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

(1948) 77 CLR 1

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(Judgment by: Latham CJ)

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

Court:

Judges:
Latham CJStarke J
Dixon J
McTiernan J
Williams J

Subject References:
Estate Duty

Judgment date: 22 September 1948

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Judgment by:
Latham CJ

Case stated under s. 28 of the Estate Duty Assessment Act 1914-1942. Section 8 (3) of the Act provides that for the purpose of the Act the estate of a deceased person comprises, inter alia -

"(b)

his personal property, wherever situate (including personal property over which he had a general power of appointment, exercised by his will), if the deceased was, at the time of his death, domiciled in Australia."

The Commissioner of Taxation of the Commonwealth has included in an assessment to estate duty an amount of 6,814 pounds, representing what is described in the assessment as a "right of action" belonging to the deceased person for "recovery of unliquidated damages valued at the sum paid by the Treasury to the administrators of the deceased person's estate." The sum so paid was 6,814 pounds. (at p11)

In May 1944 this Court gave judgment in the case of Magrath v. The Commonwealth (1944) 69 CLR 156 . The plaintiff Magrath was the holder of gold dollar bonds issued in New York in 1927 by the Commonwealth. The bonds provided that the principal was payable to bearer in New York without deduction of any tax then or at any time thereafter imposed by the Commonwealth or by any taxing authority thereof or therein. The interest coupons provided that interest was payable "without deduction for any Australian taxes present or future." Two questions were submitted to the Full Court in a case stated. The first question was as follows: -

"Whether by the bonds the defendant promised the plaintiff as holder that the 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 Income Tax Assessment Act 1922, and the Income Tax Assessment Act 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 p12)

This question was answered in the affirmative by the majority of the Court - Rich, McTiernan and Williams JJ. Counsel for the appellants in the present case sought to challenge the decision in Magrath's Case (1944) 69 CLR 156 but the Court refused to allow him to do so. Accordingly, this case must be dealt with upon the basis that the promise made by the Commonwealth by the bonds was that the interest would not form part of the assessable income of the taxpayer within the meaning of the specified Income Tax Assessment Acts. (at p12)

A second question was submitted to the Court in Magrath's Case (1944) 69 CLR 156 , at p 160. It was as follows: -

"In the event of the first question being answered in the affirmative, whether the plaintiff is entitled to recover from the defendant by way of indemnity or as damages the additional amounts of income tax which the plaintiff has become liable to pay or has paid by virtue of the inclusion of such interest as part of his assessable income derived during the years ended 30th June 1932 to 30th June 1942 inclusive under the provisions of the Income Tax Assessment Acts 1922 and 1936 as amended." (at p12)

This question was not answered. Rich J. expressed a doubt whether, upon the construction of the contract adopted by the majority of the Court, such a contract would be valid: see the report (1944) 69 CLR, at pp 169, 170. McTiernan J. (1944) 69 CLR, at p 175 considered it unnecessary to answer the question because, though the Executive Government did not have power to bind the Parliament not to impose tax upon the bond interest, the attitude of the Commonwealth was that it would not contend on technical grounds that the plaintiff had no right to recover tax which he had paid on bond interest. Williams J. (1944) 69 CLR, at pp 183, 184 expressed a doubt as to whether the Income Tax Assessment Acts of 1922 and 1936 did actually operate to impose taxation upon the bond interest. After the decision of the Full Court upon the case stated, a settlement was effected between the plaintiff and the defendant in Magrath's Case (1944) 69 CLR 156 upon terms which have not been disclosed. (at p12)

Mrs. Christina Thomson owned at the time of her death 133 one thousand dollar bonds belonging to the issue which the Court considered in Magrath's Case (1944) 69 CLR 156 and containing the provisions which were construed in that case. Mrs. Thomson included in her returns of income made under the Income Tax Assessment Act 1936 the amounts of bond interest received in the income year ending 30th June 1939 and thereafter until the income year ending 30th June 1943. The tax paid in respect of this income was 6,814 pounds. (at p13)

