By a mortgage executed before the passing of the Income Tax Act 1915 the mortgagors covenanted to pay interest at 52 per cent. per annum with a proviso that if they should, within a certain time after the dates fixed for the payment of interest, pay interest at such a rate as, after deducting (inter Gavan Duffy JJ. alia) the income tax payable by the mortgagee in respect of a specified sum amounting to 41 per cent. on the mortgage debt, would leave a clear remainder of 41 per cent. per annum, the mortgagee would accept interest at such reduced

Held, by Isaacs and Higgins JJ., Gavan Duffy J. doubting, that the proviso was not and did not contain a covenant or stipulation which had or purported to have the purpose or effect of imposing on the mortgagors the obligation of paying income tax on the interest to be paid under the mortgage within the meaning of sec. 54 of the Income Tax Assessment Act 1915-1916, and therefore that the mortgagors were liable to pay interest at the rate of 53 per cent. reducible as prescribed by the proviso.

Decision of the Supreme Court of Victoria Brett v. Barr Smith, (1918) V.L.R., 476: 40 A.L.T., 136, affirmed.

APPEAL from the Supreme Court of Victoria.

In an action brought in the Supreme Court by Frank Pilkington Brett and Arthur Frederick Hooper against Tom Elder Barr Smith

26 CLR 88

and Henry Percival Moore, as trustees of the estate of Robert Barr

Smith, deceased, the following special case was stated for the opinion of the Court and was referred by Hood J. to the Full Court :-

This action was commenced on 21st January 1918 by a writ of summons whereby the plaintiffs claimed for money payable by the defendants to the plaintiffs for money received by the defendants for the use of the plaintiffs, being interest in excess of that properly payable demanded by the defendants from the plaintiffs and paid by them; and the parties have concurred in stating the question of law arising in this action in the following case for the opinion of the Court :-

1. Robert Barr Smith in par. 2 hereof mentioned died on 20th November 1915, and since his death the defendants have at all times material to this case been his executors and the trustees of his estate.

2. By a memorandum of mortgage dated 28th February 1913. and registered Number A.13786 under the Real Property Act 1900 of the State of New South Wales, the plaintiffs mortgaged to the said Robert Barr Smith, his executors or transferees, the parcels of land therein described, and situate in the said State, as security for the…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Brett v Barr Smith

Details

AGLC: Brett v Barr Smith [1919] HCA 4
Case: [1919] HCA 4
Decision Date: 17 March 1919

CaseChat Overview and Summary

This case concerned an appeal from the Supreme Court of Victoria regarding a dispute over the interpretation of a mortgage agreement in light of the *Income Tax Assessment Act 1915-1916*. The mortgagors, Brett and Hooper, sought to recover interest payments they alleged were excessive, arguing that a specific proviso within the mortgage effectively imposed on them the obligation to pay the mortgagee's income tax on the interest. The mortgagees, the trustees of the estate of Robert Barr Smith, contended that the proviso merely offered a reduction in the interest rate upon punctual payment, without creating any obligation to pay income tax.

The central legal issue before the High Court was whether a particular clause in a mortgage, executed before the commencement of the *Income Tax Assessment Act 1915*, constituted a "covenant or stipulation" that had or purported to have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage, within the meaning of section 54 of that Act. The mortgagors argued that the proviso, which allowed for a reduced interest rate if a sum was paid that, after deducting certain taxes including income tax on a specified amount, left a clear remainder of 4.5% per annum, effectively compelled them to pay the mortgagee's income tax.

The High Court, by majority, dismissed the appeal. Isaacs and Higgins JJ. held that the proviso did not create a legal obligation on the mortgagors to pay income tax on the interest. They reasoned that the mortgage, as drafted, stipulated a primary interest rate of 5.75% per annum, reducible upon punctual payment. The proviso offered an "indulgence" or an "abate prompt payment," where the mortgagee would accept a reduced interest rate if the mortgagors paid punctually. This reduced rate was calculated to ensure the mortgagee received a clear 4.5% after accounting for certain taxes, including income tax on a fixed sum of £405, but this calculation did not impose a legal obligation on the mortgagors to pay the income tax itself. Rather, it defined the amount of interest they were required to pay to achieve the reduced rate. Gavan Duffy J. expressed some doubt but ultimately agreed with the majority's conclusion that the mortgage did not contain a covenant or stipulation imposing an obligation to pay income tax.

Consequently, the High Court affirmed the decision of the Supreme Court of Victoria. The first question, concerning whether the proviso imposed an obligation to pay income tax, was answered in the negative. The Court found it unnecessary to answer the other questions, and the mortgagors were ordered to pay the costs of the appeal. The rate of interest payable was determined to be that prescribed by clause 1 of the mortgage, reducible as provided by clause 7.

Orders