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: Isaacs J)

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

Court:

Judges: Knox CJ

Isaacs JHiggins J
Rich 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:
Isaacs J

Federal Commissioner of Taxation v Munro (Law Points)

This case, so important in every way, comes to us under ss. 18 and 19 of the amending Act of 1925, No. 28. It has been twice argued, and the second argument has confirmed the opinion I had formed after the first. The material facts are that the Commissioner assessed the appellant for the financial years 1921-1922 and 1922-1923. An objection was lodged against the disallowance of some bank interest paid by the taxpayer. The taxpayer in 1924 asked that the matter should be referred to the Board of Appeal. In December 1924 the Board decided in favour of the taxpayer, and in February 1925 the Commissioner gave notice of appeal to this Court. Later in that month this Court heard an appeal in the case of British Imperial Oil Co v Federal Commissioner of Taxation, ^[F7] and held that under the law as it then stood the Board was not validly constituted because by the terms of the then existing statute "judicial power" in the strict constitutional sense had in fact been conferred on the Board contrary to the judicature provisions of the Constitution. The Court went carefully through the statutory provisions and stated its reasons categorically. In September 1925 the Commonwealth Parliament drastically altered the Act so as to conform to the law as explained in the judgments, and created a new Board-a Board of Review-on a totally different basis. Provisions was made for dealing with future objections, and other provisions were introduced for dealing with past objections. Secs. 18 and 19 are the appropriate sections for the present case; and under these this appeal comes on to be heard.  

The respondent contests the merits, but also on several grounds objects to the Court entertaining the appeal at all, and raises arguments that, even if the Court can entertain the appeal, it ought to be dismissed irrespective of the merits, and simply because the legislative provisions of the Act of 1925 relating to the Board of Review are invalid. This Full Bench hearing is concerned, not with the merits, but only with the legal objections anterior to the consideration of the merits. The legal objections stated in logical order are:

(1)

the retrospective adoption of decisions of the former de facto Board of Appeal is invalid;

(2)

the present Board of Review is invalidly constituted because, while not being created a Court as required by Chapter III. of the Constitution, it is given judicial power in the strict constitutional sense;

(3)

the Act of 1925, assuming to constitute the new Board of Review, fails to have any relevant legal operation by reason of s. 55 of the Constitution;

(4)

s. 55 by its second limb annuls s. 28 of the Principal Act.

These objections, which are quite distinct, have been supported by contentions of very varied character, each of which represents a highly important aspect of constitutional law.  

1. Secs. 18 and 19 of the Act of 1925

These provisions are first attacked radically as being an attempt to validate retrospectively what could not have been authorized prospectively by the Parliament. I entirely accede to the principle invoked, but its application is, in my opinion, unwarranted. It is said that, since this Court in the British Imperial Oil Co's Case ^[F8] declared the "decisions" in fact of the old Board of Appeal unauthorized in law and therefore void, even though prospectively permitted by Parliament they cannot be taken up retrospectively and simply validated by Parliament. If the assumed premises were true the conclusion would be sound. But the premises are not true. The new legislation does not recognize the old Board of Appeal at all except to identify the individual persons who assumed to compose it. The new legislation does not recognize the old decisions as those of the Board but as those of the individual persons referred to and identified, and those decisions were facts. The new legislation does not attempt to give to those de facto decisions any such status as they purported to have under the former legislation, that is, as judicial determinations; it does attempt to adopt those decisions held not to be judicial decisions as administrative facta on the same footing as future decisions of the new Board of Review. Unless the new Board of Review is, for the reason stated in the second objection, to be regarded as incompetently created, Parliament could have antecedently authorized what it has retrospectively adopted. The scheme of retrospective adoption includes the retrospective creation of the Board of Review itself by which it is deemed to have been created in October 1922. The individual decisions-failing of effect as decisions of the old Board of Appeal-are not revived as judicial decisions, but are declared to be as valid and effective as if given by the new Board of Review, which is deemed to have existed at the date of the decisions. Unless the power of the Legislature to make that retrospective declaration is denied, this Court must place those decisions on the same footing as they would be on if the now existing Board of Review had then pronounced them. The first objection, in my opinion, fails, and we are driven to consider the second.  

2. Board of Review

One preliminary circumstance may be at once referred to. It was contended for the respondent that the decision in the British Imperial Oil Co's Case ^[F9] supported the similar objection to the present Board of Review. In view of that contention permission was given to reopen, if necessary, the reasoning in that case. Since the statutory provisions upon which it was founded have-subject to the third objection-been repealed and replaced by markedly different provisions, it is evident that reconsideration of the decision must be limited to the principles of law enunciated. If, on the other hand, the third objection be sustained, the present appeal must fall in any event. No principle enunciated in that case, however, was challenged at the Bar. The argument of the respondent naturally challenged nothing of that decision, because it was made a starting-point for the second objection. It challenged some of the opinions expressed. A suggestion, however, was made that the decision was wrong because the appellate power of this Court is not confined to appellate power within the meaning of s. 73 of the Constitution but may be extended by Parliament to revision of administrative decisions. The suggestion is contrary to the expressed views of this Court from the very first case decided, namely, in 1903, Dalgarno v Hannah ^[F10] at p. 10, to the British Imperial Oil Co's Case, decided last year. It is also contrary to principle, because, as Story says in his work on the Constitution:

"In reference to judicial tribunals, an appellate jurisdiction, therefore, necessarily implies that the subject matter has been already instituted in and acted upon by some other Court, whose judgment or proceedings are to be revised" (par. 1761).

