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: Knox CJ)

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

Court:

Judges:
Knox CJIsaacs J
Higgins 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:
Knox CJ

Federal Commissioner of Taxation v Munro (Law Points)

These are appeals under s. 51 (6) of the Income Tax Assessment Act 1922-1925 from decisions of the Board of Appeal constituted by the Income Tax Assessment Act 1922-1923, and the first question for decision by the Full Bench is whether the appeals are competent. In the case of British Imperial Oil Co v Federal Commissioner of Taxation ^[F1] this Court held that Parliament had by the Act of 1922-1923 purported to confer on the Board of Appeal powers which were part of the judicial power of the Commonwealth; that by s. 71 of the Constitution such power could only be vested in a Court; that if such Court be created by the Parliament its members must have the tenure of office prescribed by s. 72 of the Constitution; and that, as the tenure of office of members of the Board did not comply with the requirement of that section, it was beyond the power of the Parliament to confer judicial power on the Board. It followed that the Board of Appeal was not and could not be validly constituted under the Act, and that the High Court could not entertain a case purporting to be stated by the Board pursuant to the provisions of the Act. To meet the position created by this decision Parliament in 1925 passed the Income Tax Assessment Act 1925 (No. 28 of 1925). By that Act the name of the Board was changed from "Board of Appeal" to "Board of Review" and ss. 44 and 51 of the earlier Act were repealed. These sections were replaced by provisions which are in the words following:

"44.(1)

A Board of Review shall have power to review such decisions of the Commissioner, Assistant Commissioner or Deputy Commissioner as are referred to it by the Commissioner under this Act and, for the purpose of reviewing such decisions, shall have all the powers and functions of the Commissioner in making assessments, determinations and decisions under this Act, and such assessments, determinations and decisions of the Board, and the decisions of the Board upon review, shall, for all purposes (except for the purposes of sub-section 4 of section fifty and sub-section 6 of section fifty-one of this Act) be deemed to be assessments, determinations or decisions of the Commissioner.

(2)

Notwithstanding anything contained in this Act, a determination made by the Board under section twenty-one of this Act shall not be invalidated by reason of the fact that it is not made within the time prescribed by that section."

"51.(1)

Where a taxpayer has, in accordance with the last preceding section, requested the Commissioner to refer a decision to a Board of Review, the Commissioner shall, if the taxpayer's request is accompanied by a deposit of such amount as is prescribed for the particular class of case, refer the decision to the Board not later than thirty days after receipt of the request.

(2)

A taxpayer shall be limited on the review to the grounds stated in his objection.

(3)

If the assessment has been reduced by the Commissioner after considering the objection, the reduced assessment shall be the assessment to be dealt with by the Board under the next succeeding sub-section.

(4)

The Board, on review, shall give a decision and may either confirm the assessment or reduce, increase or vary the assessment.

(5)

The Board may, if it considers the reference to be frivolous or unreasonable, order the forfeiture of the whole or part of the amount deposited in accordance with sub-section 1 of this section.

(6)

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."

Having made these alterations in the name and powers of the Board, Parliament, by ss. 18 to 21 of the amending Act, purported to validate the decisions of the body of persons de facto acting as a Board of Appeal under the earlier Act by providing that such decisions should be deemed to be and at all times to have been decisions of a Board of Review given in pursuance of the provisions of the later Act, and provided further by s. 18 that "in any case in which the Commissioner or the taxpayer has instituted, or purported to institute, an appeal to the High Court from the decision of that body of persons, the Commissioner or the taxpayer may appeal to the High Court from that decision (as if it were a decision of a Board of Review) if, in the opinion of the High Court, the decision involves a question of law." By s. 19 similar provisions were made to apply to cases which had arisen under any Act repealed by the Act of 1922-1924. It is under the provisions of ss. 18 and 19 that these appeals are now brought to this Court.  

The first question is whether the amending Act No. 28 of 1925 purports to confer on the Board of Review portion of the judicial power of the Commonwealth. The proper method of approach to this question is, in my opinion, to consider, not whether or to what extent the obnoxious provisions contained in the earlier Act have been altered, but whether the amending Act itself, properly construed, purports to confer such power. If the words used in the later Act be not ambiguous, its meaning is to be ascertained by interpreting these words, and not by reference to the extent to which its provisions appear to resemble or to depart from the provisions of previous legislation.  

