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

Judges: Knox CJ
Isaacs 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

MELBOURNE

Judgment by:
Starke J

These cases were heard together and, though arising under different circumstances, involve in the main the same legal considerations. In both cases it is contended that Parliament cannot confer the judicial power of the Commonwealth, or any part of it, upon a tribunal constituted as are the Boards of Review under the Income Tax Assessment Act 1922-1925 (Alexander's Case; ^[F67] British Imperial Oil Co's Case), ^[F68] and that it may be none the less judicial power because the purpose of the power is to aid administrative bodies or officers in the performance of their duties (Inter-State Commerce Commission v Brimson). ^[F69]  

The decisions in Munro's Case, the subject of the present appeals to this Court, were made by Boards of Appeal constituted under the Income Tax Assessment Acts 1915-1921 and 1922; but this Court held that these Acts purported to invest that tribunal, which was not a Court, with judicial power, and thereby violated the Constitution (British Imperial Oil Co's Case). ^[F70] The Commissioner had appealed against these decisions to this Court; but after the appeals were instituted, and in consequence of the decision in the British Imperial Oil Co's Case, the Income Tax Assessment Act 1925 (No. 28 of 1925) was passed.  

That Act established Board of Review, and endeavoured to remove from those tribunals the indications of judicial power which had, in the British Imperial Oil Co's Case, ^[F71] brought down the Boards of Appeal established under the Acts already referred to. The general intent to avoid those dangers is clear enough, but the functions and authorities conferred upon the Boards of Review must nevertheless be examined. The provisions of ss. 18 and 19 of the Act of 1925 govern Munro's Case, whilst ss. 50, 51 and 51A of the Income Tax Assessment Act 1922-1925 govern the British Imperial Oil Co's Case. (See Income Tax Assessment Act 1922-1924 and amending Act of 1925, ss. 11 and 12.) By ss. 18 and 19 it is enacted that decisions of persons purporting to act as a Board of Appeal shall be deemed to be and at all times to have been a decision upon review, and as valid and effectual as if they had been given by a Board of Review constituted pursuant to the provisions of the amending Act; and further, that in any case in which the Commissioner or the taxpayer had instituted or purported to institute an appeal to the High Court from a decision of a Board of Appeal the Commissioner or the taxpayer might appeal to this Court from that decision as if it were a decision of a Board of Review if, in the opinion of the High Court, it involved a question of law.  

It was said that these sections constituted an attempt by Parliament itself to exert the judicial power of the Commonwealth, and were therefore in contravention of the Constitution; but I cannot agree. Parliament simply takes up certain determinations which exist in fact, though made without authority, and prescribes, not that they shall be acts done by a Board of Review, but that they shall be treated as they would be treated if they were such acts. The sections, no doubt, apply retroactively, but they do not constitute an exercise of the judicial power on the part of the Parliament. The functions of the Board of Review must, therefore, be considered.  

It has power to review the assessments of the Commissioner, and its decisions are to be deemed to be assessments, determinations or decisions of the Commissioner (Act No. 28 of 1925, s. 10). Now, the Commissioner causes assessments to be made for the purpose of ascertaining the taxable income upon which income tax shall be levied (Act 1915-1921, s. 31; Act of 1922, s. 35). His function is to ascertain the amount of income upon which the tax is imposed. That does not, in my opinion, involve any exercise of the judicial power of the Commonwealth: it is an administrative function. The decision of a Board of Review stands, as we have seen, precisely in the same position. Its functions are in aid of the administrative functions of government. So far, then, a Board does not exercise the judicial power of the Commonwealth.  

We then come to the right of appeal to this Court from determinations of Boards of Review. That is a right given both to the Commissioner and to the taxpayer. A right of appeal in itself does not establish the vesting of judicial power either in the Commissioner or in a Board of Review. The Parliament may have imposed upon the Courts the duty of reviewing administrative determinations. If such determinations can be tested by some rule of law, there is no constitutional difficulty in remitting the matter to the judicial power (cf. Willoughby on the Constitution, p. 1276; Butterworth v United States, ex rel. Hoe). ^[F72] If it cannot be conferred on this Court as appellate jurisdiction, then it may be conferred as original jurisdiction (cf. Constitution, ss. 73 and 76). The grant of the right of appeal to this Court does not, therefore, alter the essentially administrative character of the functions which are conferred upon the Commissioner and the Boards of Review under the Income Tax Assessment Acts. The actual decision in the British Imperial Oil Co's Case ^[F73] was, having regard to the decisions of this Court and the provisions of s. 10 (38 (8)) of the Act No. 31 of 1921, I still think, right, but it affords very little guide to the construction of the enactments now before the Court, and is certainly not an authority upon the meaning and effect of the provisions which fall for determination in the present cases.  

The same result must follow as to the provisions in relation to Boards of Review in ss. 50, 51 and 51A, but the British Imperial Oil Co , it must be observed, did not appeal to a Board of Review but to the Supreme Court of the State of Victoria, and the provision for an appeal to the High Court or a State Court is, in my opinion, entirely severable from appeals to a Board of Review. It is not, therefore, necessary to rely upon s. 16 of the Act No. 28 of 1925.  

