Federal Commissioner of Taxation v Australian Mutual Provident Society

[1953] HCA 17

Bank L ld \V o m ro f Taxation ^

450 HIGH COURT

[1952-1953.

[HIGH COURT OF AUSTRALIA.]

F]^ DERAL COMMISSIONER OF TAXATION .

A p p e l l a n t

AND

AUSTRALIAN MUTUAL PROVIDENT SOCIETY R e s p o n d e n t .

H. C. OF A. Income Tax (Cth.)—Assessment— Assessable income—Deductions—Permissibility 1952-1953.— Debt conversion— Mutual life assurance company—“ Principal business ”— — Interest derived from Commonwealth Government securities—Rebates—

1952. “ Income from personal exertion ”—“ Included in his taxable income ”—

S y d n e y , Income Tax Assessment Act 1936-1942 (No. 27 of 1936 —No. 50 of 1942),

Nov. 13, 14;

ss. 6, 50, 51, 113, 115, 160ab—Commonwealth Debt Conversion Act 1931 (No.

1953.18 of 1931), s. 20.

M e l b o u r n e ,

The taxpayer (a life assurance society within the meaning of rhe Income April 27.Tax Assessment Act 1936-1942) derived considerable income byway of interest

Dixon C.J., Williams, from securities of the class mentioned in s. 20 of the Commonwealth Debt

Webb, Piillagar and

Conversion Act 1931 and also large sums by way of interest from securities

of the classes mentioned in s. 160ab of the Income Tax Assessment Act 1936­

Kitto

JJ .

1942.*

Held that in calculating the amount of this income to which the benefits provided by s. 20 and s. 160ab should be applied, no deductions should be made for a jjroportion of expenses of general management or calculated liabilities within the meaning of ss. 113 and 115 of the Income Tax Assessment Act.

Commercial BanJcing Co. of Sydney Ltd. v. Federal Commissioner of Taxation/ (1950) 81 C.L.R. 263, applied. /

A p p e a l .

The Australian Mutual Provident Society was incorporated in New South Wales by private Act to carry on in or out of New South Wales the business of a mutual life assurance society. Its objects included, inter alia, the granting of assurances and endow­ ments, the investment of its funds, the lending of money and other activities as might be incidental or conducive to the attainment of its objects. The Society furnished income tax returns based on an accounting period ending on 31st December in each year.

* The relevant portions of each of these sections appears at pjj. 460, 461, post.

88 C.L.R.] OF AUSTRALIA.

451

During the year of income ended 31st December 1942, the Society’s H. C. OF A.

assessable income included interest upon securities, some of which 1952-1953.

were within the provisions of s. 20 of the Commonwealth Debt

F ed er a l

Conversion Act 1931, and others of which came within the provisions Commis­

sio n er OF

of s. 160ab of the Income Tax Assessment Act 1936-1942. Both of

T axation

those provisions accord the interest to which they apply a benefit,

V.

A ustralian Mutual

which stated broadly ŵ as a reduced amount of tax.

The Society

duly furnished its return for the year of income ended 31st December P r o v id en t

1942, and, in the supplementary statements accompanying the

So c iety .

return, showed the respective amounts of interest included in the return and claimed that the benefits referred to above should be allowed in respect of the whole of those amounts of interest included in the return, without any deduction therefrom.

The Federal Commissioner of Taxation took the view that those benefits should not be allowed in respect of the whole of the respec­ tive amounts of interest included in the return and that, before those benefits were applied, the respective amounts of interest should be diminished in accordance with the provisions of s. 113 and s. 115 of the Income Tax Assessment Act 1936-1942. The com­ missioner, by notice of assessment issued on 24th April 1943, assessed on that basis and the Society objected to, inter alia, that matter. After two amendments the Society and the commissioner were still at issue on the method of assessing the amounts of interest referred to and the commissioner having disallowed the Society’s objections on this aspect, the Society requested that the com­ missioner’s decision be referred to the Board of Review for review. At the hearing counsel for the commissioner stated that the assessment before the Board of Review had been made on 17th February 1950 and prior to the decision in Commercial Banking Co. of Sydney Ltd. v. Federal Commissioner of Taxation (1) and that the board would be requested, pursuant to s. 195 (1) of the Income Tax and Social Services Contributions Assessment Act 1936-1950, to vary the assessment in accordance with the principles enunciated in that case by the High Court. A series of documents illustrating the manner in which the commissioner contended the Society should be assessed in the light of that decision was tendered in evidence. By tacit agreement the real issue before the board was the manner in which the Society should be assessed on a proper appli­ cation of the principles so enunciated in the abovementioned case. The board decided not to uphold the commissioner’s decisions on the Society’s objections and in particular decided : (1) that the Society’s principal business did not consist of the lending of money ;

(1) (1950) 81 C.L.R. 26.3.

452 HIGH COURT

[1952-1953.

H. C. OF A.(2) tliat for the purpose of s. 20 (2) of the Commonwealth Debt 1952-195:?.Conversion Act 1931 no deduction should be made from the amount of interest to whicli s. 20 applied ; and (3) that the rebate under

F u d e u a i ,

C O M M I S - s. 1()0ab of the Income Tax Assessment Act 1936-1942 should be

S I O N E H OF

'I'a x a t i o ncalculated uj)on the whole amount of the interest to which s. 160ab

r.

ap])lied without any deduction.

A vi.s t h a i .ian

M o t f a i ,From that decision the commissioner appealed to the High Court.

J’k o v i d h n t

The parties by their counsel agreeing that the evidence tendered before the Board of Review should be treated as evidence in the appeal and that there would not be any further evidence in the appeal except of facts to which the parties agreed, Williams J., on 27th June 1952, by consent, directed and ordered pursuant to s. 18 of the Judiciary Act 1903-1950, that the appeal be referred to the Full Court of the High Court and that it should not come on for hearing until the parties had agreed upon the questions of law to be submitted to the Full Court and those questions had been approved by a justice of the High Court.

S O C I K TV .