Under the Act the Board, for the purpose of reviewing decisions of the Commissioner, is to have all the powers and functions of the Commissioner in making assessments, determinations and decisions under the Act, and such assessments, determinations and decisions of the Board are for all purposes except for the purpose of sub-s. 4 of s. 50 and sub-s. 6 of s. 51 to be deemed to be assessments, determinations or decisions of the Commissioner. Sub-s. 6 of s. 51 has been set out above. Sub-s. 4 of s. 50 provides for the reference to the Board at the instance of a taxpayer of decisions of the Commissioner, and alternatively for the objection of a taxpayer to be treated as an appeal to the High Court or to the Supreme Court of a State.  

In s. 51 Parliament has, I think, clearly expressed the intention that, in a controversy between the taxpayer on the one hand and the Commissioner representing the Executive Government on the other, the Board of Review shall be invested with power to determine at the instance of one of the parties to the controversy the respective legal rights and obligations of the parties; conclusively, as to any case in which no question of law is involved, and subject to a right of appeal by either party to the High Court in any case involving a question of law. I find it impossible to regard a tribunal invested with such a power as a mere administrative body or as a mere adjunct to, or agent or instrument of, the Executive Government, exercising portion of the executive power of the Commonwealth. The function of determining finally where no question of law is involved what are the legal rights and obligations inter se of the Crown and a subject clearly may be judicial in its nature; and I think it is so when, as in the present case, the Crown and the subject are treated as parties to a lis and a right of appeal to a Court of law from the decision of the tribunal is given to either party. It may well be that the determination by an officer of the Government or by a Board of the amount of tax payable by the taxpayer, such as an assessment by the Commissioner, may in some cases be treated as an act of administration coming within the ambit of the executive power of the Commonwealth as distinguished from its judicial power. In such cases the officer or Board acts as an agent or instrument of the Executive Government of the Commonwealth on its behalf, and the decision may be regarded as the decision of the Executive. But, where as in this case the decision of the Board as to the legal rights of the Commonwealth is pronounced in a proceeding inter partes and may be challenged by the Commonwealth or by one of its officers acting on its behalf, it seems to me that the Board must be taken to be acting as a Judge in a contest between the Commonwealth or its Executive Government on the one hand and the taxpayer on the other, to determine the legal rights and obligations of the parties, who occupy the position of litigants. In these circumstances I think the power exercised by the Board is judicial power.  

For these reasons I am of opinion that the decision in the case referred to is in point and that the Board of Review is not legally constituted. It follows that, in my opinion, these appeals are incompetent and should be struck out.  

British Imperial Oil Co v Federal Commissioner of Taxation

This is a special case stated by the Supreme Court of Victoria (Macfarlan J.) for the opinion of this Court pursuant to s. 51A of the Income Tax Assessment Act 1922-1925. It was argued with the preliminary point in Munro's Case before a Full Bench.  

The relevant facts may be shortly stated as follows:On 28th March 1925 notice of assessment to income tax was given to the Company by the Commissioner in respect of the financial year 1924-1925, based on income derived during the year ended 30th June 1924. The assessment purported to be made under s. 28 of the Income Tax Assessment Act 1922-1924, which remained in force until amended by the Act No. 28 of 1925, which became law on 26th September 1925. The Company, being dissatisfied with the assessment, on 4th May 1925 duly lodged objections pursuant to s. 50 of the Act 1922-1924. On 1st December 1925, after that Act had been amended by the Act No. 28 of 1925, the Commissioner gave notice to the Company that its objections had been disallowed. The Company then requested the Commissioner, pursuant to s. 50 (4) of the Income Tax Assessment Act 1922-1925, to treat its objection as an appeal and to forward it to the Supreme Court of Victoria, and the Commissioner forwarded the objection accordingly.  

On the hearing, in the Supreme Court, of the appeal so constituted, the Company challenged the validity of the assessment on a number of grounds stated in the case, which raised the questions submitted for the opinion of this Court, namely:

(1)

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

(2)

Is the assessment appealed against good in law?