I have no hesitation in adhering to the decision referred to, and for the reasons there given. But, that decision standing, what after all is its effect upon the present case? The mere fact that it interprets a differently worded statute excludes its relevancy apart from enunciation or affirmation of some principle. It has no more relevancy than the interpretation of one will has to that of a different will. But as a matter of contrast it affords a powerful illustration. The difference in point of status and nature of function between the new Board of Review and the original Board of Appeal is the difference between daylight and dark. When Parliament has shown so unmistakably its resolve to steer clear of the judicial rocks plainly charted in the earlier case, it would be a serious matter to impute an intention which would wreck the legislation and confuse the finances. In the former legislation the Board of Appeal was linked up in character with the High Court and the Supreme Court of the State, and an appeal on law points was given to this Court in its appellate jurisdiction. That was an unmistakable and an inseparable indication that the Board of Appeal was intended by Parliament to exercise "judicial power." Where that legislative intention appears in addition to a tribunal so constituted, it must fail by reason of the constitutional provisions contained in s. 71 of Chapter III. of the Constitution. And it matters not how that intention appears, so long as on proper methods of construction it does appear. It may appear, for instance, where the new tribunal is created expressly as a "Court" and the functions assigned are appropriate to judicial action. That is exemplified by Alexander's Case. ^[F11] And as to the importance of the nature of the tribunal see National Telephone Co v Postmaster-General. ^[F12] Or it may appear simply from the nature of the functions assigned, where they are appropriate exclusively to judicial action, as punishment for crime or trial of actions for breach of contract or for wrongs. But there are many functions which are either inconsistent with strict judicial action, as the arbitral functions in Alexander's Case, or are consistent with either strict judicial or executive action. If inconsistent with judicial action, the question is at once answered. If consistent with either strictly judicial or executive action, the matter must be examined further. In a sense the function may involve so-called judicial conduct in a wider sense than the dispensing of the King's justice as understood in the law. It may be merely the incidental or ancillary determination of circumstances as a factum for the operation of the legislative will. The dispensing of royal justice by means of the King's judicial power is in itself a primary function; the ascertainment or determination in a judicial manner of facts, whether controverted or not, for the purpose of carrying out executive functions in a just way is a secondary or incidental function attached to and taking its dominant character from the main purpose. The very same process may thus, in some instances, be either judicial or executive. A right of appeal from the decision of a Permanent Secretary to the Minister, whose direction is, after hearing the parties concerned, to govern their rights, is primarily executive. The same right of appeal to a Court is primarily judicial. The whole relevant legislation must, in such a case, be looked to in order to pronounce upon the question as to which category the particular function belongs to. If, for instance, the Legislature could validly go on to give the tribunal jurisdiction to enforce the decision by execution, the function would be judicial, since the concept of judicial power includes enforcement.

If, however, the Legislature could not validly and that jurisdiction, then, in the absence of other controlling expressions-as in the British Imperial Oil Co's Case ^[F13] -one would say the function assigned was not judicial. The application of these considerations to the present case leaves me in no doubt whatever as to the character of the function assigned to the Board of Review. The only judicial attribute here is that controverted matters of fact and discretion are to be decided by the Board if the taxpayer is dissatisfied with the Commissioner's decision regarding the assessment and, unless some misconstruction of the law takes place, the Board's decision stands as the assessment. All questions of law are for the Court. The power and function of finally determining matters of fact and even of discretion are not solely indicative of judicial action. That is an attribute common to administrative bodies, to subordinate bodies that are adjuncts to legislation, and to judicial bodies. (See Sir William Harrison Moore's Commonwealth of Australia, 2nd ed., at pp. 305-306.) The character of the function often takes its colour largely from the primary character of the functionary, and depends also on how the decision is made binding and how enforced. Government could not be carried on without some administrative power of finally determining disputed facts. This is becoming every day more manifest and pressing. As was said by Viscount Haldane in Everett v Griffiths ^[F14] at p. 659,

"the tendency of modern legislation has recently been to entrust to many who are prima facie only administrative officers, functions which have some judicial attributes at all events, although they remain primarily administrators."

His Lordship then refers to the cases of Board of Education v Rice ^[F15] and Local Government Board v Arlidge, ^[F16] and speaks of them as "administrative awards" attended with "quasi-judicial powers." The word "appeal" is appropriately used even as to executive functions (see Arlidge's Case, per Lord Haldane L.C., ^[F17] per Lord Parmoor, ^[F18] and very particularly per Lord Moulton). ^[F19] Everyone knows that the term "quasi-judicial" means not strictly judicial but analogous to judicial. The case of Lapointe v L'Association de Bienfaisance et de Retraite de la Police de Montreal ^[F20] at pp. 539, 540 shows this very clearly both in its own language and in the language quoted. In Fisher v Keane ^[F21] at p. 360 Jessel M.R. referred to the committee of a club as "a judicial, or quasi-judicial tribunal." I am quite unable to understand why Parliament, without in the least trenching upon the strictly judicial domain reserved for the Judicature, cannot entrust successive administrative functionaries to consider and review assessments, making the final decision the governing factum fixing the taxpayer's liability. In doing that, what is there to prevent Parliament from enabling the Commissioner to contest the challenge of his initial accuracy? For instance, if, instead of the Court, the Treasurer were made the ultimate functionary to settle the accuracy of the Board's assessments in case either the Commissioner or the taxpayer desired further revision and appeared to explain why, how could it be said with any show of reason that the Board's functions were of that strictly constitutional judicial character that is reserved for the Judicature. It would not alter the nature of the Treasurer's functions if Parliament expressly said the Commissioner should be heard by the Treasurer. The function would be departmental and administrative. If that be so, it surely cannot alter the nature of the Board's duties if, on the assumption that the Board has violated the statute, the Court may be asked by either the Commissioner or the taxpayer to correct the error.

The decisions of the Board of Review may very appropriately be designated, in Lord Haldane's words, "administrative awards," but they are by no means of the character of decisions of the Judicature of the Commonwealth. I shall presently indicate how essentially in this respect the position of this Board differs from that of the former Board. In the meantime I would say, speaking with considerable experience in each of the three departments of government, that, if a legislative provision of the present nature be forbidden, then a very vast and at present growing page of necessary constitutional means by which Parliament may in its discretion meet, and is at present accustomed to meet, the requirements of a progressive people, must, in my opinion, be considered as substantially obliterated so far as the Commonwealth is concerned. Administration must be hampered, and either injustice suffered or litigation fostered. The Constitution, it is true, has broadly and, to a certain extent, imperatively separated the three great branches of government, and has assigned to each, by its own authority, the appropriate organ. But the Constitution is for the advancement of representative government, and contains no word to alter the fundamental features of that institution.  