By an order made on 11th November 1952, Williams J. ordered that the following questions of law arising on the appeal be sub­ mitted to the Full Court for argum ent:—

1. Whether, in determining for the purposes of s. 20 of the Commonwealth Debt Conversion Act 1931 the amount of income tax which is payable in respect of interest derived by the taxpayer during the year ended 31st December 1942 from the securities specified in that section, the rate of tax referred to in the section should be applied to (a) the whole of such interest; or (b) the amount remaining after deducting from the whole of such interest the following amounts (i) so much of the general management expenses of the taxpayer within the meaning of s. 113 of the Income Tax Assessment Act 1936-1942 as bears to that expenditure the same proportion as the whole of the said interest bears to the total income of the taxpayer during the said year ; (ii) so much of three per cent of the calculated liabilities of the taxpayer at the end of the said year of income calculated in accordance with Div. 8 of Pt. I l l of the Income Tax Assessment Act 1936-1942 as bears to that amount the same proportion as the value of the assets from which the said interest was derived bears to the value of all the assets of the taxpayer at the end of the said year.

2. Whether the amount of interest included in the taxable income of the taxpayer for the year ended 31st December 1942 derived from the bonds, debentures, stocks and securities specified in s. 160ab of the Income Tax Assessment Act 1936-1942 and on which the taxpayer was entitled under that section to a rebate in

88 C.L.R.] OF AUSTRALIA.

453

its assessment of two slaillings for every pound thereof, was (a) the H. C. OF A.

whole of the interest derived by the taxpayer from such bonds, 1952-1953.

debentures, stock and other securities without any deduction, or F ed er a l

Com m is­

(b) the amount remaining after deducting from the whole of such

sio n er OF

interest the following amounts (i) so much of the general manage­T axation

A ustralianV.

ment expenses of the taxpayer within the meaning of s. 113 of the

Income Tax Assessment Act 1936-1942 as bears to that expenditure

Mutual

the same proportion as the whole of the said interest bears to the P r o v id en t

So c ie t y .

total income of the taxpayer during the said year ; (ii) so much of three per cent of the calculated liabilities of the taxpayer at the end of the said year of income calculated in accordance with Div. 8 of Pt. I l l of the Income Tax Assessment Act 1936-1942 as bears to that amount the same proportion as the value of the assets from which the said interest was derived bears to the value of all the assets of the taxpayer at the end of the said year.

Further material facts appear, and the relevant statutory provisions are sufficiently stated in the judgments hereunder.

F. G. Myers Q.C. (with him G. P. Donovan and J . L. Burke), for the appellant. A proportion of the deductions which are allowable under ss. 113 and 115 of the Income Tax Assessment Act 1936-1942 should be made from each class of income for the purpose of ascer­ taining the tax payable. A deduction allowed by s. 113 is a purely arbitrary deduction. I t is a proportion of general management expenses to general management expenses after excluding so much of them as is exclusively incurred in gaining assessable income and so much as is exclusively incurred in gaining non-assessable income, and a proportion of the balance is a deduction, and that proportion is ascertained by applying a fraction to it which is assessable income over total income. Under s. 115 also, the deduction is purely arbitrary. Three per cent of the calculated liabilities is taken, and then part of them is taken, that part being a fraction in which the numerator is assets from which the Society derives assessable income, and the denominator is the total assets of the Society ; and that amount becomes an allowable deduction. Included in the numerator of the fraction under s. 113 is interest to which s. 160ab of the Act applies, therefore the amount of the deduction allowable under s. 113 was increased because of the presence in the assessable income of s. 160ab interest. The commissioner claims that the amount by which the deduction was increased by the presence of that assessable income was a deduction which should be appfied to the s. 160ab interest in order to determine how much was actually included in the income. The amount of the deduction under s. 113 was also

454 HIGH COURT

[1952-1953.

H. C. OF A.incroas('(l l>y the presence of interest under s. 20 of the Common­ wealth Debt Conversion Act :1931 in tiie assessable income of the ]<’ei)hkai, taxpayc'.r, which increased the numerator. Because the deduction

C o m m i s ­

wa,s so increased l)y the presence of s. 20 interest in the assessable

s i o n e r

OF

'Tax a t i o nincome tlic commissioner claims that that part of the deduction

V.wa,s properly attril)utable to s. 20 and therefore should be deducted

A u s t r a l i a n

M u t u a lfrom it. The deduction allowed by s. 115 is a proportion of three

P roviuiont

])er cent of the calculated liabilities of a life assurance company

SoeiETv.

at the end of its year of income. The proportion is a fraction in which the numerator is the assets from which the Society derives assessable income, and in that numerator to calculate that deduction was included the assets from which s. 20 interest was derived, and to that extent the deduction under s. 115 was increased and the commissioner’s claim is, accordingly, that part of the deduction under s. 115 was properly attributable to the s. 20 interest. Similarly with regard to the s. 160ab interest, the numerator included the assets from which that interest was derived. Therefore the com­ missioner claims that that part of the deduction is only allowable because of the inclusion of the s. 160ab interest in the assessable income and, therefore, should be deducted from it in determining the amount of the rebate. There were not any costs actually involved in collecting the interest. The question so far as s. 20 is concerned is whether the proportion of the deductions under s. 113 and s. 115 which the commissioner has arrived at are properly attributable to the s. 20 interest or whether they are not. The question with regard to the s. 160ab interest is whether the commissioner was entitled to make the deductions made by him in order to arrive at the amount of s. 160ab interest included in the taxable income. This case has not been conducted as an appeal from the Board of Review in which its opinion could be a guiding factor. The final conclusion is one of law, that is, the proper construction of s. 20 and s. 160ab. The ascertainment of the principle by which the amounts of the deductions may be determined depends not upon the facts or the figures but upon what those sections mean. The Board of Review could not have made an assessment on the infor­ mation before it, because the figures put before it were to a certain extent'hypothetical.

[Williams J. referred to Commercial Banhing Co. of Sydney Ltd.

V.

conditions then prevailing, and it has remained in the Act ever

Federal Commissioner of Taxation (1).]

Section 115 was inserted in the Act about 1930 or 1931 purely

(1) (1950) 81 C.L.R. 263.

88 C.L.R.] OF AUSTRALIA.

455

since. Apart from that it has no basis, logical or otherwise, in H . C. o r A.

relation to the gaining or producing of income of any kind at all. 1952-1953.