After the decision in Magrath's Case (1944) 69 CLR 156 Mrs. Thomson's solicitors applied to the taxation authorities on 6th November 1944 for repayment of the income tax so paid. They relied upon the decision in Magrath's Case (1944) 69 CLR 156 . Mrs. Thomson died on 15th December 1944, before any reply was received to the letter of her solicitors. On 12th February 1945 a return was lodged under the Estate Duty Assessment Act. In this return the bonds were included, valued at 41,537 pounds 14s. 7d. On 10th May 1945 the executors received a letter from the Commonwealth with a cheque for 6,814 pounds, described as refund of the income tax on the interest received on the bonds. (at p13)

The Commissioner originally included in his assessment of the estate of the deceased to estate duty a sum of 6,814 pounds, described as "refund of income tax." The executors objected on the ground that the sum of 6,814 pounds "was not received until after the death of the deceased and at the date of her death was not a debt owed to her, nor was the said sum, or any part of it, comprised in her estate for the purposes of the Estate Duty Assessment Acts." The Commissioner allowed this objection and amended the assessment by excising the refund of income tax 6,814 pounds and adding "right of action for recovery of unliquidated damages, valued at the sum paid to the administrators by the Treasury - 6,814 pounds." The executors objected to this amended assessment on the following grounds: -

"1.

The amount of 6,814 pounds referred to in the alteration sheet annexed to the Notice of Amended Assessment forms no part of the estate of the deceased for purposes of Estate Duty.

2.

The deceased at the date of her death had no right of action against anyone to recover unliquidated damages.

3.

The amount of 6,814 pounds received by the executors of the deceased from the Commonwealth on or about the 10th May, 1945, was expressed to be paid as and was received as a 'Refund of income tax on interest received on Gold Dollar Bonds raised in the United States of America.'

4.

Prior to her death the deceased had no right to sue for or recover the said sum of 6,814 pounds.

5.

The sum of 6,814 pounds which was refunded as aforesaid had been paid by the deceased in discharge of obligations validly imposed on her by assessments to income tax duly made under the Income Tax Assessment Acts." (at p14)

The Commissioner disallowed the objections and the executors appealed. This case is stated in the executors' appeal. (at p14)

The case states that the Commissioner relied on certain contentions in support of the inclusion of the sum of 6,814 pounds in the value of the estate for Federal duty. These contentions are as follows (par. 25): -

"(i)

that the amended assessment in its present form is correct because at the date of her death the deceased had a right of action for the recovery of unliquidated damages which right was properly valued at 6,814 pounds.

(ii)

that the Commonwealth's contractual obligation to the deceased was to pay not only the principal and interest agreed to be paid but also the amount of any tax lawfully levied by the Commonwealth of Australia upon her in respect of the receipt by her of such principal or interest and that therefore the deceased at her death had a right of action to recover the sum of 6,814 pounds as a debt due to her by the Commonwealth.

(iii)

that the amounts of income tax referred to in paragraph 14 hereof were not lawfully levied and could have been recovered at law by the deceased during her lifetime.

(iv)

that the deceased's claim to the repayment of 6,814 pounds had such a high degree of probability of success and was so well founded in expectation that it should be treated as an asset in her estate and valued at the sum of 6,814 pounds." (at p14)

The case states two questions for the court: -

"1.

Are any of the second third and fourth of the contentions stated in paragraph 25 hereof open on this appeal and relevant to its determination?

2.

Subject to Question 1 ought the sum of 6,814 pounds or any part thereof to be included in the value of the estate of the deceased for Federal Estate Duty?" (at p14)

The appellants contend that the Commissioner is not entitled to rely upon the above-stated contentions, Nos. (ii), (iii) and (iv). The assessment is an assessment of the value of particular property claimed by the Commissioner to be personal property of the deceased at the time of her death. That property is in the assessment described as a claim for unliquidated damages. Such a right, though the precise value of it is unknown at the time of the death, is part of the estate of a deceased person: Attorney-General v. Brunning (1860) 8 HLC 243 ( 11 ER 421 ). (at p14)

The assessment is, upon an appeal, prima-facie evidence that the amount and all particulars of the assessment are correct: Estate Duty Assessment Act, s. 22 (1) (b). The onus is therefore upon the appellant to displace the assessment to which he has objected. Upon the hearing of his appeal he is limited to the grounds stated in his objection: s. 27 (3). Accordingly, the objector would lose the appeal unless he established a good ground which was stated in his objection. It is contended, therefore, that the Commissioner is limited to meeting the grounds stated in the objection and that he cannot support his assessment by a contention which, if well-founded, does not show that his assessment is correct, but shows only that some other assessment, if it had been made, would have been, or might have been, correct. (at p15)