Partly repeating, for emphasis, some previous observations, I would say that some matters so clearly and distinctively appertain to one branch of government as to be incapable of exercise by another. An appropriation of public money, a trial for murder, and the appointment of a Federal Judge are instances. Other matters may be subject to no a priori exclusive delimitation, but may be capable of assignment by Parliament in its discretion to more than one branch of government. Rules of evidence, the determination of the validity of parliamentary elections, or claims to register trade marks would be instances of this class. The latter class is capable of being viewed in different aspects, that is, as incidental to legislation, or to administration, or to judicial action, according to circumstances. Deny that proposition, and you seriously affect the recognized working of representative government. Admit it, and the provision now under consideration is fully sustained.  

I will mention a few instances of tribunals set up for administrative purposes, but all of them empowered to exercise the functions of deciding between contestants questions of fact and discretion and of doing so with the effect in some way of binding the rights of one or more of the contestants. The Trade Marks Act (see ss. 34, 42, 43 and 44), for example, empowers the Registrar, and on appeal from him the Law Officer, to decide very important controverted facts and law. An appeal is given to this Court from either Registrar or Law Officer. If the legislation as to the Board of Review conflicts with the Constitution, then a fortiori do the trade mark provisions referred to. The Patents Act stands in the same position. The Commonwealth Public Service Act 1922 provides for a Board of Inquiry and Appeal Board which inquires into alleged offences, summons any person to attend, takes evidence on oath, requires production of documents, and determines the rights and obligations of officers. Section 50 as amended (s. 15 of Act No. 46 of 1924) allows an appeal to the Board from the Permanent Head on questions of transfer or promotion. The Board hears "the appellant" and "determines the appeal." Statutory rights are thereby definitely affected. Again, take the Board of Directors and the Appeal Board of three members under s. 16B of the Commonwealth Bank Act 1911-1924. Where an officer of the bank is affected in his employment by some bank authority he may appeal to the board of directors, which refers the matter to an appeal board. The latter reports to the board of directors, which "shall determine the appeal and notify the appellant of its determination, which shall be final and conclusive."  

What is the discrimen which can nullify the Board of Review and uphold all the rest? I can find none, and can find no reason for invalidation in any case. This case has been twice argued, and learned counsel has, with becoming frankness, indicated a possible further appeal. Therefore I shall state somewhat more explicitly the reasons leading to my opinion. It is always a serious and responsible duty to declare invalid, regardless of consequences, what the national Parliament, representing the whole people of Australia, has considered necessary or desirable for the public welfare. The Court charged with the guardianship of the fundamental law of the Constitution may find that duty inescapable. Approaching the challenged legislation with a mind judicially clear of any doubt as to its propriety or expediency-as we must, in order that we may not ourselves transgress the Constitution or obscure the issue before us-the question is: Has Parliament, on the true construction of the enactment, misunderstood and gone beyond its constitutional powers? It is a received canon of judicial construction to apply in cases of this kind with more than ordinary anxiety the maxim Ut res magis valeat quam pereat. Nullification of enactments and confusion of public business are not lightly to be introduced. Unless, therefore, it becomes clear beyond reasonable doubt that the legislation in question transgresses the limits laid down by the organic law of the Constitution, it must be allowed to stand as the true expression of the national will. Construction of an enactment is ascertaining the intention of the legislature from the words it has used in the circumstances, on the occasion and in the collocation it has used them. There is always an initial presumption that Parliament did not intend to pass beyond constitutional bounds. If the language of a statute is not so intractable as to be incapable of being consistent with this presumption, the presumption should prevail. That is the principle upon which the Privy Council acted in Macleod v Attorney-General for New South Wales. ^[F22] It is the principle which the Supreme Court of the United States has applied, in an unbroken line of decisions, from Marshall C.J. to the present day (see Adkins v Children's Hospital ^[F23] at p. 544). It is the rule of this Court (see, for instance, per Griffith C.J. in Osborne v Commonwealth ^[F24] at p. 337). These considerations I proceed to apply to the present case.  

In using the word "appeal" in the collocation in which it is found in ss. 18 and 19 of the Act of 1925, Parliament did not mean to create a new appellate power of this Court. That would have been contrary to the expressed views of this Court on that point from the very first case decided in 1903, Dalgarno v Hannah ^[F25] at p. 10, to the British Imperial Oil Co's Case, ^[F26] decided last year. If, as was found in the last-mentioned case, the express language of the Legislature, whether employed by inadvertence or otherwise, leaves no other interpretation possible, the Court must accept it as governing the intention. But here the Legislature has sedulously and in detail corrected that very language and, by the omission of appellate jurisdiction in relation to the Board and by the contradistinctive use of the term "appellate jurisdiction" in another connection, has shown that it did not mean appellate jurisdiction when giving what is called an "appeal" from the Board. The "appeal" in ss. 12, 18 and 19 of the amending Act is simply the creation of original jurisdiction under s. 76 of the Constitution. It appears to me impossible to construe the word "appeal" in ss. 12, 18 and 19 of the amending Act otherwise than as giving merely the right of applying to this Court to exercise its ordinary judicial power in original jurisdiction. The effect of the contrary view of the word "appeal," if applied to other legislation, such as the Trade Marks Act, the Patents Act, and other Acts, would be disastrous.  