I t is anomalous that the rebate under s. 160ab is actually allowable

F ed er a l

on more than the income left after deduction of the s. 20 interest. Com m is­

sio n er OF

In Coynynercial BanJdng Co. of Sydney Ltd. v. Federal Co^nmissioner

T axation

A ustralianV.

of Taxation (1) the Court did not have to advert to the question

which arises with regard to s. 20 interest. There the income was

Mutu al

P r o v id en t S o c ie t y .

not from property but from personal exertion. When the Common­

wealth Debt Conversion Act 1931 prescribes that the interest shall be free of any deduction, except such part of the deductions as are properly attributable &c., all that it means is : such part of the deductions as would not be allowable at all if the s. 20 interest were not included in the assessable income. A deduction is “ properly attributable ” to s. 20 interest if the deduction is obtained only because of the receipt of the interest. In the case of s. 113 the deduction itself, as a deduction, would be allowable in any event, but a large part of that deduction only becomes a deduction because s. 20 interest is included in the assessable income. In this case the s. 113 deduction was increased by £37,000 because s. 20 interest was included in the assessable income. That £37,000 would not have existed but for the presence in the assessable income of the s. 20 interest, therefore it is properly attributable to it, and as it is a deduction it may be deducted from the s. 20 interest in arriving at the amount liable at the 1930 rate. The word “ properly ” must receive a rather strained meaning if it is not to be applicable to such a set of circumstances as this. All that was meant by the use of the word “ properly ” was that the whole of that interest would enjoy freedom from any extra tax except for any deductions which only existed because the interest was part of the income of the taxpayer. The problem under s. 115 is a similar problem. The deduction there is a deduction of a part of calculated liabilities, and the part is ascertained by a fraction in which the numerator is assets from which assessable income is derived. In this case the deduction included assets from which s. 20 interest was derived. I t was only because s. 20 interest was included in the assessable income that those assets found their way into the numerator of the fraction, because what the section provides is the proportion which the value of the assets from which the Society derives asses­ sable income bears to the value of all the assets of the company ; and here the assets from which so much of the assessable income as represented s. 20 interest is derived were included in the numerator of that fraction. If that had not been assessable income, if that

(1) (1950) 81 C.L.R. 263.

4f)()

HIGH COURT

[1952-1953.

H. 0. OF A. interest had not l^een received, those assets would not have found

ISI52-195:5.their way into that fraction, and to that extent the deduction would

KumoRAi,

have been so much lower. iSo far as it applies to the word “ included ”

Ĉ O.MMI.S-

SIONHIi oil’ttie judgment in Commercial Banking Co. of Sydney Ltd. v. Federal

'1’ax at i o nCommisdoner of Taxation (1) is applicable to s. 20 as well as to

s. IGOab. Arithmetically, a rebate is allowed on a far greater sum

A o s t h a m a n

M I'TOAI. of s. IGOab interest than is in fact included in the taxable income.

I’HOVIDIONT Once there be found a sum of money allowable as a deduction only

t’iocIlOTV.

because the interest is included in the assessable income, then the deduction is “ properly attributable ” within the meaning of s. 20, and the deduction should be made to determine how much is included. The Board of Review was in error in holding that deduc­ tions cannot be apportioned. In order to find, on any construction, how much of s. IGOab interest is included in the assessable income it may be necessary to dissect the actual deductions.

G. E. Barwich Q.C. (with him A. B. Kerrigan), for the respondent. Section 20 of the Commonwealth Debt Conversion Act 1931 does not give rise to the difficulty about “ included ” as does s. IGOab of the Income Tax Assessment Act 1936-1942. The word “ income ” there means assessable and not taxable income only in the holding company. The relationship between the two sections is shown in Commercial Banking Co. of Sydney Ltd. v. Federal Commissioner of Taxation (2) by the conclusion that if what the section directs to be done, namely, that there be taken the gross amount of the interest and there be deducted from it only such expenditure as is properly attributable to it, the result is the sum which is included in the assessable income. But if the directions in s. 20 (2) be followed out, that is taking the gross amount, deducting from it only such deductions as are peculiarly referable, specifically referable, indis­ solubly associated with the interest, the result is a sum which is both at the one time the sum to which the favourable rate under s. 20 must be applied, and the sum which is included in the taxable income within the meaning of s. IGOab. As the Court came to the conclusion in the Commercial Banking Co.’s Case (2) that in order to find out how much was included in every pound of interest—was included in the taxable income—there should be deducted only such expen­ diture as is specifically referable to the interest. So, dealing with s. 20, the sum, the deduction of which is properly attributable to the interest is again only that sum which is specifically referable, indissolubly connected with the interest as such, and the problem

(1) (1950) 81 C.L.R., at pp. 306, 309.

(2) (1950) 81 C.L.R. 263.

88 C.L.R.] OF AUSTRALIA.

457

H. C. OF A. 1952-1953.

is one problem in that sense. In this case, by concession, that is

nothing.

The acceptance of the submissions made on behalf of the

appellant would be tantamount to redrafting s. 20 (2) by the omission F ed er a l

of the words “ from the income of the taxpayer derived from Commis­

sio n er OF

property ” . Those words are wholly words of description of a class

T axation

A ustralianV.

of deductions {Commercial Banking Co.’s Case (1) ). Neither s. 113

nor s. 115 yield deductions from income derived from property, Mutual

P r o v id en t S o c iety .

neither in terms, nor in their nature. Before applying any fraction

the amount proposed to be spread under s. 113 is : first exclude all the expenditure referable to the gaining of the premiums ; there has been excluded all expenditure exclusively referable to the gaining of assessable income ; then exclude any sum which is exclusively referable to the gaining of non-assessable income. The amount left is overhead expenses of a life assurance company not falling under any of those heads. Any sum exclusively incurred in getting the interest is first excluded from the sum proposed to be spread. For the words “ is properly attributable to the interest ” in s. 20 the appellant desires to substitute the words “ is properly attributable to the inclusion of the interest in the assessable income ” . If the words “ except such part . . . of the deductions . . . as . . . is . . . attributable to the interest ” be read in some­ what the same sense as decided in the s. IGOab case, this is properly referable to the in terest; it is the cost of getting it. So that the favourable rate of tax is to be applied to the net gain in respect of the interest to the taxpayer, “ net ” being the difference between his gross figure and his specific cost of earning or obtaining the interest. That is a different idea. Because of the way s. 20 (2) is drawn, namely, “ such part . . . of the deductions allowable from the income of the taxpayer ” , not “ a ” taxpayer, regard should be had to the particular circumstances of the taxpayer. The appellant seems to elide the words “ derived from property ” and to substitute the word “ allowed ” for “ allowable ” . The word “ part ” is not merely quantitative ; it is descriptive. The sense would be : “ such of the deductions as are attributable ” . The primary significance of the word “ part ” is to describe, but it may ultimately permit, so as to arrive at an ultimate money sum. The last words of the section are “ properly attributable to the interest ”, not to the inclusion of the interest in the assessable income nor, regarding s. 115 as used by the appellant, not properly attributable to the inclusion of the assets from which the interest is derived in the fraction. There is a big difference between the allowance of a deduction because of the inclusion of the interest,

(1) (1950) 81 C.L.R., a t pp. 296, 302, 303.