Another argument must also be examined. It was based upon the provisions of s. 55 of the Constitution, and was developed under four propositions:  

(1) That the Assessment Acts No. 37 of 1922 and No. 28 of 1925 are laws imposing taxation. It was pointed out that a law imposing taxation was more limited in scope than a law with respect to taxation (Constitution, s. 51 (II.)), and that the constitutional practice of the Parliament of Great Britain with reference to Money Bills (Anson's Law and Custom of the Constitution, 4th ed., vol. II., "Money Bills," s. 111, p. 268) afforded but little assistance in the interpretation of s. 55.  

Then it was argued that the essence of laws imposing taxation was that they either defined the object or the subject of the tax, or fixed or measured its amount. Consequently, whenever an Act imposed a duty upon anyone to pay tax, then that was a law imposing taxation. The provisions of ss. 17, 21, 22 and 28 of the Assessment Act of 1922 were referred to as imposing such a duty and therefore establishing this Act as a law imposing taxation. These very arguments were addressed to the Supreme Court of Victoria in Stephens v Abrahams (No. 2), ^[F74] but without success. Beckett J. in that case said: ^[F75]

"We have to say what is meant by a law, and at what period it is to be regarded in considering whether it imposes taxation or not. I should say that 'law' means the Act of Parliament - that is, the document to be construed; the time at which we are to regard it in applying the test is that at which the Act comes into force"

and again: ^[F76]

"But the best reason for saying that the time when it passes is the time to be considered seems to me to be that the section is intended to secure the observance of certain rules of parliamentary procedure and the preservation of certain rights as between the two Houses at the time when the proposed measure is being made into law. If these are then observed, and the measure is launched, its framers having observed the conditions of s. 55, they have exercised their constitutional rights, and have broken through no constitutional restrictions. Their Act is good once and for all, and not to be retrospectively invalidated because some subsequent exercise of legislative authority gives it an operation which it had not when it left their hands."

Those observations of the learned Judge are, in my opinion, an accurate statement of the law.

Now ss. 17, 21, 22 and 28 of the Assessment Act of 1922 do not, in themselves, impose any tax. They are declaratory, or are for the purpose of interpretation and definition of, or sanctioning deductions from, a tax otherwise imposed. Likewise ss. 16, 17, 18 and 19 of the Assessment Act of 1925 do not in themselves impose any tax upon the subject; they are machinery provisions for carrying out and enforcing a tax otherwise imposed (e.g., the Income Tax Act 1922, No. 38).  

Section 28 of the Assessment Act of 1922, perhaps, requires a little amplification. It does not per se impose any tax. Income tax is imposed by the relevant Tax Acts, at rates and amounts declared in those Acts. Those Acts, however, do not define income, nor do they prescribe the persons who are to pay the tax or the standards by which income is to be fixed. All that is left to the Assessment Act, and the object of s. 28 is to prescribe a standard for fixing or estimating income in a particular case. It takes the total receipts as the source of income and then prescribes a percentage on those receipts as the standard for assessing income; but it is said that the case in which that standard is prescribed is one in which there is no taxable income. That is true; but it means no taxable income in reference to other standards set up by the Act, and therefore requiring a standard of its own. It is no secret that income tax has been avoided by companies and traders resident outside Australia setting up local companies to trade in Australia, and supplying them with commodities at prices that cannot return a profit here, but returning handsome profits to the company or trader so setting up the local companies.  

(2) That the Income Tax Acts coupled with the Assessment Acts which they incorporate are laws imposing taxation. The relevant Acts are the Income Tax Act 1921 (No. 33); which incorporates the Assessment Act 1915-1918 and imposes tax for the financial year beginning on 1st July 1921; the Income Tax Act 1922 (No. 38), which incorporates the Assessment Act of 1922 and imposes tax for the financial year beginning on 1st July 1922, and the Income Tax Act 1924 (No. 50), which incorporates the Assessment Act 1922-1924 and imposes tax for the financial year beginning on 1st July 1924 - which is not relevant to Munro's Case, but is relevant to the Imperial Oil Co's Case. These Tax Acts are, in my opinion, laws imposing taxation, and fall within the scope of s. 55 of the Constitution. The time when these Acts were respectively passed is the time which must be regarded in applying the test of s. 55; but it must be observed that the Assessment Act No. 28 of 1925 was not in force at the time of the passing of the Tax Act No. 50 of 1924, though in some respects it applied retroactively.  

(3) That the Assessment Acts or the Tax Acts incorporating the Assessment Acts contravene the provisions of s. 55 of the Constitution in that they deal with other matters than the imposition of taxation. As was said in Osborne's Case, ^[F77] however, the constitutional provision is that laws imposing taxation shall deal only with the imposition of taxation, and is not that they shall only impose taxation. Consequently, in my opinion, it is not unlawful to include in a taxing Act provisions incidental and auxiliary to the assessment and collection of the tax. This would include provisions for administration, returns, assessments, reviews of assessments and so forth. The Assessment Acts are not by themselves, as already indicated, laws imposing taxation, and neither they nor the Tax Acts which incorporate them deal with any matter other than the imposition of taxation.  