There is some language in amended s. 51 which perhaps calls for some attention. I refer to sub-s. 6, which says: "The Commissioner or a taxpayer may appeal to the High Court from any decision of the Board under this section which, in the opinion of the High Court, involves a question of law." That is to be considered with the concluding words of sub-s. 1 of s. 44 as amended. Those concluding words except from the legal assimilation of the Board's decisions with the Commissioner's decisions the purposes of sub-s. 4 of s. 50 and sub-s. 6 of s. 51. The latter sub-section, of course, means that the Board's decision, unlike that of the Commissioner, is not necessarily to be accepted by the Crown as correct. The Commissioner may on behalf of the Crown contest it before this Court if, and only if, it is thought to be wrong owing to an error in law. But when sub-s. 6 of s. 51 is read, not merely with the rest of that section but with the whole of Part V., as it must be, and particularly when its history is considered, the substance of the legislation, in my opinion, frees the matter from any difficulty. Once we conclude that the word "appeal" in sub-s. 6 of s. 51 (and the same word in ss. 18 and 19 of the amending Act) has reference to original jurisdiction, it follows necessarily that the Board was not intended by Parliament to exercise judicial power at all in the constitutional sense. In this vital respect the present legislation differs toto coelo from the prior enactment under which the British Imperial Oil Co's Case ^[F27] was decided. Apart from that distinctive difference, a detailed examination of the amending Act indicates the careful and elaborate way in which Parliament set itself to alter the existing law so as to conform to the law as laid down by the Court in the British Imperial Oil Co's Case, while establishing a Board of Review as an aid to the fair administration of the Act. There can be no doubt, especially since the case of In re Viscountess Rhondda's Claim, ^[F28] that a comparison of the amending Act with the Act it amended is not only permissible, but necessary, because the whole argument for invalidity rests on implied intention to adhere to or alter the prior law. When that comparison is made, the general intention is apparent to transform the old Board of Appeal, declared by the Court to have a judicial character de facto, into a Board of Review having a true administrative character and affording, as I have said, a practical means of reconsidering business matters without the intricacies, delay and expense of legal proceedings. The Courts were reserved for matters involving legal questions.  

To show how completely the two Boards differ in character the principal amendments made seriatim must be followed:

(a)

s 17 of the main Act was altered by leaving so far as that section is concerned the Commissioner's decision absolutely final. This was done by eliminating all reference to a Board.

(b)

Similarly with regard to ss. 21, 23 and 28.

(c)

In s. 41 the title of the Board was altered from "Board of Appeal" to "Board of Review."

(d)

s 44, which previously expressly applied sections creating judicial powers to the Board, is absolutely transformed.

Instead of assimilating the Board to the Court, as in the old s. 44, the Board in the new s. 44 is assimilated to the Commissioner. Instead of the Board being given the powers and functions of the Court, it is given "the powers and functions of the Commissioner in making assessments, determinations and decisions under this Act."

Those are the only powers and functions conferred upon the Board for the purposes of decision. Other powers of formulation after decisions are given, but these are incidental only.

(e)

s. 44 then takes up the "decisions" of the Board and says they are for all purposes (with certain exceptions) to be deemed those "of the Commissioner."

(f)

The first exception is patently immaterial here. It is merely to prevent the taxpayer having a double choice instead of an alternative choice of tribunal from the Commissioner.

(g)

The second exception, when carefully examined, is really to negative the notion of the Board being judicial.

It allows an appeal to the Court from any decision which in the opinion of the Court is a question of law. That is to say, the Crown is bound by all opinions of the Board on pure matters of fact-that is, on true administration of the law-but as to law the Court, and not the Board, is to determine. The appeal being given to the Court in its original jurisdiction only-which is manifest when s. 50 (4) (b) and s. 51A (2) and (10) are compared-it follows necessarily that the Board's decision is not intended to be an exercise of the judicial power. The fact that the Commissioner may appeal as well as the taxpayer only indicates that the Crown as well as the subject may invoke the Court to correct a misconstruction of the law, which would, of course, affect not merely that taxpayer but all taxpayers in a similar position.

(h)

The Board's decision, when given, may, by s. 51 (4), be formalized by confirming, reducing, increasing or varying the assessment. This is form only.

(i)

By the next sub-section it may order the forfeiture of the deposit if it thinks the reference frivolous or unreasonable. Administrative "orders" are numerous, and, in this instance, the exercise of the power rests, not on law, but on opinion. In any event the sub-section is quite subsidiary.

This series of amendments, not only leaves the case of the British Imperial Oil Co ^[F29] no precedent for nullifying the present legislation, but makes that case, if relevant at all, a very strong authority for differentiating between the two enactments and for supporting the amending Act.  

3. Section 55 of the Constitution

Up to the present point the case has been treated as if the new Act of 1925 were unaffected by the special provisions of s. 55 of the Constitution. For instant purposes that means that s. 7, for example, of the Act of 1925, repealing sub-s. 3 of s. 28 of the earlier Act, and ss. 9 and 10, altering the nature of the Board, are in law part of the statute, their effect and their operation being determined by other considerations. But it is urged that these sections-among others-are by force of the first limb of s. 55 of the Constitution to be regarded as of no effect. It is argued that s. 22 of the Act of 1925 is a law "imposing taxation" and therefore the sections referred to fall. But s. 22 is merely an amendment of the former Assessment Act and deals with official formalities. It does not purport to "impose taxation"; it assumes the existence of a law imposing taxation, it assumes official action under an assessment law relating to such taxation, and then it prescribes the nature of a sufficient official act for the purpose of recovering the tax already imposed and ascertained by assessment. The mere fact that a condition of liability to enforcement of the tax is relaxed is not equivalent to a fresh imposition of the tax. There is no reason for applying the first limb of s. 55. Section 7 of the Act of 1925 validly repeals retrospectively sub-s. 3 of s. 28 of the Principal Act.  