458 HIGH COURT

[1952-1953.

H . 0 . op A.ami the (|uaiit.uin of the deduction because of the presence of the

interest in the assessable income. The commissioner cannot pass to the sec.ond of those things by the use of the word “ properly ”.

F kdiokai ,

('OMMIS- [D i .kon C.,1. rc 'ierred to Hymon v. Federal Commissioner of

NIONIOK Ol''

'Fax at i o n TaxaiUnt. (I).|

V.The word ‘‘ ])a,rt ” should be elided with the word “ allowable ”,

A i istualiax

M I ' T U A L“ such ])art ” must be part of the description because “ allowable ”

I’u o v im o x Tis a- descrij)tiou in itself. Rut “ such part ” is part of a description

S o r i i o T Y .

and it is conceded that in applying it “ such part ” might be used to justify an ajrportionment of a deduction of a class which is interest as a tleduction because of the interest. There is a difference between “ allowed ” and “ allowable ” in that sentence. “ Allow­ able ” as there used means that it is allowable because of the presence of the in terest; it has nothing to do with the quantum of it but only to do with its character {Commercial Bankmg Co.’s Case (2) ). The deductions mentioned in s. 20 (2) were intended to be a very narrow class. Sub-section (1) of s. 20 shows that what the commissioner proposes to do is an impossibility under the section. The more the commissioner diminishes the number of pounds to which he applies the specified sum the greater the benefit that would come to the taxpayer under s. 20 properly under­ stood. The words “ in that year ” and the use of the words “ the taxable income of that person ” in s. 20 (1) mean that the same taxable income is to be taken in each case, that is ascertaining the two rates. As the number of pounds of interest to which the rate is applied is depressed, so is the total depressed ; and as the section provides that the entire gross amount of the interest derived is to be free of any tax, except the total of the tax which would be imposed under the Income Tax Act 1930, it must follow that as the total of the tax under that Act is depressed the taxpayer gets the benefit, and in respect of the whole of the income. The effect of sub-s. (2) is to remove any possibility of simply making a spread of deductions against all the income rateably. I t requires that the whole of the interest derived be freed from tax except that amount which is arrived at by applying the taxable income to the 1930 Act—to the whole of the interest less only deductions prescribed. The deductions to be made under s. 20 (2) are of an extremely narrow class. The direct expenditure of gaining interest is excluded from the sum which is sought to be dealt with under s. 113 (1). The residue in s. 113 (1) is the general “ overhead ” that cannot be specifically referred to the gaining of premiums, or the gaining of

(1) (19.32) 47 C.L.R. 538, at pp. 546,

(2) (1950) 81 C.L.R., at pp. 308, 311.

88 C.L.R.] OF AUSTRALIA.

459

assessable income, or the gaining of non-assessable income. Those H. C. OF A.

general management expenses do not include any amount which 1952-1953.

was directly incurred in gaining or producing the income' of the

F ed er a l

interest, because by sub-s. (2) it is expressly excluded. The reasoning Commis­

sio n er OF

in Commercial Banking Co.’s Case (1) would not permit the rateable

T axation

spread if the appellant seeks to use s. 113, or for that matter, s. 115.

V.

Australian

Section 115 is not a deduction from income from property. Whilst

Mutual

it is called an allowable deduction, it is in the nature of a concession P r o v id en t

or relief. The broad policy of the section was to exclude from tax

So c iety .

quite an arbitrary sum, unrelated to income or its components, in order to bring down, or keep down, the rates of interest. The fact of the nature of the income or the nature of the assets is quite irrelevant to the deduction : (1) it is not a deduction of income from property ; and (2) it is not a deduction which is allowable in any sense because of the interest. I t does not matter what the nature of the assets is, whether they are assets or freehold. I t has nothing to do with the sort of asset or the sort of income that the asset bears, that this deduction is given. This deduction is unrelated to the nature of the income or the nature of the assets, and it is not neutral as to whether it is income from property or income from personal exertion. I t is a relief granted to insurance companies, and the policy would be that they should have the full benefit of it. Sections 113 and 115 are not allowable as deductions as income from property, nor in any sense because of the quality of the interest as an item of income. To apply s. 20 (2) in the way submitted on behalf of the respondent is to produce the same result as the Court itself produced in relation to s. 160ab, that is, that there should be thrown against the gross amount of the interest only in substance its actual cost, the thing that is specifically referable to it, and for the rest there could not be any spread of deduction against it. There is not any significant distinction between this case and the Commercial BanJdng Co.’s Case (2). The decision in that case covers this case precisely. This case is like the Com­ mercial BanJdng Co.’s Case (2) in that the income in question is not income from property, because the principal business of the taxpayer in this respect was that of money-lending. The real thing the Society is bent on doing to survive is the gaining of interest by the lending of money {Commercial BanJiing Co.’s Case (3) ). The real success of a company of this kind depends upon its investment pohcy, and that is where as an organized business, apart from gathering in the exempt income, it has its major activity.

(1) (1950) 81 C.L.R., a t p. 305.

(3) (1950) 81 C.L.R., a t pp. 294, 303,

(2) (1950) 81 C.L.R. 263.

304.

460 HIGH COURT

[1952-1953.

H. C. OF A. Where the interest is a profit depending upon the pursuit of organized

1952-1953.business activities it is income from personal exertion

{Commercial

F ed era l

Banking Co.’s Case (1) ). What was there said is true of insurance

t'O.MMIS- companies organized similarly to the respondent Society. There is

SIONER OF

T axation

a distinction between the broad purpose and the immediate object.

V.

A i ŝtkaltan

Mutual Cur. adv. vuU.

P rovid ent

S O O IE T Y .

