could not be done and the foreign lender could not be made liable. The special case of an Australian resident going upon the New York stock market and purchasing bonds of the issu e was not a public fact. If the legislature had adverted to the exemption in the bonds and to such a case it is more probable that the policy of taxing residents on all income from all sources would have prevailed. Non haec in foedera veni would have expressed the more probable legislative judgment, not pacta sunt servanda. It was not for the benefit of resident Australians that the clause had been written into the bond.

(2)

The clause is not expressed in language amounting to a clear and unambiguous declaration that in no circumstances will the interest ever be taken into account in assessing a taxpayer holding such bonds to income tax even if an Australian resident. The conclusion that it did so was only reached by a process of construction, one involving some use of inference or implication.

(3)

The subject of exempting interest on Government loans is one that has been much before the legislature as a matter calling for special provision. Section 52B (1) of the Commonwealth Inscribed Stock Act 1911-1933 deals with freedom from State income tax. Sub-section (2) deals with exemptions from Federal income tax where a prospectus had declared interest should be free of such tax. The Taxation of Loans Act 1923 dealt specially with the liability of interest on loans raised in Australia to Federal and State taxation. Section 14 (1) (e) of the Income Tax Assessment Act 1922-1934 specially exempted interest on War Loans declared by a prospectus to be free of tax. The former Act also dealt with the taxation of interest on loans raised in Australia by countries and Dominions outside the Commonwealth, a subject to which s. 27 of the Income Tax Assessment Act 1936 is directed.

It is true that these enactments deal with loans raised in Australia, though perhaps the Commonwealth Inscribed Stock Act may be capable of a wider application. But they are not unimportant as showing that when the question is of exempting Australians from tax, it has always been treated as a matter for special enactment. The grant or continuance of such an exemption by implication based on the existence of a clause in an issue of bonds abroad is rather remote from the realities of tax legislation. (at p31)

I am therefore of opinion that the interest on the bonds was lawfully included in the assessable income of the deceased and that she was properly assessed to income tax in respect of the interest as a resident. (at p31)

Upon that view, so to assess her could not have amounted to an actionable breach of contract. Upon a contrary view the question would arise whether she was not bound by the assessments in fact made so that tax paid thereunder was not recoverable unless by amendment, objection or appeal she obtained relief from the assessments, a thing she did not do. It is suggested that an answer to this question is to be found in a provision of the "Loan Contract," which is mentioned in the text of the bonds. Clause 5 of that contract is as follows: -

"All payments in respect of the bonds and the coupons shall be made without deduction for any taxes, imposts, stamp dues and assessments now or at any time hereafter imposed or levied by the Commonwealth of Australia or any of its States or municipalities or other taxing authorities thereof or therein." (at p32)

The suggestion is that under this clause to assess a bondholder in respect of interest on the bonds would amount to a breach of contract and, on the hypothesis that the Assessment Act did not authorize the inclusion of the interest in the assessable income, there would be no supervening statutory provision inconsistent with the contract. The breach would therefore be actionable. As I reject the hypothesis, I think that it is unnecessary for me to pursue this suggestion. (at p32)

For the reasons I have given I think that the Commonwealth was under no liability to the deceased in respect of the inclusion of interest on her bonds in her assessable income. It was under no liability either to refund the tax or to pay damages for imposing the tax legislatively, assessing it administratively or receiving it fiscally. In refunding the amount the Commonwealth made a purely voluntary payment to her executors. (at p32)

The second question in the case should be answered: No. The first question in these circumstances calls for no answer, but if it is to be answered the answer should be: Yes. (at p32)