As to the second limb of s. 55 of the Constitution, represented in the fourth objection, a devastating effect is sought to be attached to s. 28 of the Assessment Act. It is said that the tax there sought to be "imposed" is not an "income tax" but some other tax, namely, a tax on an estimated percentage of gross receipts. That is said to be another "subject of taxation" and to be contrary to the peremptory requirement of the second paragraph of s. 55. If that section be not a "law imposing taxation" the contention falls. But if the section be a "law imposing taxation," the rest of the Assessment Act falls by virtue of the first limb of s. 55. And then, by virtue of the second limb, s. 28 acting on the incorporation into the Taxing Act of the whole of the Assessment Act, the Taxing Act itself wholly disappears because s. 55 is a limitation of the general power of legislation. The answer to all this appears to me to be plain. First, s. 28 is not a "law imposing taxation." It is part of an Assessment Act, and it creates a special measure of "taxable income" to meet the special circumstances of a case offering facilities for evasion and not justly met by the ordinary measure of taxable income generally applying to Australian incomes. Section 2 of the relevant Taxing Acts incorporates the relevant Assessment Acts. The incorporation in each case includes s. 28. Therefore, when, as is the case, the Taxing Act imposes the income tax by fixing rates upon what it calls "taxable income," one has to read the Taxing Act itself to see what is meant by "taxable income." There is in that Act no definition of that term other than that which can be found in the Assessment Acts incorporated. It is true that s. 55 of the Constitution by its first branch eliminates from the Taxing Act all of the Assessment Acts as incorporated, except such parts as deal with the "imposition" of the taxation, leaving them to operate independently as Assessment Acts. But every part of the Assessment Act establishing what is "taxable income" within the meaning of the Taxing Act remains incorporated, because every such part is essential to understand the term "taxable income."  

I had, thus far, stated shortly and succinctly the effect of the Constitution on the relevant statutory enactments and, until the argument in the later case of Federal Commissioner of Taxation v Hipsley, ^[F30] I thought that statement sufficient. But in view of the further argument in that case, it is, I think, desirable to treat the matter once and for all in greater detail.  

This branch of the case affects one of the vital compromises of the Constitution, whereby an adjustment was made so as to permit of responsible government as understood in British communities-that is, the responsibility of the Ministers of the Crown to the representatives of the nation considered numerically-and at the same time to guard the Senate from financial coercion in its representation of the nation grouped in States. I confess I am greatly concerned lest what the pen has written the axe may destroy. If the reasoning prevailed upon which, in reliance upon the second limb of s. 55, the constitutional attack upon the legislation has been made, it would leave to the chance majority in Parliament for the time being to determine, by the mere form in which taxation Bills were framed, whether the constitutional powers and privileges of either House should be exercised or not. If such measures were introduced in one form, the Senate could not amend a line of any provision relating to the assessment, collection or enforcement of the tax; and, if in another form, it could amend every provision relating to the imposition of the tax. So far as taxation Bills are concerned, s. 53 and the first limb of s. 55 would be dead letters. The Constitution would become the plaything of political parties. Only one thing could avoid that result, that is, the entire exclusion of the Senate in the opinion of this Court from amendment even of a taxation machinery Bill. If, as seems to me unquestionable, no sensible distinction can be drawn between a Bill "imposing taxation" and a Bill "dealing with the imposition of taxation," then, if machinery for collection is incidental to, that is, incidentally included in, "imposition," it necessarily follows that the Senate cannot, consistently with s. 53, amend an ordinary Assessment Bill at all. If this were held by the Court, and it is perhaps the only logical conclusion should the opposing contention be upheld, then one of two results would inevitably follow: either the Senate would, conformably to that opinion, be shorn of rights it has always by common consent enjoyed, or else both Houses of Parliament would with impunity constantly disregard the opinion of this Court and in the most practical manner declare its incorrectness. In either event the dominant intention of the Constitution in this respect would be defeated. It was that a political struggle should never take place; that a surrender could never take place; that the Senate should never be in real danger of surrender; and that, if coercion were pressed so far as to be politically successful, it should not be legally successful, because this Court under s. 55 would be the standing security for the maintenance of the rights of the Senate.  

The theory that is opposed to the view I have expressed, apart from the objection that in fact two subjects of taxation are dealt with, rests on some or all of three propositions:

(1)

that no enactment is a "law" imposing taxation within the meaning of the Constitution unless it directly or by reference completely provides for subject matter, rates and persons liable;

(2)

that a law still deals only with the "imposition" of taxation if it also enacts provisions regulating the assessment, levy, collection and enforcement of the tax, with penalties, including creation of tribunals and the investment of judicial power; and

(3)

that if an Act imposing taxation incorporates an existing Assessment Act, the independent Assessment Act thereby itself becomes a law imposing taxation.

 

Before indicating how utterly opposed to these propositions were the opinions of former members of this Court, it is advisable to examine the position independently. It is, of course, familiar to us all that Money Bills were a pregnant source of controversy in colonial Parliaments, and that to a greater or less degree the relations of the two Chambers in each colony were in this respect moulded on British precedent. Indeed, British precedent and terminology lie at the root of the matter, the constitutional compromise being the agreed modification of the Imperial system. That system, for present purposes, begins with the Bill of Rights, which declares:

"That levying money for or to the use of the Crown, by pretence of prerogative, without grant of Parliament; for longer time, or in other manner than the same is or shall be granted, is illegal."

We have there the main divisions of the subject of legal taxation. "Levying" taxation, that is, collection, is an executive act, and it cannot be supported by the law of the prerogative. The "grant," that is, the imposition of the tax by Parliament, is essential. The "period" is necessarily part of the grant. The "manner," that is, the machinery, such as the assessment, etc, must be prescribed by Parliament. In these days, the divisions so marked out are spoken of as "imposition" or "imposing," and "assessment and collection." Bowles v Bank of England ^[F31] is a most convenient place to find all these phrases of the parliamentary and executive processes of obtaining taxes from the subject mentioned and differentiated. Almost every page from p. 70 to p. 82, and the judgment of Parker J., passim, will attest this. It will there be seen that the words "imposition" and "imposing" mean the same thing, and that both mean the grant; further, that both are distinct from the management, assessment, collection and control of the tax.  

It is common knowledge that up to 1860 contests arose between the Lords and the Commons as to their respective rights and privileges regarding Money Bills. In that year the House of Commons passed resolutions setting forth its privileges with respect to taxation, and give practical effect to them in the forms of the financial Bills it passed. Anson (Law and Custom of the Constitution, 5th ed., vol. I., pp. 283-284) says:

"There can be no doubt that the principle of these resolutions expanded, and that the Commons came to regard as a breach of privilege not merely the imposition by the Lords of any charge by ways of rates or taxes, but any dealing with the regulation or administration of such a charge."

(The italics are mine.)