The following written judgments were delivered :—

April 27.D ix o n C.J., W il l ia m s , F u l l a g a r a n d K it t o JJ . This is an

appeal by the Commissioner of Taxation against a decision of a Board of Review given on an appeal by the Australian Mutual Provident Society against its assessment to income tax on income derived by it in the accounting period ended 31st December 1942. The matter comes before the Full Court on a reference, under s. 18 of the Judiciary Act 1903-1950 by Williams J. The order referring the matter was made on 27th June 1952. By a later order, made on 11th November 1952, Williams J. formulated certain questions for the determination of the Full Court. The first question is con­ cerned with the amount of income tax payable by the Society in respect of interest derived by it during the accounting period from securities of the class described in s. 20 of the Commonwealth Debt Conversion Act 1931. The second is concerned with the amount on which the Society is entitled under s. IGOab of the Income Tax Assessment Act 1936-1942 to a rebate of two shillings in the pound in respect of interest derived by it during the accounting period from securities of the class described in that section.

I t is desirable to set out s. 20 of the Commonwealth Debt Conver­ sion Act in full. I t provides : “ 20. (1) Notwithstanding any­ thing contained in the Taxation of Loans Act 1923 or in any other Act or State Act, the interest derived by any person in any financial year from new securities exchanged for existing securities (other than interest which in accordance with the provisions of section fourteen of this Act is free from Commonwealth and State Income Tax) shall be free—{a) from any income tax payable under a law of the Commonwealth to the extent by which the total amount of income tax which but for this section would be payable in respect of that interest exceeds the amount of income tax which would have been payable in respect of that interest if income tax had been imposed upon the taxable income of the person in that year in accordance with the provisions of the Income Tax Acts 1930 (other than section seven a of that Act) ; and (6)

(1) (1950) 81 C.L.R., a t p. 304.

88 C.L.R.]

OF AUSTRALIA.

461

H. C. OF A.

from all income tax under the law of a State.

(2) In determin­

ing, for the purposes of this section, the amount of income tax 19.52-1953.

which would be payable in respect of interest to which this F ed eh al

section applies, the rate of tax shall be applied to the whole Commis­

sio n er OF

amount of that interest included in the income of the taxpayer

T axation

without any deduction except such part (if any) of the deductions

V.

A ustralian

allowable from the income of the taxpayer derived from property

M utual

P r o v id en t So c ie t y .

as, in the opinion of the Commissioner of Taxation, is properly

attributable to the interest.

(3) In this section ‘ income tax ’

includes any tax imposed in respect of incomeDixon C.J.

Williams J.

It is not necessary to set out in full s. IGOab of the Income Tax

Fuliagar J.

K itto J.

Assessment Act. I t provides that “ A taxpayer shall be entitled to a rebate in his assessment of . . . two shillings for every pound of interest which is included in his taxable income and which is derived from ” securities of certain specified classes. Interest which is entitled to the benefit of s. 20 of the Commonwealth Debt Conver­ sion Act is excluded from the classes of interest entitled to the benefit of s. IGOab.

The Society in the accounting period derived large sums by way of interest from securities of the class mentioned in s. 20, and also large sums by way of interest from securities of the classes mentioned in s. IGOab. This is not disputed, but the commissioner maintains that, in calculating the amount to which each section must be applied, certain very substantial deductions must be made from the gross amount received. The Society carries on a very large business of life assurance, and is a mutual life assurance company within the meaning of the Income Tax Assessment Act. The assess­ ment of the taxable income of life assurance companies is the subject of special provisions of the Act. These provisions are contained in Div. 8 of Pt. I l l of the Act.

Section 111 provides : “ The assessable income of a life assurance company shall not include premiums received in respect of pohcies of life assurance, or considerations received in respect of annuities granted. The total income shall include such premiums and con­ siderations ” . Section 112, which may be regarded as the comple­ ment of s. I l l , provides : “ Expenditure incurred by a life assurance company exclusively in gaining such premiums or considerations shall not be an allowable deduction

L’p to this point the effect of the legislation is that the assessable income of a life assurance company is to be ascertained in the ordinary way subject to s. I l l , which excludes what is commonly called “ premium income ” . Allowable deductions are also to be ascertained in the ordinary way subject to s. 112, which excludes

402 HIGH COURT

[1952-1953.

H. 0. OP A.expcjiditiire exclusively referable to the gaining of premium income.

1952-195:5.The Act leaves assessable income to be ascertained in the ordinary

F u n i i R A L way subject to s. I l l , but proceeds, in ss. 113 and 115, to make

('o.MSlI.S-

two specitd provisions for allowable deductions. Section 113

SI ONKI I

OP

'I'ax a t i o nprovides, as the chairman of the Board of Review has pointed out,

r.

a convenient method of calculating the amount of a deduction

A o s t r a l i a n

Mutoar

which would have to be calculated in some way in the absence of

l ’R O \ n ) i i N ' rany express provision. Section 115 contains a provision of a

SOCIUTY.

different character.

I t allows a deduction of a special kind, based

Dixon O.J.

Williams ,T. presumably on the manner in which life assurance companies,

■''iilliigar ,T. for their own purposes, normally ascertain the “ profit ” of an

Kit to J.

accounting period. Sub-section (1) of s. 113 provides that “ So much only of the expenditure incurred in the year of income in the general management of the business of a life assurance company, as bears to that expenditure the same proportion as its assessable income bears to its total income, shall be an allowable deduction ”. Sub-section (2) provides that “ Bor the purposes of this section, the expenditure exclusively incurred in gaining or producing assessable income, or exclusively incurred in gaining or producing income which is not assessable, shall be deemed not to be expen­ diture incurred in such general management ” . Section 115 provides that “ An amount equal to three per centum of that part of the calculated liabilities of a life assurance company at the end of the year of income, which bears to such calculated liabilities the same proportion as the value at that date of the assets from which the company derives assessable income bears to the value at that date of all the assets of the company, shall be an allowable deduction ” . Section 116 provides that “ When the calculated liabilities at the end of the year of income exceed the value at that date of all the assets of the company, the company shall not be liable to pay income tax in respect of the income derived in that year from the business of life assurance ” . The method of arriving at “ calculated liabilities ” for the purposes of ss. 115 and 116 is prescribed by s. 114. Actuarial valuations are, of course, necessary. Nothing in this case turns on the method of arriving at “ calculated liabilities ”. The commissioner notified his original assessment to the Society

on 24th April 1944. The taxpayer objected. On the disallowance. an amendment of his original assessment on 25tli June 1946, and a further amendment on 17th February 1950. Neither of these amendments, however, involved any departure from the basis of the original assessment. There were merely slight differences

of its objection, it required the matter to be referred to a Board of

88 C.L.R.] OF AUSTRALIA.

463

in the actual figures, and these amendments may, for present H. C. OF A.

purposes, be ignored. On 6th June 1950, however, this Court 1952-1953.

delivered judgment in the case of Commercial Banking Co. of

F edekal

Sydney Ltd. v. Federal Commissioner of Taxation (1). This case Commis­

sio n er OF

had raised the same questions as those which now arise, and, on

T axation

27th April 1951, the Crown Solicitor wrote to the solicitors for the

V.

