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

Judges: Mason CJ
Brennan J
Deane J

Dawson J
Toohey J
Gaudron J
McHugh J

Court:
Full High Court

Judgment date: Judgment handed down 25 February 1992

---

Dawson J

I agree with the reasons for judgment of Mason C.J., Deane , Toohey and Gaudron JJ. and with the answers which they propose. I desire only to add the following observations.

Section 114 of the Constitution precludes the Commonwealth from imposing any tax on property of any kind belonging to a State. There is a reciprocal prohibition against a State imposing any tax on property of any kind belonging to the Commonwealth. The phrase ``tax on property'' cannot be interpreted literally. A tax on property is a tax upon a taxpayer in relation to property. It is the relationship between the tax and the property which will, if it is sufficiently direct and substantial, characterise the tax as a tax on property. In Queensland v. The Commonwealth (The First Fringe Benefits Tax Case ) ^[50] 87 ATC 4029, at p. 4041; (1987) 162 C.L.R. 74, at p. 98. Mason , Brennan and Deane JJ. held that a tax upon the holding or ownership of property is a tax on property and that some taxes upon the use of property may also amount to a tax on the property itself. I also agreed ^[51] ibid., at ATC pp. 4044-4045; C.L.R. p. 104. that a tax upon the holding or ownership of property is a tax on property. Further, I expressed the view ^[52] ibid., at ATC p. 4045; C.L.R. p. 105. that otherwise a tax will only be of that character if it is tantamount to a tax upon the holding or ownership of property; the example I gave was a tax upon the proceeds of sale of property.

The view which I expressed gave a somewhat narrower scope to the concept of a tax on property than has been given to the like concept in s. 125 of the Canadian Constitution, but I adhere to that view. However one approaches the problem, it is a question of distinguishing between a tax on property and a tax which is not upon the property itself but merely upon a transaction affecting the property. The expression a tax ``upon property qua property'' was used by the Court in D'Emden v. Pedder ^[53] (1904) 1 C.L.R. 91, at p. 108. to describe the kind of tax that falls within the prohibition contained in s. 114 of our Constitution. Difficulties have been expressed about the use of that expression, ^[54] See The First Fringe Benefits Tax Case 87 ATC 4029; (1987) 162 C.L.R., per Gibbs C.J. at ATC pp. 4035-4036; C.L.R. p. 88; Superannuation Fund Investment Trust v. Commr of Stamps (S.A.) (No. 2) 80 ATC 4392 ; (1980) 25 S.A.S.R. 35 , per King C.J. at ATC pp. 4394-4395; S.A.S.R. p. 38. but it seems to me to be an apt enough means of distinguishing between a tax which is a tax upon the holding or ownership of property or its equivalent and a tax upon a transaction affecting the property.

The distinction was, perhaps, made clearer in Attorney-General of N.S.W. v. Collector of Customs for N.S.W. (``the Steel Rails Case '') ^[55] (1908) 5 C.L.R. 818. where a majority appear to have held that customs duties were not a tax on property (i.e. goods) because they were a tax upon the act of importation rather than a tax on the goods themselves. Isaacs J., on the other hand, took the view that customs duties were a tax on goods and were, therefore, a tax on property and it is by contrasting his judgment with those of the majority that the real distinction is to be seen. No doubt customs duties and, for that

---

ATC 4076

matter, excise duties, may be said to be taxes on goods because the incidence of the tax is determined by some step taken in relation to goods. But because the taxes are levied upon a step taken in relation to the goods - a transaction - and not upon the goods themselves, as in the case of a tax upon the simple holding or ownership of the goods, they are not a tax upon property qua property. The phrase ``tax on goods'' is elliptical, as is the phrase ``tax on property'', but the distinction between a tax on property as such and a tax upon a transaction involving property is a real one. It has consistently been held in this country, the most recent decision being The First Fringe Benefits Tax Case , that a tax which is not, or does not amount to, a tax upon the holding or ownership of property is not a tax upon the property itself. Thus it is that a tax on property is distinguished from a transaction tax.

