Broken Hill South Ltd v Commissioner of Taxation (New South Wales)

56 CLR 337

(Judgment by: EVATT J)

BROKEN HILL SOUTH v COMMISSIONER

Court:
HIGH COURT OF AUSTRALIA

Judges: Latham CJ
Rich J
Starke J
Dixon J
Evatt J
McTiernan J

Subject References:
Constitutional law (NSW)
Legislative power
Peace, welfare and good government
Statute
Validity
Taxation and revenue
Income tax (NSW)
Foreign company
Debentures
Interest
Security

Legislative References:
Income Tax (Management) Act 1912 (NSW) No 11 - ss 4; ss 10(g); ss 11
Income Tax (Management) Act 1928 (NSW) No 35 - ss 4; ss 10; ss 11

Hearing date: 24 November 1936; 25 November 1936; 26 November 1936;
Judgment date: 1 March 1937

MELBOURNE


ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES.

Judgment by:
EVATT J

These are two appeals by special leave from the Full Court of the Supreme Court of New South Wales. Each appeal raises the same question-whether it is within the competence of the Parliament of the State to tax the interest received upon money where the security taken by the mortgagee includes any property in New South Wales.

The first appeal relates to the Income Tax (Management) Act 1912; the second to the Act of 1928. The former Act taxed "income" by reference to its having been derived from any source in the State, but s. 4 expressly included within the term "income" interest upon money secured by the mortgage of any property in the State, deeming such interest to have been derived from a source in the State. Under the Act of 1928, the definition of "income" also expressly included interest upon money secured by the mortgage of any property in the State. In each Act, moreover, a mortgage was defined to include any charge, lien or encumbrance to secure the repayment of money.

A preliminary question is whether, in these two cases, the debenture interest received by the appellant company was interest upon money secured by a "mortgage" within the meaning of the two Acts. The answer must be Yes, for much the same reasons as were stated in Barcelo v Electrolytic Zinc Co of Australasia Ltd [F26] , following, on this point, the judgment of Cussen A.C.J. in the court below [F27] .

Another preliminary question is whether the definition sections of the two Acts can be "read down" and limited to cases where the mortgage comprises property within New South Wales but no other property. The Full Court felt itself able to interpret the Acts in the way mentioned. But I think that the wording of each Act is too unyielding to allow of such an interpretation. Each Act aims at bringing within the denotation of "income" all the interest payable under a security so long as the property secured includes property within the State.

The Full Court also felt able to sustain the assessments by reason of the covenant contained in the specific mortgage to a trustee for debenture holders of certain freehold and leasehold lands in New South Wales, it being held that such covenant was itself the "source" of the debenture interest, which should therefore be regarded as having been derived from a "source" in the State. But the interest paid to the taxpayer was not paid under the covenant in the specific mortgage, and it is difficult to see how the covenant can be regarded as the source of such interest.

The main question on the appeals is whether, interpreting the definition sections in their ordinary grammatical sense, the legislation is legislation for the peace, welfare and good government of New South Wales.

Of recent years the extent to which the constitutional competence of Dominion legislatures to pass taxation legislation is affected by reason of territorial considerations has been considered by this court in a catena of cases, viz.:Commissioner of Stamp Duties (N.S.W.) v Millar [F28] ; Trustees Executors & Agency Co Ltd v Federal Commissioner of Taxation [F29] ; Colonial Gas Association Ltd v Federal Commissioner of Taxation [F30] ; and Australasian Scale Co Ltd v Commissioner of Taxation (Q.) [F31] ). In some of these judgments, the great significance of the judgment of the Privy Council in Croft v Dunphy [F32] is emphasized, for, although s. 3 of the Statute of Westminster is not yet in force in relation to the Commonwealth of Australia, Croft v Dunphy [F33] proceeded upon the basis of the law as existing prior to that statute.