A ustralian

Society a letter, in which he said that the commissioner would, on M utual

P r o v id en t Ko c iety .

the hearing before the Board of Review, ask the board “ to vary

the assessment in accordance with the principles enunciated in ”

the Commercial Banking Co.’s Case (1). Schedules were enclosed Dixon C.J.

Williams J .

setting out the amendments which the commissioner considered

Fnllagar

J .

K itto J .

should be made. These amendments (which were put forward as subject to possible modification in respect of some of the figures actually adopted) by no means abandoned the view that very substantial deductions ought to be made from the gross amounts received in order to arrive at the amounts of interest in respect

of which the Society was entitled to the benefit of s. 20 and s. 160ab

respectively. On the contrary, they were, in the result, less favour­ able to the Society than the original assessment. But they arrived at the result by a different calculation.

Before examining the commissioner’s original and proposed assessments, it is convenient to mention, in order to dispose of it, one argument which was put forward for the Society in connection with what may be called the “ s. 20 interest ” . Apart from premium income (which is not assessable) the Society’s main source of income is interest, some of which falls within s. 20, some of which falls within s. 160ab, and some of which falls within neither section. Now, sub-s. (2) of s. 20 clearly contemplates that deductions may have to be made from the gross amount of interest which is prima facie entitled to the benefit of the section. But only deductions which are allowable from the taxpayer’s income from property are to be made. If, therefore, the interest derived by the Society is income from personal exertion, it will be clear that no deduction can be made under s. 20 (2). Whether interest is income from personal exertion or income from property depends on the definition in s. 6 of “ income from personal exertion ” . Interest is excluded from that definition “ unless the taxpayer’s principal business consists of the lending of money ” . In the Commercial Banking Co.’s Case (1) it was held that the principal business of a bank was the lending of money. The Society maintains that its principal business also is the lending of money. The argument was, in our opinion, rightly rejected by the board. The Society’s principal

(1) (1950) 81 C.L.R. 263.

4(54

HIGH COURT

[1952-1953.

H . C. OF A. business is the business of life assurance, that is to say, the making

19,')2-lira,and |)('rforinance of contracts to pay, in consideration of premiums FumoKAr. paid to it, sums of money on death or on the expiration of a period.

(Co m m i s ­Its Imsiness differs radically from that of a banker. The lending of

sion UK Oh'

'.r.AX.vnoNmoney is of the essence of the business of a banker. He provides

r.

many other facilities for his customers, but it may be said to be

A f s t r a i .ian M i ' toao

the characteristic of his business that he borrows money in order

P r o vi df .ntto lend it. If he ceased to lend money, the nature of his business

SoCIETV.

(assuming it to survive) would radically change. A life assurance

Dixon 0..T.

Williiiins J.

company lends money, and its lendings are very important, but

I''ulliigar .1.Kitk) .r.they are not of the essence of its business. They are operations ancillary to the main business, made primarily because the holding of large funds to cover contingent liabilities is a necessity of that business. If a life assurance company ceased to lend money, the nature of its business would not change. The position would simply be that it would have to charge larger premiums in order to maintain itself in a sound position. Interest derived by a life assurance company on money lent by it is, in our opinion, income from property and not income from personal exertion.

The Society in the accounting period had no income from dividends, but had a comparatively very small amount of income which was treated as personal exertion income. In his original assessment the commissioner appears to have begun by applying s. 50 (c) of the assessment Act to the total of allowable deductions. He thus arrived at a figure of £2,871,339 as the total of allowable deductions from property income. The Society’s income from property was £4,409,312. The interest derived from s. 20 securities was £1,162,228, and the interest derived from s. 160ab securities was £684,407. The commissioner used these four figures in order to arrive at the amount to be deducted from the gross amount of

s. 20 interest and s. 160ab interest respectively, and he worked

out the following formidable proportion sums :—

Section 20 : 1,162,228

of £2,871,339 = £756,842.

4,409,312

Section 160ab : 684,407

of £2,871,339 = £445,685.

4,409,312

The deduction of these respective products from the s. 20 interest and the s. 160ab interest left £405,386 to receive the benefit of

s.

before the matter came before the Board of Review, and no attempt was made to defend it before us. The new method, which he

20, and £238,722 to receive the benefit of s. 160ab.

88 C.L.R.] OF AUSTRALIA.

465

supported before the board and before us, proceeded, like the original H. C. OF A.

method, on an apportionment basis, but it differed from the original

19.52-1953.

method in two respects. In the first place, it had regard separately

F ed er a l

CIOMMIS- S I O N E B OF

to s. 113 and s. 115 of the assessment Act, and its object was to

attribute to the s. 20 interest and the s. IGOab interest respectively

T axation

a proportion of the deductions from assessable income allowed

r.

A ustralian

under s. 113 and a proportion of the deductions from assessable Mutual

P r o v id en t iSoCTETY.

income allowed under s. 115. In the second place, it adopted different

bases of apportionment.

I t is now necessary to state some further

IMxoii C..T.

figures :—Williams ,T.

Section 20 interest . . . . . . . .£1,162,228I'ullagar .T.

K itto .J,

Section IGOab interest . . . . . .

£684,407

Total income (i.e. including premium income)

£17,437,530

Management expenses (s. 113) . . . .

£564,082

Assets producing s. 20 interest . . . ..£29,427,511

Assets producing s. IGOab interest . . . .

£23,963,994

Total assets . . . . . . . . ..

