THE STATE OF SOUTH AUSTRALIA & ANOR v THE COMMONWEALTH OF AUSTRALIA & ANOR

Members: Mason CJ

Brennan J
Deane J
Dawson J
Toohey J
Gaudron J
McHugh J

Tribunal:
Full High Court

Decision date: Judgment handed down 25 February 1992

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Brennan and McHugh JJ

For the reasons stated by the majority of the Court, we agree that the tax imposed on net capital gains by operation of s. 160ZO of the Income Tax Assessment Act 1936 (Cth) (``the Act'') falls within the description of a tax on property in s. 114 of the Constitution. Although we would also respectfully agree that a tax on interest on

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ATC 4074

money lent by a taxpayer is not a tax on the capital, we have formed a view different from their Honours' view as to the character of the tax on income which falls within s. 25(1) of the Act as income according to the ordinary conceptions and usages of mankind, including the interest payable on a loan.

The case was argued on the footing that, unless the tax imposed on income derived by the South Australian Superannuation Fund Investment Trust (``SASFIT'') were characterised as a tax on property, SASFIT would be liable to pay tax upon the taxable income of the South Australian Superannuation Fund as though SASFIT were a resident taxpayer (ss. 268, 272, 278). It is necessary to decide this case upon that assumption. Accordingly, in determining whether SASFIT is immune from tax assessed under the Act by reference to interest on money lent by SASFIT, the question is whether a tax imposed on a resident taxpayer's taxable income, being the surplus of assessable income (according to ordinary concepts) over allowable deductions, is a tax on property.

For the reasons stated by the majority, the immunity from taxation conferred on the States by s. 114 of the Constitution is usually said to be limited to ``an exaction made in respect of the holding or ownership of property''. <sup>[42]</sup> See Attorney-General of N.S.W. v. Collector of Customs for N.S.W. (``the Steel Rails Case'') (1908) 5 C.L.R. 818 , at p. 844 . To describe a tax on property as a tax on the holding or ownership of property is a helpful guide in distinguishing a tax on property from a tax on transactions, although the dichotomy is not complete. As DFC of T v. State Bank of New South Wales ^[43] [92 ATC 4079], published concurrently with this judgment on 25 February 1992. illustrates, a tax on transactions may sometimes operate in substance as a tax on property. The description of a tax falling within s. 114 of the Constitution as a tax on the holding or ownership of property is not intended to exclude from the scope of the immunity a tax on property which is received, held or owned on revenue account rather than on capital account. Property which is received on revenue account by a State is property belonging to the State, and if a tax be imposed upon the receipt of that property, it is a tax on the ownership of the property received. There is no relevant distinction to be drawn between a tax on receipt of an item on capital account (as in the case of capital gains) and a tax on receipt of an item on income account. The immunity created by s. 114 is from tax on any property which belongs to Commonwealth or State (as the case may be). The immunity is not restricted to taxes on property from or out of which other property of the Commonwealth or a State is derived. A tax which taxes fruit may not tax the tree, but if the fruit belongs to the Commonwealth or a State, s. 114 protects ownership of the fruit as well as ownership of the tree. A tax on either the fruit or the tree is offensive to s. 114.

The scope of the s. 114 immunity thus extends to taxation on property of any kind, whether the property be an item of revenue or an item of capital. Indeed, if s. 114 were not to protect the revenue of a State from taxation by the Commonwealth and the revenue of the Commonwealth from taxation by a State, the taxing power of either polity could be undermined by an exercise of the taxing power of the other. The immunity would be illusory if tax revenue could be depleted by adverse taxation. And s. 114 would have an illogical operation if it failed to protect the revenue of a State or the revenue of the Commonwealth from taxation by the other but protected capital held or owned by a State or by the Commonwealth.

To attribute a character to a tax imposed by the Act in reference to items constituting income according to ordinary concepts, it is necessary to identify what it is that attracts the liability to tax. Section 17 of the Act brings to charge taxable income derived during a year of income. Taxable income is defined ^[44] s. 6(1). relevantly to mean ``the amount remaining after deducting from the assessable income all allowable deductions''. By s. 25(1), a resident taxpayer's assessable income includes the gross income derived directly or indirectly from all sources by the taxpayer, subject to certain immaterial exceptions. Although ``taxable income'' is defined as an ``amount'', and is therefore defined as a pecuniary figure rather than as property, the ``amount'' is the remainder ascertained by deducting all allowable deductions from the assessable income of a taxpayer. The year in which taxable income is derived is therefore the year in which the relevant assessable income is derived, and the tax levied by s. 17 on taxable income is a tax which is imposed on the relevant assessable income although it is calculated upon a net amount after deducting allowable deductions. It is not a tax on the act or transaction of

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ATC 4075

derivation of assessable income; the derivation of assessable income attracts no liability to tax.

Assessable income which is income according to ordinary concepts is property, though its amount be expressed as a pecuniary figure: it is money or money's worth. ^[45] FC of T v. Cooke & Sherden 80 ATC 4140 , at pp. 4147-4148; (1980) 42 F.L.R. 403 , at p. 413; (1980) 29 A.L.R. 202 , at p. 211 . Money received by a taxpayer during an income year is income derived by the taxpayer if it has been earned or it becomes income derived by the taxpayer when it is earned. ^[46] Arthur Murray (N.S.W.) Pty. Ltd. v. FC of T (1965) 14 A.T.D. 98 ; (1965) 114 C.L.R. 314 . Income may also be derived during a year of income though it is not received during that year provided it is a debt owing to the taxpayer, ^[47] Henderson v. FC of T 70 ATC 4016 , at pp. 4019-4020; (1968-1970) 119 C.L.R. 612 , at pp. 650-651 . albeit not a debt due for payment during the income year. ^[48] J. Rowe & Son Pty. Ltd. v. FC of T 71 ATC 4157 , at pp. 4159-4160; (1970-1971) 124 C.L.R. 421 , at p. 450 . In short, assessable income, being income according to ordinary concepts, is not derived during a year of income unless the taxpayer has acquired property on revenue account during that year.

The tax levied by s. 17 is attracted by the surplus of the value of property answering the description of assessable income derived during an income year over the amount of the allowable deductions for that income year. The tax is not imposed on the act or transaction of derivation but on property which the taxpayer has acquired on revenue account. In one sense, the tax may be said to be a tax on the ownership of the property acquired but, as we are not here concerned to distinguish a tax on property from a tax on transactions, we would prefer to say simply that income tax on income according to ordinary concepts derived by a taxpayer during a year of income (including interest derived from the lending of money) is a tax upon that income and that such a tax is a tax on property. ^[49] Cf. the approach taken by the Supreme Court of Canada in Nowegijick v. The Queen (1983) 1 S.C.R. 29, at pp. 38-39; (1983) 144 D.L.R. (3d) 193, at p. 200, where the statutory context was somewhat different.

We would therefore answer questions 3 and 4 of the questions reserved as follows:

As to income tax on interest derived from money lent and as to income tax on net capital gains - Yes.

In accordance with the parties' agreement, there should be no order as to costs.