Not merely does the passage recognize the inherent distinction between "imposition" and collection of the tax, but the words "dealing with" are illustrative of their meaning in connection with any specific branch of taxation. To "deal with" a specific branch of taxation means, according to the quotation, directly to regulate that branch, and not merely to assist it indirectly by directly regulating some other branch.  

That being the British system and terminology, ss. 53 and 55 of the Constitution can readily be understood. Confining myself to taxation only, s. 53 - which is for parliamentary guidance only - declares

(1)

that proposed laws imposing taxation shall not originate in the Senate;

(2)

that "the Senate may not amend proposed laws imposing taxation"; or

(3)

"amend any proposed law so as to increase any proposed charge or burden on the people."

Passing by the provision for requests, the section declares that, except as therein provided, the Senate is to have equal powers of legislation with the House of Representatives. Now, if, as was argued, in accordance with the first proposition formulated, no law is a "law imposing taxation" unless complete as to rate, subject matter and every person to be reached, and so that an instant certain obligation lay on identifiable persons, it is plain that a Bill could lawfully and in full conformity with the Constitution be originated in the Senate, declaring that there shall be a land tax an income tax, or any other tax at a stated rate to be paid by all such persons as might be declared by a later Act. Or, if such a Bill were originated in the House of Representatives, it could be amended in the Senate. Such a construction would, as is apparent, entirely annul the first three provisions quoted from s. 53 and subvert the constitutional arrangement to the prejudice of the House of Representatives. It ought not, in my opinion, to receive the sanction of this Court.

The expression law or proposed law "imposing taxation" has reference, not to the completeness or incompleteness of its provisions, but to the character or category which is properly applicable to it. It belongs to the category of laws by which a tax is "imposed." It may be in an absolutely complete form, or it may be in a form which needs some further provision or some further action to make it complete or operative. But, if it is essentially a measure appertaining to the classification of those "imposing taxation," then, even if it merely takes the first step as declaring that there shall be a poll tax leviable on such persons and at such rates as may be declared by some future Act, it is for the purposes of the Constitution a measure "imposing taxation." If it went on to name the rate, but left the persons on whom the tax should fall to be thereafter determined, the same result would follow. The proposition leads, indeed, to absurdity. If the words "law imposing taxation" mean a law which, as it stands, completely and presently "imposes taxation" though it may be from some future date, then the phrase "proposed law imposing taxation" means a proposed law which, as it stands, completely and presently imposes taxation. That would be nonsense, but inescapable nonsense. It shows that the words "imposing taxation" are descriptive of the nature or character of the Bill or the law, and indicate the category it occupies in political practice. Any other construction leads, as is plain, not merely to a clear path for evasion of the Constitution, but to a misunderstanding of the history of the subject. We have only to imagine a Money Bill in England or in a State to enact that a tax of PD1 a head should be henceforth imposed on horses, payable by such persons and with such exemptions as should thereafter be enacted. Could it be doubted that the Legislative Assembly of a State would regard that as unalterable by the Legislative Council? The first proposition then, if maintained, strikes at the House of Representatives.  

Passing then to the second proposition, that, if maintained, would equally emasculate the Senate's co-ordinate power over taxation machinery Bills. We have only, in accordance with that proposition, to imagine a complete taxation measure combining the Taxing Act and the Assessment Act. If the proposition be true, then, as it assumes, the Bill is "a proposed law imposing taxation," and it is throughout unamendable by the Senate. It may include, as the Income Tax Act would, on this assumption, include, provisions for Boards of Review, their remuneration and duties, provisions enabling this Court to make rules, provisions for criminal consequences, provisions for validating former statutory rules; and yet, because included in a Bill which inter alia does impose taxation, the Senate is entirely precluded from amending a letter of the whole measure. That, in my opinion, is a radical error and cuts away a right which, on the well-understood meaning of parliamentary terms, is conserved to the Senate by the words of the Constitution.  

I do not think the fallacy can be better exposed than in the words of Griffith C.J. in Osborne's Case. ^[F32] It was there the opinion of four members of the Court (Griffith C.J., Barton J., O'Connor J. and myself) that the Land Tax Assessment Act 1910 (No. 22) was not an Act imposing taxation within the meaning of s. 55 of the Constitution, although the Land Tax Act itself (No. 21) incorporated in itself the provisions of Act No. 22. The argument for invalidity of s. 39 of the Act No. 22 of 1910 - on which the liability of the appellant depended-was, as the Chief Justice pointed out, of a twofold nature. First, it was said ^[F33] that the Acts, that is, both No. 21 of 1910 and No. 22 of 1910, dealt with more than one subject of taxation, and were, therefore, wholly invalid. Then there was what the learned Chief Justice called "a subsidiary argument whether the Land Tax Assessment Act is a law imposing taxation within the meaning of s. 55." He said:

"In the view I take of another branch of the case it is not necessary to express a concluded opinion on this point, but I think it right to say a few words about it."

Now, before quoting the "words," let us remember that the Taxing Act (No. 21 of 1910) had incorporated the provisions of the Assessment Act (No. 22 of 1910). Bearing that fact in mind, we can appreciate the words which follow:

"Some confusion was introduced into the argument, I think, by the tacit assumption that a law dealing with taxation is necessarily a law imposing taxation."

I stop there a moment because it is necessary in order to draw attention to the precision of the language used. "A law dealing with taxation" is the first phrase-that is, taxation in any or all of its branches; not a law dealing with the "imposition" of taxation-that is, with one particular and exclusive branch of taxation. To fail to observe this is to fall into the confusion the learned Chief Justice was trying to dispel. Then, referring to the false tacit assumption he has stated, he proceeds to show its error. He says, in a passage the meaning of which appears to have been entirely reversed: ^[F34]

"That is not so. The terms are not synonymous. An Act imposing taxation may, like the English annual Finance Acts, both impose taxes and contain a complete scheme for their collection."

The meaning that it has been, tacitly at all events, attempted to attach to those words is that that course may be taken under our Constitution. Nothing of the sort was intended. The learned Chief Justice was speaking of the traditional mode of taxation legislation. And his reference to the English Act shows it. And, further, it was for the very purpose of drawing the distinction between an Act "dealing with taxation" without restriction, and an Act dealing only with imposition of taxation. He goes on to show that by the next sentence:

"Or the Act may impose taxation eo nomine, leaving its collection to be regulated by other laws."