£147,038,833

3% of “ Calculated Liabilities ” (s. 115)

£3,486,524

Taking these figures, the commissioner proceeded to work out the following even more formidable proportion sums :—

1 (a)

Deduction from s. 20 interest by reference to s. 113 :—

of £564,082 = £37,597.

17,4.37,530

(b)

Deduction from s. 20 interest by reference to s. 115 :—

29,427,511of £3,486,524 = £697,773.

147,038,833

2 (a)

Deduction from s. IGOab interest by reference to s. 113

684,407 £5g4 QQ2

£22,140.

17,437,530

(b)

Deduction from s. IGOab interest by reference to s. 115

98 968 994

, ,

of £3,486,524 = £568,224.

147,0.38,8.33

The result of the acceptance of these apportionments would be that from the s. 20 interest (£1,162,228) there would be deducted a total sum of £7.35,370, leaving a balance of £426,358 to receive the benefit of s. 20. .From the s. IGOab interest (£684,407) there would be deducted a total sum of £590,364, leaving a balance of £94,043 to receive the benefit of s. IGOab. This result is very slightly more favourable to the Society than the original assessment in respect of the s. 20 interest, but very substantially less favourable to the Society in respect of the s. IGOab interest.

VOL. LXXXVIII.-

4()(i

HIGH COURT

[1952-1953.

ir. ('. Oh’ A. Wc will tilke first the position under s. IGOab, because that

I Do:.'-1!),'):!.

section w<is considertMl in the Commercial Banking Co.'s Case (1), iind beciuise the ])osition is not complicated by any reference to ( 'OMJIIS- the opinion of the coniniissioner. Similar questions arose under

SION KR OK

Taxationother stiitutes in Douglass v. Federal Commissioner of Taxation (2)

r.

and in Carpenters Investment Tnuling Co. Ltd. v. Federal Commis­

A k s t r a m a n

.Mi 't i ' ao

sioner of Taxation {■)), the (|uestion in each case arising from the

I’ko \ I moNT use of the words “ included in the taxable income The effect

SoolKTV.

to be given to those words in s. IGOab must be taken to be settled D i x o n ( ' . . I . by the Commercial Banking Co's Case (1). In that case, Dixon J.

W i l l i a m s ,1.

l ' ' i i l l aKar

.1. said

“ I construe s. IGOab as in effect meaning that a taxpayer is to be entitled to a rebate in his assessment of an amount of 2s. for every pound of interest by reason of the inclusion of which in his assessable income his taxable income has been increased ” (4). (As is made clear by the context as well as by the authorities cited, this means that he is entitled to a rebate of 2s. for every pound by which, by reason of the inclusion of the interest in his assessable income, his taxable income has been increased.) His Honour pro­ ceeded : “ It will be seen that upon this meaning the rebate cannot be upon more than the taxable income which, of course, is obvious enough, and, further, that if there are any special deductions which, but for the inclusion of the interest in the assessable income, would not be allowable, they are to be thrown against it ” (4). I t is clear, from the nature of the income in question, which commonly involves no expense in its collection, that in very many cases no deductions at all can properly be made from the gross amount of interest received. But it is equally clear that it was contemplated that there might be cases in which a deduction would have to be made from that gross amount in order to arrive at the rebateable amount. The nature of such deductions is clearly described in the passage quoted. We add one sentence from the judgment of Fidlagar J., in which he said :—“ Where, but only where, no expenditure can be actually attributed to the receipt of the interest so as to be deductible because of the receipt of the interest, the rebate is to be calculated on the gross amount of the interest ” (5).

K i t t o

.1.

In the Commercial Banking Co.'s Case (1) as in Douglass v. Federal Commissioner of Taxation (2), none of the deductions which the commissioner sought to make were of the character described. And it appears to us that none of the deductions which the commissioner seeks to make in this case are of that character.

(1) (1950) 81 C.L.R. 263.(4) (1950) 81 C.L.R., at p. 309.

(2) (1931) 45 C.L.R. 95.(5) (1950) 81 C.L.R., a t p. 311.

(3) (1949) 79 C.L.R. 341.

88 C.L.R.] OF AUSTRALIA.

467

The commissioner has attributed to the s. 160ab interest a propor­H. C. OF A.

tion of the deduction allowed under s. 113 of the Assessment Act, 1952-195.3.

and also a proportion of the deduction allowed under s. 115 of that F ed er a l

C0MMI,S-

Act. So far as s. 115 is concerned, the deduction allowable there­

SIONER OF

under appears to be of a more or less arbitrary nature, though the

T axation

provision was (as we have said) doubtless inserted in the light of the

V.

Australian Mutual

peculiar nature of the business carried on by the life offices.

I t

appears to us impossible to attribute a deduction of that nature P r o v id en t

or any part thereof to the s. 160ab interest, and, unless some part So c ie t y .

Williams J. Dixon C.J.

thereof can be so attributed, no part can be deducted for the pur­

poses of s. IGOab. I t is nothing to the point to say that the assets I ’ullagar J.

K itto J.

from which the company derives assessable income and which are a factor in the proportion sum under s. 115 include the assets which produce the s. IGOab interest. For that matter they are also included in the total assets of the company, which provide the other factor in the proportion sum. But the point is that the deduction allowable under s. 115 bears no relation to the s. IGOab interest in fact derived by the company. Its allowability is a consecjuence of the interest-bearing character of the s. IGOab securities but not of the presence of the interest which they actually produced in assessable income. The deduction is not connected in any way with the receipt of that interest. I t is in no sense and in no part a special deduction which, but for the inclusion of the interest in the assessable income, would not be allowable. Of no part of it can it be said that it only became an allowable deduction because of the inclusion of the interest in the assessable income. The deduction directed to be made under s. 115 depends in no way whatever upon the receipt of s. IGOab interest or of any particular assessable income.

So far as s. 113 is concerned, the position is, we think, essentially the same, though there may be more, at first sight, to be said for the commissioner’s view. We would think it clear that behind s. 113 lies the same fundamental conception that is inherent in s. 51, i.e. that primarily taxable income is to be assessable income less the cost of gaining or producing it. In applying s. 113 you begin by applying sub-s. (2) of that section, and you ask whether any particular expenditure in fact incurred by way of general manage­ ment expenses can be exclusively referred to any particular assess­ able income in the sense that it can be isolated as the cost, or part of the cost, of gaining that assessable income. You also ask whether any particular expenditure in the way of general management expenses can be exclusively referred to any particular non-assessable income (e.g. premium income) in the same sense. Having answered

4(38 HIGH COURT

[1952-1953.