Some of the cases also illustrate the fact, occasionally overlooked, that, constitutionally speaking, the status of the States of Australia is equal to, or co-ordinate with, that of the Commonwealth itself. Sovereignty is not attributable to one authority more than to the others; it is divided between them in accordance with the demarcation of functions set out in the Commonwealth Constitution. Within the limits so prescribed, the legislative authority of the States is of precisely equivalent quality and potency to that of the Commonwealth, the authority of which is, in ss. 51 and 52 of the Commonwealth Constitution, limited by reference to subject matter. In short, the Commonwealth Parliament may legislate for "the peace, order and good government of the Commonwealth with respect to" a large number of subject matters. Similarly, the State of New South Wales may legislate for the "peace, welfare and good government" of New South Wales. In relation to such a subject matter as that of taxation, and subject, of course, to any overriding provision of the Commonwealth Constitution, it is quite impossible to deny to the States in relation to their geographical area constitutional powers precisely analogous to those possessed by the Commonwealth Parliament in relation to its geographical area. The legislation of the States cannot be deemed ultra vires merely because of territorial reasons, unless analogous legislation of the Commonwealth Parliament would similarly be deemed unconstitutional and void. So far as concerns direct taxation, the States of Australia occupy a constitutional position quite different from that of the Provinces of Canada. Accordingly, the four cases referred to above are all in point, although two of them relate directly to the powers of the Commonwealth Parliament, and two to those of the States.

I have discussed the question in Trustees Executors & Agency Co Ltd v Federal Commissioner of Taxation [F34] , and I shall not repeat the conclusions reached in that judgment. But one point should perhaps be stressed. In any investigation of the constitutional powers of these great Dominion legislatures, it is not proper that a court should deny to such a legislature the right of solving taxation problems unfettered by a priori legal categories which often derive from the exercise of legislative power in the same constitutional unit. For instance, as was pointed out by Griffith C.J. in Morgan v Deputy Federal Commissioner of Land Tax (N.S.W.) [F35] , a court must accept the position that, in dealing with all questions of constitutional validity, a legislature is entitled to regard shareholders in a company as being the beneficial owners of property although the company is usually treated as its sole legal owner. This method of approach is illustrated in the judgment delivered by Gavan Duffy C.J. and myself in Millar's Case [F36] , although the particular opinion did not prevail in that case. On the hearing of the present appeals, counsel for the appellant founded himself largely upon the judgment of the majority in Millar's Case [F37] , arguing that a taxing enactment of a Dominion, if it is based upon a connection or relationship with the Dominion, must be strictly confined to legislation with respect to that connection or relationship. As a general principle, this contention cannot be accepted.

In the present case, the State of New South Wales may be regarded as thus putting forward its claim to tax:"Under the terms of your mortgage investment, you receive in every year certain interest payments. But the security for the repayment of your principal moneys is, or at any rate includes, property in New South Wales. In a rare type of case the value of that property will be small in proportion to the value of your total moneys secured or the aggregate value of the property securing it. But you, the mortgagee, have deliberately chosen to accept a security over property in this State, and, in almost every possible case, the value of that part of the security will be significant. In the case of default, you, the mortgagee, will probably have recourse to the laws of this State. We therefore regard your investment as being, to a substantial extent, a New South Wales investment. We do not think it expedient to reduce the quantum of tax merely because part of the property is situate outside the State. We think it more convenient to tax you on the whole of the interest which you receive from the principal moneys secured (in part or in whole) by a charge on New South Wales property."

In my opinion, it is not longer possible to deny that such legislation is for the peace, welfare and good government of New South Wales. There is a territorial connection with that State, which, in an ordinary case, will turn out to be of great, and even decisive, consequence. In my opinion, neither a State nor the Commonwealth is constitutionally confined to legislating by reference to the precise economical advantage gained by the taxpayer from his having accepted security over property within the jurisdiction. Such advantage is often incommensurable. The legislature can pierce through the forms of the transaction, and determine to treat the taxpayer as a person deriving income from a New South Wales mortgage or charge.

The appeals should both be dismissed.


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