That is his example of an Act dealing only with the imposition. Observe the word "regulated," which is only an interchangeable term with "deal with." The learned Chief Justice used the words "deal with" at the foot of p. 336 in that sense. He has so far spoken of the well-understood branches of taxation legislation in order to apply the provisions of the Constitution to the Assessment Act No. 22 of 1910. He says:

"Now, Act 22, when examined, does not on its face purport to impose taxation at all."

He gives his reasons. He says:

"The Act then goes on to make provision for assessing and levying the tax, which it assumes to have been imposed by another Act."

The "collection" is not the "imposition." It has nothing to do with the imposition except that it is the legal machinery by which the obligation declared by the imposition is effectuated. The distinction and the separateness of the two conceptions appear from the Bill of Rights. The imposition is the "grant"; the collection (which includes assessment, levy, etc) is the "manner." "Grant" is purely legislative, "collection" is purely executive and must be legislatively authorized. The Constitution enforces that separateness. Anticipating what I have to say as to the third proposition, I should point out that the learned Chief Justice there plainly refutes it. For, notwithstanding the incorporating section, he treats Act No. 22 of 1910 as having an independent existence, and not as being a "law imposing taxation." He emphasizes that by pointing out that the incorporating section may affect the Taxing Act No. 21 of 1910, which is a different matter. The observations of Griffith C.J. fully establish that, if it were permissible here to follow the example of the English Finance Act, the Senate could not amend a word of it, because it would not only be an Act "dealing with taxation," which embraces both imposition and collection, but it would be an "Act imposing taxation," because it dealt with imposition. That, of course, he could have never intended to sanction by any opinion of his. Barton J. says: ^[F35]

"The provisions for assessment and collection are ... proper to an Act not imposing taxation."

This is relevant to the second proposition. As to the third, he negatives it, ^[F36] where he says that the reference section made the two Acts one, but only for the purpose of interpretation. Clearly that means for the interpretation of the Taxing Act. O'Connor J. is in exact concurrence on these points with Griffith C.J. He says as to the Assessment Act ^[F37] that it "though dealing with taxation, does not ... impose taxation, and is therefore not within the section." He does not suggest, but, in my opinion, denies, that it "deals with the imposition of taxation."  

As to the third proposition, I have already added sufficient to my original statement to indicate the admitted separateness of the Assessment Act so far as it is considered as a law in itself. Section 55 of the Constitution has, consequently, no application whatever to s. 22 of the Act of 1925.  

The result, so far as now material, is that the definitions of (1) "income from personal exertion," and of (2) "income from property," and of (3) "income tax," and of (4) "taxable income," are to be read as part of the Taxing Act. The first declares that income in relation to a business means "the proceeds" of the business-in other words, the gross receipts of the business in Australia. "Income tax" means the income tax imposed as such by "any Act" as assessed under the Assessment Act; and "taxable income" means the amount of income remaining after all statutory deductions allowed have been made. It is clear, therefore, that in view of the definition of "income" the Legislature, in declaring chargeability on a "percentage of the total receipts" of a business, makes no departure from the original subject of taxation, namely, "the proceeds" of the business. That is merely declaring, in respect of the particular total income, how much of it shall be "taxable income" and prescribing for the special purpose a method different from that prescribed for ordinary cases. I have more fully stated my reasons in this connection in the British Imperial Oil Co's Case ^[F38] at p. 434, and I refer to that statement.  

The only imaginable difficulty in the matter is occasioned by the words in s. 28, "no taxable income" or less than the ordinary taxable income which might be expected to arise from the business. The difficulty, such as it is, arises really from the words "no taxable income," because it is said that, it being assumed by the section that there may be "no taxable income," there is necessarily a new subject of taxation, since in the Taxing Act itself the rates are declared only in respect of "taxable income." But that view overlooks the fact that "taxable income" in the Taxing Act is, in view of the incorporating section, to be interpreted as including every kind of "taxable income" declared by the Assessment Act, and is not limited to the ordinary "taxable income." In the generality of cases the primary definition of taxable income applies, but where special cases are prescribed for we have to find what is "taxable income" from those special provisions. Section 28 is one of those special provisions. The words in that section "no taxable income," especially when read with the words immediately succeeding, are referable to the usual primary definition paragraph. But, says s. 4, the definitions there given hold good "unless the contrary intention appears," and it seems to me transparently clear that the Legislature has contemplated in s. 28 a case where the ordinary "taxable income" is or may be absent altogether and it expressly substitutes for that case another "taxable income" which equally falls within the scope of the Taxing Act. That is to say, the contrary intention apparent from the operative provisions of s. 28 displaces and supersedes the primary definition and constitutes the "taxable income" for rate purposes within the meaning of the Taxing Acts. If the contentions of the respondent were sound, that s. 28 proceeded upon the assumption that assessment and chargeability were independent of "taxable income," it would mean that no rate at all would be applicable, for there is none except on taxable income. Nor could I think that s. 28 is an adoption of corresponding rates. It does not say so, and taxation must be unambiguously imposed. It cannot be implied to the destruction of all else the Legislature was enacting in the Assessment Act. The words used, "assessable and chargeable," are words that are outside "imposition" of taxation, and the word "imposing" or its corresponding form is not used. The words "income tax" in s. 28 have, in the absence of contrary intention, and there is none, the primary meaning of "income tax imposed by any Act," that is, some other Act, in contradistinction to the words "as assessed under this Act." So that the simpler objection to liability, if the argument of the respondent is right, would be, not conflict with s. 55 of the Constitution, but absence of any taxing statute to which s. 28 is referable.  

In brief my opinion is:

(1)

Secs. 18 and 19 of the Act of 1925 are valid and this appeal is competent.

(2)

The Board of Review is validly constituted and organized.

(3)

There is no breach of s. 55 of the Constitution.

(4)

Section 28 of the Assessment Act is both valid and applicable to the relevant Taxing Acts.