The objector can argue all the grounds which he has stated in his objection. Therefore he can argue not only the precise objection, No. 2, that the deceased at the date of her death had no right of action against anyone to recover unliquidated damages, but also the general ground, No. 1, that the amount of 6,814 pounds froms no part of the estate of the deceased for purposes of estate duty. Argument on this objection permits the use of any contention which meets the argument of the appellants that the amount of 6,814 pounds received from the Commonwealth Treasury does not form any part of the estate of the deceased for the purposes of the Act. Contentions (ii), (iii) and (iv) of the Commissioner, if established, would provide an answer to objection No. 1. In my opinion, therefore, it is open to the Commissioner to rely upon all the contentions to which reference was made in the case. (at p15)

The Full Court is concerned only with the case stated, and not with any questions which may arise if the answers to the questions submitted should show that the assessment of the Commissioner as at present made cannot stand, but that some other assessment in the same amount could be supported. It does not appear that the Commissioner has a right to make a further amendment of the assessment (see s. 20 (3)), if the amendment would increase the liability of the estate in any particular. But s. 20 (7) allows amendment to give effect to the decision of the Court upon an appeal: See also s. 27 (5), which gives wide powers to the Court upon the hearing of the appeal. (at p15)

Question No. 1 should, in my opinion, be answered: Yes. (at p15)

The second question inquires whether the sum of 6,814 pounds or any part thereof should be included in the estate of the deceased for Federal estate duty. (at p15)

The Commissioner relies upon the answer to the first question in Magrath v. The Commonwealth (1944) 69 CLR 156 , which shows that the promise in the bond to pay interest without deduction for any taxes meant that the Parliament of the Commonwealth would not impose any tax in respect of bond interest. This was a warranty which would be broken if the Commonwealth Parliament did impose such a tax. A breach of contract can be committed only by a party to the contract. The Parliament of the Commonwealth does not make contracts - it makes laws. It would not be the Parliament which would have broken the contract in the bonds if a tax were imposed upon the bond interest. The position would be that the warranty given by the Executive Government would be broken. There would be such a breach only if a tax were lawfully imposed. An unlawful tax creates no duty, and the "law" purporting to impose it can be ignored - independently of any contract with the Crown. An "assessment" made under such a law does not impose any liability, though if a taxpayer pays the amount assessed without objection he may be unable to recover it. (at p16)

Mrs. Thomson was assessed to tax and paid tax under the Income Tax Assessment Act 1936. If for any reason that Act does not impose tax in respect of bond interest, then there was nothing that could be called a breach of contract and there was no ground for any claim based upon a breach of contract. (at p16)

The bonds were issued under the authority of the Loans Securities Act 1919, s. 3, under which the Governor-General may, if an Act authorizes the Treasurer to borrow moneys, authorize the Treasurer to borrow the moneys "on such terms and conditions and issue" such "securities in such form as the Governor-General approves." The Governor-General approved the form in which the bonds were issued and therefore, it is contended, the contract contained in the bonds was authorized by the statute. Then, it is further argued, the Income Tax Assessment Act 1936 is a general Act taxing all income, with certain exemptions, whereas the bond is a special contract to which no express reference is made in the Income Tax Assessment Act, so that the maxim generalia specialibus non derogant applies so that the bond interest remains exempt, notwithstanding the general provisions of the Income Tax Assessment Act. Reference was made to various authorities dealing with special statutes exempting property from tax, which statutes were held to remain in operation even though general taxing Acts covering in their terms the tax-free property were subsequently enacted: see London Corporation v. Netherlands Steamboat Company [1906] AC 263 ; Associated Newspapers Ltd. v. City of London Corporation [1916] 2 AC 429 and the cases referred to by Williams J. in Magrath's Case (1944) 69 CLR 156 , at p 184. (at p17)