 

There are really three questions for consideration, namely:

(a)

Was the assessment valid when made?

(b)

If so, did it cease to be valid at any time before the passing of the amending Act (No. 28 of 1925)?

(c)

If the assessment was originally invalid or became invalid before the passing of the amending Act, was it validated by that Act?

 

(a) This question must be dealt with on the Act 1922-1924 as it stood in March 1925. The assessment was made under s. 28, which, so far as relevant, is in the words following:

"(1)

When any business which is carried on in Australia is controlled principally by persons resident outside Australia, and it appears to the Commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall be assessable and chargeable with income tax on such percentage of the total receipts (whether cash or credit) of the business, as the Commissioner in his judgment thinks proper.

...

(3)

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."

 

In the case of British Imperial Oil Co v Federal Commissioner of Taxation ^[F2] this Court decided that sub-s. 3 of s. 28 was wholly inoperative.  

The further discussion of the above question in the present case affords, in my opinion, no ground for departing from that decision. In this view the question as to the validity of an assessment made under s. 28 turns on the connection or want of connection between sub-s. 1 and sub-s. 3 of that section.  

If the provisions of sub-s. 1 are wholly independent of sub-s. 3, the validity of sub-s. 1 will not be affected by the invalidity of sub-s. 3. "But if they" (the provisions of the two enactments) "are so mutually connected with and dependent on each other, as conditions, considerations or compensations for each other, as to warrant a belief that the Legislature intended them as a whole, and that if all could not be carried into effect, the Legislature would not pass the residue independently, and some parts are unconstitutional, all the provisions which are thus dependent, conditional or connected, must fall with them" (per Shaw C.J. in Warren v Charlestown Corporation ^[F3] at p. 99, cited with approval in Waterside Workers' Federation of Australia v J. W. Alexander Ltd ^[F4] at p. 470).  

I proceed to consider the provisions of the section. In cases within s. 28, as in those within ss. 17 and 21 of the Act, the liability to assessment was made to depend on the opinion of the Commissioner as to the existence of certain facts. The question whether the opinion formed by the Commissioner was correct, or whether the grounds on which he formed that opinion were sufficient, would not, apart from the provision for reference of the case to the Board of Appeal, be examinable by any tribunal. His opinion, bona fides being assumed, would be conclusive (Cornell v Deputy Federal Commissioner of Taxation; ^[F5] Thomson v Federal Commissioner of Taxation). ^[F6] It was not seriously disputed that, on the reference of the "case" to the Board of Appeal, that Board could review the opinion of the Commissioner or the sufficiency of the grounds on which his opinion was formed. The right to have his case referred to the Board was given to the person affected only in cases coming under ss. 17, 21, 23 and 28 of the Act where the taxpayer's liability to assessment or his claim to a deduction from gross income depended on the opinion of the Commissioner, and was a right of a special kind not available in any other proceedings by way of appeal from a decision of the Commissioner. It is apparent that sub-s. 3, if valid, would confer on a person assessed under s. 28 a substantial benefit of which he would be deprived by its elimination. I can find nothing in the words of the enactment inconsistent with the view that sub-s. 3 should be treated as a proviso to sub-s. 1, nor anything which indicates that the two provisions were to be construed as wholly independent of each other.  

These considerations appear to me to warrant the inference that Parliament intended that the exercise by the Commissioner of the power conferred on him by s. 28 (1) should be conditional on the right of the person assessed under that provision to have the opinion of the Commissioner and the sufficiency of the grounds on which that opinion was formed reviewed by the Board of Appeal. It follows that, in my opinion, sub-ss. 1 and 3 must be treated as mutually connected with and dependent on each other and that sub-s. 3 being invalid and inoperative sub-s. 1 falls with it. It follows also that the assessment in question was not, when it was made, a valid assessment.  

(b) The assessment being, in my opinion, originally invalid, this question does not arise.  

(c) For the reasons expressed in my opinion in Munro's Case I think the provisions of the Act No. 28 of 1925 which constitutes the Board of Review are invalid. It was not contended that these provisions were independent of and severable from the rest of the Act, and, having regard to the provisions of s. 16, I think it is clear that the validation of assessments is conditional on the existence of the Board of Review. It follows that, in my opinion, the Act so far as it purports to validate the original assessment is invalid, and that question 2 should be answered in the negative.  