Under the Income Tax Assessment Act 1936 (Cth) income tax is levied upon the taxable income derived by the taxpayer during the year of income: s. 17. Taxable income is relevantly defined to mean the amount remaining after deducting from the assessable income all allowable deductions: s. 6(1). The assessable income of a taxpayer who is a resident includes the gross income derived directly or indirectly from all sources whether in or out of Australia which is not exempt income: s. 25(1). Taxable income is therefore a net amount expressed in terms of money which can only be calculated by reference to a period of time (namely, a year of income). That is to say, it can only be calculated at the end of a period, when all allowable deductions are known, and for that reason it is not possible to identify particular sums of money as representing the taxable income of the taxpayer at any point during the period. Whilst property in the form of money may flow in and out of the taxpayer's hands during the period, no particular sum can be said to constitute property in the form of taxable income. Nor is it possible to say that income tax is a tax upon property in the form of assessable income to the extent that it represents taxable income. True it is that taxable income represents a proportion of the money or money's worth in the form of assessable income derived by the taxpayer during the year of income, but the proportion cannot be known until the end of the year when allowable deductions have been taken into account. Moreover, at the time when the taxable income of the taxpayer is calculated, that is, at the end of the year of income, the money or money's worth may have ceased to be the taxpayer's property. It would be artificial in those circumstances to speak of income tax as a tax on property represented by money or money's worth. So, taxable income is a concept of the Income Tax Assessment Act , being an amount which is calculable only by the deduction of allowable amounts from the assessable income.

In Nowegijick v. The Queen ^[56] (1983) 1 S.C.R. 29; (1983) 144 D.L.R. (3d) 193. the Supreme Court of Canada concluded that a section of the Indian Act 1970 (Can.), which provided that no Indian should be subject to taxation in respect of any of his personal property situated upon a reserve, exempted the wages of an Indian from taxation. Dickson J., who delivered the judgment of the Court, said: ^[57] ibid., at pp. 38-39; p. 200 of D.L.R.

``Although the Crown... recognizes that `salaries' and `wages' can be classified as `personal property' it submits that the basis of taxation is a person's `taxable' income and that such taxable income is not `personal property' but rather a `concept', that results from a number of operations. This is too fine a distinction for my liking. If wages are personal property it seems to me difficult to say that a person taxed `in respect of' wages is not being taxed in respect of personal property. It is true that certain calculations are needed in order to determine the quantum of tax but I do not think this in any way invalidates the basic proposition.''

However, in that case the Court was concerned not with a provision such as s. 114, but with a provision of a very different kind which, being included in a statute relating to Indians, was to be liberally construed in favour of the Indian if its meaning was doubtful. ^[58] ibid., at p. 36; p. 198 of D.L.R. Moreover, the words ``in respect of'' were clearly of crucial importance. ^[59] ibid., at p. 39; p. 200 of D.L.R. It is clear that a tax may be in respect of property but not upon property. The former notion does not require fine distinctions to be made but the latter does. Indeed, Dickson J. was prepared to recognise that there may be a distinction between a tax upon property and a tax on persons in respect of property. ^[60] ibid., at p. 41; p. 202 of D.L.R.

In summary, income tax is not levied upon the property in the form of money or money's worth which flows in and out during the year of income. It is levied upon the taxable income which is an amount calculated by reference to

---

ATC 4077

that flow upon the principles laid down by the Income Tax Assessment Act . It is the derivation of income to the extent of that amount, rather than the holding or ownership of money or money's worth, which is taxed, so that income tax is a tax upon an activity involving property rather than a tax upon the property itself. Of course, the mechanisms used to impose income tax may be used to impose a tax which is not truly an income tax, of which the capital gains tax imposed in this case is an example. But, speaking generally, income tax is, I think, of the character which I have described.

ORDER

Answer the questions reserved as follows:

• 1. (a) Prior to 19 October 1989 was SASFIT; and
• (b) is SASFIT now
• the State of South Australia within the meaning of s. 114 of the Constitution?
• Answer : (a) Not necessary to answer.
• (b) Not necessary to answer.
• 2. (a) Prior to 19 October 1989 was property held on account of the South Australian Superannuation Fund; and
• (b) is property now held on account of the Fund
• ``property of any kind belonging to a State'' within the meaning of s. 114 of the Constitution?
• Answer : (a) Not necessary to answer.
• (b) Not necessary to answer.
• 3. Is SASFIT exempt from paying income tax on income received into or on account of the Fund or net capital gains made by the Fund for the period 1 July 1988 to 19 October 1989 by reason of s. 114 of the Constitution and s. 271 of the Income Tax Assessment Act 1936 (Cth)?
• Answer : As to income tax on interest derived from money lent - no. As to income tax on net capital gains - yes.
• 4. Is SASFIT exempt from paying income tax on income received into or on account of the Fund or net capital gains made by the Fund after 19 October 1989 by reason of s. 114 of the Constitution and s. 271 of the Income Tax Assessment Act 1936 (Cth)?
• Answer : As to income tax on interest derived from money lent - no. As to income tax on net capital gains - yes.