I do not find it necessary to consider whether the maxim relied upon to limit the application of an Act of Parliament is relevant to the consideration of that Act in relation to a prior contract or only to the comparison of two parliamentary enactments. If the contention based on the 1919 Act is well-founded, then the Income Tax Assessment Act 1936 did not impose any tax upon the bond interest. There was no breach of contract, and the bond-holder had no legal cause for complaint. Mrs. Thomson, it is true, paid the tax, but if she paid tax which she need not have paid, that act on her part cannot produce the effect of creating a breach of contract where otherwise there was no breach of contract. The assessments under the 1936 Act were made, the amounts assessed were paid and s. 177 of that Act prevents any recovery of those amounts. If Mrs. Thomson had brought an action to recover the amounts paid in tax, the production of the assessment would have been sufficient to establish that "the amount and all the particulars of the assessment" were correct: s. 177 (1). Thus if the Income Tax Assessment Act 1936 did not impose tax in respect of the bond interest, Mrs. Thomson at the time of her death had no claim against the Commonwealth for unliquidated damages or for refund of tax. (at p17)

If, on the other hand, the Income Tax Assessment Act 1936 did impose a tax upon the bond interest, and the contract to pay interest without deduction of taxes was valid, the position is that the 1936 Act destroyed an exemption which previously existed. (If the contract was not valid it is obvious that there could be no claim for unliquidated damages.) Parliament may, by a law with respect to a matter which is within its powers, make lawful that which would otherwise be unlawful and, in particular, may so legislate as to deprive an act of the character of a breach of contract. Thus, if the 1936 Act had the effect of rendering the bond interest subject to tax, it was the duty of the Commissioner of Taxation to assess and collect the tax. In so acting he was acting in obedience to law. It was not possible for any Commonwealth authority to give effect to the promise that tax should not be imposed. In Reilly v. The King [1934] AC 176 , Lord Atkin said that it was an elementary proposition "that if further performance of a contract becomes impossible by legislation having that effect the contract is discharged." In such a case the contract is not broken. The legislation makes lawful that which would otherwise have been a breach of contract, and therefore discharges the term of the contract performance of which has become unlawful. In that case the appellant claimed that a contract authorized by statute had been made, the effect of which was that he was entitled to remain in a particular office for a certain period. But Lord Atkin said (1934) AC at p 180:

"So far as the rights and obligations rested on contract, further performance of the contract had been made by statute impossible, and the contract was discharged. It is perhaps unnecessary to add that discharged means put an end to and does not mean broken. In the result, therefore, the appellant has failed to show a breach of contract on which to found damages."

The position is, in my opinion, exactly the same in the present case if it be assumed that the cont ract was originally a valid contract, but that the Parliament by legislation made it impossible for the Executive Government to carry out its promise. (at p18)

It is of some interest to compare with the present case the procedure adopted in relation to an agreement between the Commonwealth and Australian Consolidated Industries Limited with respect to the manufacture of motor vehicles. The Motor Vehicles Agreement Act 1940 authorized the execution of an agreement in the schedule and contained in s. 4 a provision that duties of customs should not be imposed and collected in respect of certain machinery. By Act No. 1 of 1945 the 1940 Act was repealed, but s. 4 of the repealing Act provided that the rights of the company against the Commonwealth should not be affected by the repeal. (at p18)

There can be no doubt as to the power of the Commonwealth Parliament to repeal or amend any Act which it has passed and so to make it impossible to perform a contract which has been made. Parliament may, as in the case of the statute last cited, take care to preserve existing rights. But there is no means of compelling Parliament to any particular course of action. Parliament does not have to buy a right to alter the law by compensating persons who suffer loss by reason of the alteration. Thus there can be no objection on purely legal grounds to the abolition by Parliament of the freedom from taxation promised by the bonds. Accordingly, if the Income Tax Assessment Act 1936 did impose a tax upon bond interest, then that tax was fully authorized by law and cannot give ground for any action for breach of contract. Accordingly, in my opinion, the claim of the Commissioner that at the time of her death the deceased had a right of action for unliquidated damages against the Commonwealth has not, upon any view of the relevant legislation, been established. (at p18)