(4) That the Assessment Acts and the Tax Acts incorporating the Assessment Acts contravene the provisions of s. 55 in that they deal with more than one subject of taxation. The main attack was directed against s. 28 of the Assessment Act 1922-1925, which is also incorporated in the Tax Acts for the financial years 1922, 1923 and 1924 (Tax Acts No. 38 of 1922, No. 26 of 1923, No. 50 of 1924). The section, it was argued, makes subject to taxation that which is not income: it is expressly imposed upon the basis that there is no taxable income. Again, the tax is upon the person carrying on the business and not upon the person making the income. It is quite true that the Acts impose a tax upon incomes, upon something that comes in; but, as has been said, income is as large a word as can be used to denote a person's receipts. The Acts contain no definition of the word income, and its meaning must be gathered from the text of the Acts themselves. It is clear, however, that various standards and methods are set up for arriving at taxpayers' receipts. The provisions of s. 16 illustrate the matter.  

Now s. 28, it appears to me, is but another illustration of the same thing. It assumes that the ordinary methods of the Act for assessing income are inapplicable to the case and then sets up another method for determining in certain cases what comes in to a certain class of taxpayers. It is based upon the total receipts of a business, upon what comes in to the business. The method is arbitrary and artificial, but it is only a means devised by the Legislature for getting at a taxpayer's income. The Acts deal with one subject of taxation, but ascertain or estimate the receipts of taxpayers by diverse methods.  

The other contention is untenable. The subject of the tax is not the less an income tax because the Legislature fastens upon the person who carries on the business and is amenable to the territorial jurisdiction as the person assessable and chargeable in respect of the income derived from the business he carries on.  

This view, however, led to another contention-that s. 28 operated extra-territorially and was therefore beyond the competence of the Parliament. Such cases as Macleod v Attorney-General ^[F78] show, however, that a proper interpretation of the Act would limit the receipts within its scope to receipts within the competence of the Legislature, namely, to those earned or derived in Australia.  

The questions stated by Macfarlan J. in the British Imperial Oil Co's Case should therefore be answered as follows:

(1)

No;

(2)

Yes.

In Munro's Case the merits remain for consideration. Munro carried on in Elizabeth Street, Melbourne, the business of a manufacturer and indentor, and he also owned some rent-producing freehold land in Elizabeth Street. He was minded to start another business in Sydney. Accordingly a company was incorporated under the Companies Act with a capital divided into shares of PD1 each. Two thousand of these shares were allotted to Munro, and nine thousand to each of his two sons. Munro borrowed the money necessary to pay up these shares from his banker, and secured these advances by mortgages of his Elizabeth Street property to the bank. He then claimed to deduct the sum paid for interest on these advances from his total assessable income for the purposes of the Income Tax Acts. The Commissioner disallowed this deduction but a Board of Appeal or Review allowed it. The only reason given for this decision is that stated by a member of the Board, namely, that the taxable income from the property in Melbourne was what was left after all necessary outgoings had been discharged.  

Now, the Assessment Act 1922, s. 23 (1) (a), permits a taxpayer to deduct from his total assessable income "all losses and outgoings (not being in the nature of losses and outgoings of capital) including ... interest and expenses actually incurred in gaining or producing the assessable income," and s. 25 (e) prohibits any deduction in respect of "money not wholly and exclusively laid out or expended for the production of assessable income" (see also Assessment Act 1915-1918, ss. 18 and 20 (e)). The interest paid in this case was upon moneys borrowed for the purpose of contributing capital on the part of the taxpayer and his son to a newly formed company. It was not an outgoing by means of which the taxpayer procured the use of money whereby he made any income (see Ward & Co v Commissioner of Taxes (N.Z.) ^[F79] at p. 149; Farmer v Scottish North American Trust Ltd ^[F80] at p. 127). Under these circumstances the deduction ought not to be allowed.  

An appeal only lies to this Court if the decision of the Board involves, in the opinion of this Court, a question of law: but whether there is any evidence upon which it was possible for the Board to come to its conclusion, in point of fact, has long been held a question of law (American Thread Co v Joyce). ^[F81]  

There is no evidence, in my opinion, which supports the conclusion of the Board, and the appeal in Munro's Case should, therefore, be allowed.  

My brother Gavan Duffy desires me to say that he concurs in the answers I have given to the questions stated in the case of the British Imperial Oil Co , and also in the view that the legislation attacked in both cases is within the competence of Parliament; but he does not find it necessary to express any opinion upon the accuracy of the judgment of this Court in the British Imperial Oil Co's Case. ^[F82] As he was not a member of the Bench which heard the arguments as to the deduction claimed by Munro from his assessable income, he does not express any opinion upon that point.