Permanent Trustee Company of New South Wales LTD v The Commissioner of Taxation

(1940) 6 ATD 5
[1940] ALR 291
(1940) 2 AITR 109
BC 4000012

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(Judgment by: Rich J)

Permanent Trustee Company of New South Wales LTD
v The Commissioner of Taxation

Court:

Judges:
Rich JStarke J
McTiernan J

Hearing date: 23 August 1940
Judgment date: 26 August 1940

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Judgment by:
Rich J

This is a case stated in an income tax appeal. The assessment is based on income for the financial year ending 30th June, 1933. The taxpayer is dead, and his executors appeal from an amended assessment increasing the taxable amount for the ensuing financial year to £2097. This amount represents interest, according to the theory of the Commissioner, derived during the accounting period by the deceased, but capitalised by means of a deed dated 13th August, 1932, effecting a dissolution of the partnership of which he was a member. His sole co-partner had borrowed money from him on his private account, and the deceased had lent money to the partnership. An account was made up of the dealings between them on the dissolution, and the result was shown leaving the co-partner indebted to the deceased in the sum of £8388. By the deed he undertook a personal liability to the deceased, and secured it over a certain property already mortgaged for part of the sum. According to the case stated, however, the property was actually worth only £3295, and by reason of his financial position the co-partner was unable to pay even the arrears of interest included in the sum, and no payment has ever been made in respect of the amount. The sum of £2097, the subject of the amended assessment, is included in the sum of £8388. It is calculated by deducting from a sum of £2535 a figure of £438 which the taxpayer had returned as income in previous years. The sum of £2535 is composed of two sums, viz, £1461 15s. 2d., interest said to be owing at the time of the deed to the deceased by his partner on his partner's personal account, and £1073 13s. 7d. said to be the deceased's half-share of the interest owing to him by the partnership at the time. The taxpayers say that the calculation of interest was erroneous; but, assuming that the interest was owing, the question on which liability would depend is whether the transaction by which the interest was secured as part of a new mortgage was enough to make the interest income derived by the deceased.

Section 19 of the Income Tax Assessment Act 1922-1932 provides that --

Income shall be deemed to have been derived by a person within the meaning of this Act although it is not actually paid over to him but is re-invested accumulated capitalised carried to any reserve sinking fund or insurance fund however designated or otherwise dealt with on his behalf or as he directs.

In the present case the interest was by the deed carried to the capital account, and in this sense capitalised. But s 19 does not say that wherever this happens income shall be deemed to be derived; it says that it shall be deemed to be derived income on the assumption that it is income, and in other respects is derived, notwithstanding that there is no actual payment over, but capitalisation or other dealing on behalf of the taxpayer or under his direction. The object is to prevent a taxpayer escaping tax, though his resources have actually been increased by the accrual of the income and its transformation into some form of capital wealth, or its utilisation for some purpose. If when the deceased entered into the deed of dissolution of partnership he had obtained an investment for the moneys due to him including interest adequate to cover it, providing him with the equivalent in a capital form of everything due to him, the case might not have been very different from that of a man who obtains a cheque for interest from the debtor and hands it back to him as part of a new investment on fixed mortgage on adequate security. But here the facts show that the deceased got nothing except a new obligation to pay in exchange for an existing obligation to pay. He was no nearer getting his money or of transferring it into anything of any value. His debtor could neither pay nor secure payment of the debt to him, except by charging it on property already heavily mortgaged, and quite incapable of producing a surplus out of which the amount representing interest could be paid. To see whether income has been derived one must look to realities. Usually payment of interest by cheque involves a receipt of income, but payment by a valueless cheque does not. "For income tax purposes receivability without receipt is nothing" -- Law of Income Tax , Sir Houldsworth Shaw and Baker, p 111. You do not transform interest into an accretion of capital by writing out words on a piece of paper. There must be some reality behind them. Some accretion of value to corpus. The facts in this case show that there was not "an actually realised or realisable profit" -- Cross v London and Provincial Trust Ltd ., [1938] 1 KB 792 at p 798. All that happened in this case was to change a forlorn hope of interest into a still more forlorn hope of capital. In my opinion income was not derived, even if the sums for interest included in the Commissioner's £2097 were really due, and not, as the taxpayers claim, only in part due owing to error.

In this view of the matter it is unnecessary for me to go into the question of the extent of the error and its effect. It is enough for me to say that if an error in calculation is such that the deed can be rectified I find it difficult to see how the deceased could be considered as having obtained anything by the mistake. If, however, too much income was credited to him by a mistake which could not be undone, so that he really obtained a final benefit, I should have thought that the fact that it was a mistake would make no difference in his liability for income tax. A windfall on account of revenue may quite well be income.

For these reasons I think that the question in the case stated should be answered, No, that it did not include the £2097.