But the Commissioner further argues in his second contention as above-stated that the contract of the Commonwealth was to pay to the deceased the amount of any tax lawfully levied in respect of the bond interest. The answer to this contention is to be found in the answer given to the first question in Magrath's Case (1944) 69 CLR 156 . The contract was not a contract to recoup tax paid. The distinction between an exemption from tax and a promise to recoup tax paid is emphasized in Eastern Extension, Australasia & China Telegraph Co. Ltd. v. Federal Commissioner of Taxation (1923) 33 CLR 427 , at p 438. (at p19)

It is next submitted by the Commissioner that the amounts of income tax paid by the plaintiff in respect of bond interest were not lawfully levied and could have been recovered at law by the deceased during her lifetime. If a taxpayer is assessed to income tax and pays without objecting or appealing, s. 177 of the Income Tax Assessment Act prevents any recovery of the amount paid. Accordingly, Mrs. Thomson had no right to recover the amounts of income tax paid. (at p19)

A further contention of the Commissioner is that the deceased's claim for repayment of 6,814 pounds had, by reason of the attitude taken up by the Commonwealth in Magrath's Case (1944) 69 CLR 156 , such a high degree of probability of success and was so well founded in expectation that it should be treated as an asset of her estate and valued at 6,814 pounds. There are obvious difficulties in the way of any general proposition that any expectation of benefit without any legal right to benefit is to be treated as property belonging to a deceased person at the time of his death. The argument, however, was supported by reference to cases such as Attorney-General v. Murray [1904] 1 KB 165 , where the judgment of the Court of Appeal in Worthington v. Curtis (1875) 1 Ch D 419 was applied. In those cases there were insurance policies which were void by reason of the absence of insurable interest in the insured person. It was held, however, that if the insurance company actually paid moneys under a policy the fact that the policy was void did not prevent the moneys being part of the estate of a deceased person. The ground of the decision was that the statute 14 Geo. III., c. 48, which avoided the policies, was effective only to provide the company with a defence if the company chose to raise it. If, on the other hand, the company did not choose to raise the defence, then all the elements of a valid claim existed.

The facts of the present case, however, are very different. If there was by reason of the considerations which I have already mentioned no legal ground for any claim against the Commonwealth by Mrs. Thomson, then any payment made to her for the purpose of preserving the credit and reputation of the Commonwealth was not a recognition of a right in Mrs. Thomson to receive the money, but was a gratuitous payment made to her executors. This Court had to consider a similar case in Commissioner of Stamp Duties (N.S.W.) v. Perpetual Trustee Co. Ltd. (Watt's Case) (1926) 38 CLR 12 . In that case the executors of a deceased person received certain shares, priority certificates and cash in respect of wool which had been delivered by him and his partners to the Central Wool Committee during the 1914-1918 war. There was no legal obligation to give to the deceased person the shares & c. or anything of value by reason of or in relation to the said delivery of wool. It was held, in the Supreme Court of New South Wales (1925) 25 SR (NSW) 467 that the shares & c. must be regarded as a gift by the Commonwealth to the executor after the death of the testator and that therefore the value of them did not form part of the estate of the testator at the time of his death for the purposes of the Stamp Duties Act 1920 (N.S.W.). This Court expressly approved the judgment of Ferguson J. upon this point. In that case the testator died on 21st May 1921, at a time when the Government of the Commonwealth had agreed with Bawra Ltd. that shares, priority wool certificates and cash should be issued to the Central Wool Committee for distribution among suppliers of wool. There was certainly at the time when the testator died a high probability that this agreement would be carried out, but the Supreme Court of New South Wales and this Court concurred in holding that the shares & c. were delivered as a gift by the Government to the executor and did not form part of the estate of the deceased. In my opinion this case provides in this Court a conclusive reply to the contention of the Commissioner. (at p20)

It was also argued for the Commissioner that the chance of getting some payment from the Commonwealth after Magrath's Case (1944) 69 CLR 156 should be taken into account in assessing the capital value of the bonds. A sufficient reply to this argument is provided by the fact that this appeal has nothing to do with the capital value of the bonds. But, further, the chance of getting some payment from the Commonwealth was personal to a taxpayer who had paid particular sums by way of income tax on the bond interest, and was not an element which could possibly affect the value of the bonds themselves. (at p20)

I am therefore of opinion that the arguments presented for the Commissioner fail and that the second question in the case should be answered: No. (at p20)