Federal Commissioner of Taxation v Munro (Merits).-The competency of these appeals having been upheld by the Full Bench, it becomes necessary to deal with them on their merits.  

The question at issue in each appeal is whether the respondent is entitled to a deduction from his assessable income of a sum paid by way of interest on a mortgage. The facts, which are not in dispute, are as follows, namely:The respondent at all relevant times was the owner of certain freehold land in Melbourne on which buildings were erected. Parts of these buildings were let to tenants at rentals amounting in all to PD2,593, and this sum was included in the assessable income of the respondent. The respondent borrowed from a bank sums amounting to PD30,000 or thereabouts, the repayment of which with interest was secured by mortgage of this property. The money so borrowed was applied as to PD20,000 in the payment of PD1 each on 20,000 shares in a company which the respondent caused to be formed for the purpose of carrying on in New South Wales a business similar to that carried on by the respondent in Melbourne. The balance was advanced by the respondent to the company without interest. Of the 20,000 shares so paid for, 18,000 were by direction of the respondent allotted to his two sons-9,000 to each-as a gift. The remaining 2,000 were held by the respondent. The respondent claimed to deduct the interest paid to the bank during the relevant periods on the amount so borrowed. The Commissioner disallowed his claim, the Board of Appeal reversed the Commissioner's decision and the Commissioner now appeals to this Court.  

By s. 23 (1) (a) of the Income Tax Assessment Act it is provided that from the total assessable income of a taxpayer there shall be deducted all losses and outgoings including, among other things, interest actually incurred in gaining or producing the assessable income. This section must be read with s. 25 (e), which provides that a deduction shall not in any case be made in respect of money not wholly and exclusively laid out or expended for the production of assessable income. In this provision assessable income must, I think, mean assessable income of the taxpayer claiming the deduction. The prohibition enacted in this section is absolute; and the first question therefore is whether the amounts which the respondent claims the right to deduct were wholly and exclusively laid out or expended for the production of his assessable income. It is quite clear that the money borrowed from the bank was not so laid out or expended, for nine-tenths of the amount was applied directly or indirectly for the benefit of his two sons-directly as to the PD18,000 paid for the shares given to them, and indirectly as to the advances made to the company, in which they held nine-tenths of the shares. The obligation to pay interest arose out of the loan by the bank, and might have been enforced against the respondent independently of the mortgage given by him. If no mortgage had been given to secure the payment of principal and interest to the bank, the liability of the respondent would have been no less, but it was not suggested at the Bar that in that case he would have been entitled to any deduction in respect of interest paid by him. It is said, however, that, because the respondent gave a mortgage over his rent-producing property to secure payment of principal and interest to the bank, the payment of interest was necessary in order to enable him to receive the rents of the property and the amount paid was therefore wholly expended for the production of assessable income. Indeed, it was contended that, whenever money was borrowed by a taxpayer on the security of a rent-producing property, the interest paid under the mortgage should be deducted from his assessable income, irrespective of the purpose to which or the manner in which the money borrowed was applied.  

In this case the assessable income of the taxpayer was in no way referable to the transaction with the bank out of which the liability to pay interest arose, and the loan by the Bank was in no way instrumental in or conducive to the production of the assessable income or that part of it which consisted of the rents of the freehold property. The respondent was, before the mortgage was given, entitled to the whole of these rents, and he did not gain them nor were they produced in consequence of the payment of interest. The interest was paid, not for the purpose of gaining or producing assessable income of the taxpayer, but for the purpose of satisfying pro tanto a debt which the taxpayer had incurred with a view, not to the production of his assessable income, but to the production of income by the company for the benefit of its shareholders. The debt having been incurred for a purpose wholly unconnected with the production of assessable income of the respondent, I think it impossible to say that the interest paid on the amount of the debt was money wholly and exclusively laid out or expended for the production of his assessable income.  

For these reasons I am of opinion that the appeals should be allowed and the decision of the Commissioner restored.