(5)

As a conclusion of law the appeal falls to be dealt with on its merits by the Court differently constituted.

 

British Imperial Oil Co v Federal Commissioner of Taxation

This case originates in a different manner. It comes by way of a special case stated by the Supreme Court of Victoria exercising Federal jurisdiction pursuant to s. 51A of the present Assessment Act. Unless sub-s. 8 of s. 51A is a nullity, this Court is competently seised of the special case and is bound to deal with it. The special case asks two questions which, in substance, are

(1)

whether the Deputy Commissioner's assessment of 28th March 1925 ceased to be valid or operative on the arising of the Company's dissatisfaction therewith;

(2)

whether it is now good in law.

Assuming, as I have said in Munro's Case that the Federal Parliament has the ordinary legislative power of retrospective enactment, s. 16 of the Act of 1925, upon construction, answers the first question in the affirmative without any room for discussion. According to its terms s. 28 of the Assessment Act at all material times consisted of its first and second sub-sections only and so the Deputy Commissioner's assessment was-subject to the revisionary rights created by sub-s. 4 of s. 50 - of full force and effect. Par. (b) of that sub-section contains no challengeable matter, and that is the provision under which this special case finds its source. But par. (a) is challenged for reasons pertinent to the Board of Review and dealt with in Munro's Case. The denial of constitutional invalidity is stated in my judgment in Munro's Case, and it ends any question of vitiation of par. (b). But I would add that, even if par. (a) were held to be bad, it would not, in my opinion, so infect par. (b) as to render it void. Both the terms of the extant legislation and history demonstrate to my mind that Parliament did not so bind the two sets of provisions together as to make them inseparable in the sense contended for. The Courts were always there and have always been intended to be there, and it might well be argued that the power of appeal to the Courts is an essential and inseparable condition of liability. But the Board of Review is merely additional and in a sense extraneous, and its omission would not annihilate the curial appeals. The Board of Review was merely engrafted on the parent tree, and whether it flourishes or fades the tree remains.  

I answer question 1 in the negative and question 2 in the affirmative.  

Federal Commissioner of Taxation v Munro (The Objection)

 The concrete question left is whether the objection of the taxpayer, so far as allowed by what must be regarded as the Board of Review, should be allowed or not. It should be noted that, as this matter arises in original jurisdiction and not by way of appeal in the strict constitutional sense, the ordinary rules applicable to reconsideration of determinations of fact of tribunals of first instance do not apply. That, of course, does not prevent the Court from giving in suitable cases-of which this is not one-all proper weight to determinations of fact resting on practical experience of the administrative body.

The facts come to us in a somewhat irregular manner, due largely to the former confused state of the law. They are not in any material point in dispute, the only difference between the parties being as to the effect of the law in relation to them. That the decision of the Board involves a question of law seems to me clear. Besides the contest as to the validity of the statutory provisions regarding the Board of Review, there is the seriously debated question as to the construction of s. 23 (1) (a) and s. 25 (e). This opens the whole matter for our decision (see and compare Brooks v United States ^[F39] at p. 439).

The relevant facts, when collected, are these:

The respondent carried on a business in Elizabeth Street, Melbourne, occupying for that purpose part of land and a building belonging to him.

Other portions of the building he let at rentals amounting to PD2,000 a year.

In those circumstances he promoted a limited company in Sydney to carry on business there.

He took up about 2,000 shares for himself in the company and 9,000 shares for each of his two sons.

He borrowed from a bank a sum which during the relevant period amounted to about PD33,000, of which PD20,000, approximately represented the amount paid for the shares and PD13,000 the amount he advanced to the Sydney company free of interest.

To secure to the bank the repayment of his loan he mortgaged the Elizabeth Street property and during the relevant accounting periods he paid interest upon his mortgage.

His objection is that he should be allowed to deduct that interest from the assessable income in Melbourne - either business or property - there being no Sydney income. His right to do so is rested on s. 23 (1) (a). This is denied by the Commissioner, who relies also on the negative provision in s. 25 (e). If the affirmative provision relied on for the taxpayer does not warrant the deduction, he necessarily fails. I am of opinion that that provision does not justify the deduction claimed. I am unable to see how the interest referred to was "actually incurred in gaining or producing the assessable income." "The assessable income" means the income which is taken as a basis as required by the introductory words of the section. It is said for the respondent that, since it was necessary to pay the interest if the taxpayer wished to retain his right to have the income from the property, it was interest by which that income was gained or produced. I am not able to accept that view. The taxpayer had already acquired and held his property as a rent-producing property to the full extent. Nothing more was necessary to gain or produce that income. Then he chose for his own purposes quite alien to that property to borrow money and incur a personal obligation to repay it with interest. So far, also, the property stood complete as a rent-producing instrument. But because he secured his personal debt by means of that complete rent-producing instrument he contends that the discharge of the obligation was "actually incurred in gaining or producing" the rentals it yielded. The simple position is that the property and its rentals existed before the loan and remained intact and unaltered after the loan. Had the money borrowed been expended on the property so as to increase the rentals or so as to prevent depreciation which would have reduced the rentals, then it could have been properly said that the interest had been a means of gaining or producing the assessable income. But in employing the borrowed money for purposes independent of the property, leaving its condition entirely unaffected, that result cannot be postulated. Nor is there any ground for attaching the loan to "the assessable income" arising from the business in Melbourne. That income and the whole Melbourne business were quite unaffected by the application of the money.

In short, the interest paid to the bank was not paid to create any of the assessable income in question: it was incurred because, among other things, that income was in a manner of speaking already in existence. Supposing, however, the expenditure fell within s. 23 (1) (a), it would be excluded by s. 25 (e). Clearly the production of "assessable income" was not the only purpose of the loan. That loan was to create a new enterprise owned and conducted by a new personality, having legal results which, both as to commodum and onus, must be accepted by the taxpayer, results which are distinct from and in addition to any "assessable income." The interest paid in respect of the loan follows accessorially the purpose of the principal sum.  

I am of the opinion that the appeal so called should be allowed, and the objection disallowed.