H.

OK A.

those two (juestions, you attribute to particular assessable income sucli sums a,s you have found to be exclusively referable to it, and (''nmoKAv, make a deduction under s. 51 accordingly. You also attribute to

C o m m i s ­

uon-a,ssessal)le income such sums as you have found to be exclusively

si on Ku

OK

'I’ax at i o n ri'leralile to it, and you exclude those sums from the calculation of

r,

taxable income, just as you exclude the non-assessable income.

A k s t h a u a n

M i t k Al, You then take the balance of the expenditure actually incurred in

I’liOV I moNT generid managetnent, and you work out the proportion sum which

Soc 'l HT V.

sul)-s. (1) of s. 113 directs you to work out. In effect you apportion

Dixon l.'.,l.

D'illinins ,1. the bahince of that expenditure between assessable and non­

Kulliigiir .1. assessable income, and the proportion attributable to assessable

K i l to >1.

income is an allowable deduction in ascertaining taxable income. The attribution is made on the arbitrary, though not apparently unreasonable, basis of the ratio between assessable income and non-assessable income.

The commissioner says that, when you have ascertained under s. 113 (1) the proportion of general management expenses a ttri­ butable to assessable income, you must then attribute a proportion of that proportion to the s. IGOab interest, and make a deduction accordingly in order to arrive at the amount rebateable under that section. He says that it would be unreasonable not to take some such course, because the s. IGOab interest is itself taken into account under s. 113 (1) in such a way that the larger the amount of that interest the larger is the deduction to which the company becomes entitled under that sub-section. But we do not think that such a course is contemplated by s. IGOa b , and we do not think that such a course accords with the vieŵ taken in the Commercial Banking Co.’s Case (1). That view was that the words “ included in his taxable income ” require the subtraction of such of the allow­ able deductions as are specifically referable to the s. IGOab interest, but do not authorize or contemplate any other subtraction. I t is true that one consequence of the inclusion of s. IGOab interest in assessable income is that the amount of general management expenditure which s. 113 makes an allowable deduction is greater than it would otherwise have been. But, wBile that means that a proportion of the s. 113 deduction is attributable as a matter of arithmetic to the presence of the s. IGOab interest in assessable income, it does not mean that the commissioner can point to any particular portion or constituent of that deduction as being an amount which answers the description of a deduction made allow­ able by the inclusion of the s. IGOab interest in the assessable income. In truth the s. 113 deduction is but a figure, arrived at

(1) (1950) 81 C.L.R. 263.

88 C.L.R.] OF AUSTRALIA.

469

by an arithemetical process, and made an allowable deduction in H. C. OF A.

place of so much of the general management expenditure ascer­1952-1953.

tained in accordance with s. 113 (2) as would otherwise have been

F ed eb a l

an allowable deduction under s. 51. No part of the deduction for Com m is­

sio n e r OF

which it is thus substituted could have satisfied the test laid

T axation

down in the Commercial Banking Cols Case (1) for all amounts

V.

A ustralian

capable of satisfying that test must necessarily have been excluded

Mutual

in the course of ascertaining the amount of the general management P r o v id en t

expenditure. A fortiori, no proportion of the artificial figure sub­So c ie t y .

stituted by s. 113 (1) can satisfy the test. The answer to the argument Dixon C.J.

Williams J .

for the commissioner on this part of the case is that there is no

Fnllagar J.

K itto J .

identifiable amount forming part of the s. 113 deduction, which can be distinguished from the remainder of that deduction as being specially referable to the s. IGOab interest.

I t is necessary now to turn to the s. 20 interest. We have now to deal with a section expressed in very different terms, and the question which arises is not covered by the Commercial Banking Cols Case (1). But, except that an opinion of the commissioner (for which, of course, a Board of Review could substitute its opinion) is or may be involved, we think that the position under s. 20 is substantially the same as the position under s. 160ab. We think that the reasons which led the majority of the Court to their conclusion on s. IGOab in the Commercial Banking Cols Case (1) apply—perhaps a fortiori—to s. 20. I t is on sub-s. (2) of s. 20 that the question turns, and the important words are “ without any deduction except such part (if any) of the deductions allowable from the income of the taxpayer derived from property as, in the opinion of the Commissioner of Taxation, is properly attributable to the interest ” .

Obviously the first step in applying s. 20 (2) to any particular case must be to ascertain the deductions allowable from the tax­ payer’s income from property. Again, we think that it is not s. 50 of the Income Tax Assessment Act but the conception that underlies s. 51 that is relevant. Section 50 is a subsidiary provision which is ultimately concerned with the application of rates of tax. I t speaks of the making of deductions in the course of the process of assessment: it has nothing to do with their allowability. The con­ ception behind s. 51, on the other hand, is fundamental. The “ deductions allowable from the taxpayer’s income from property ” are, in our opinion, to be ascertained in precisely the same way as deductions under s. IGOab. That is to say, they must be special

(1) (1950) 81 C.L.R. 263.

470 HIGH COURT

[1952-1953,

;ir.

OK A.

(Icdiictions wliicli, Init for tlic inclusion of the taxpayer’s income fi'oin ])roperty in the assessable income, would not be allowable. They must bo deductions which only became allowable deductions

('o.MMI.S- bociiuso of the inclusion of the taxpayer’s income from property

SIONKH Ol*'

T a x at i o n

in his iisse.ssalile income.

r.

The allowidile deductions from the taxpayer’s income from

A i '.s 'I'kali an

M u t i ' a i ,])i'operty having been ascertained on this basis, the next step must

I’k o vi dk n tbe for the commissioner to form an opinion as to what part (if

N oel

any) of the amount so ascertained is properly attributable to the

Dixon ('..7. s. 20 interest. The important point here is to see what it is that the

WilUiuus ,1,

1''nlliiKiU' .1. Kitto J.commissioner must form an opinion about. Again, in our opinion,

the test to be applied is the test laid down in the Commercial Banking Co.’s Case (1). If, for example, the taxpayer employed an agent to collect rents but incurred no expense in collecting his s. 20 interest, it would not be open to the commissioner to attribute a proportion of the agent’s commission to the s. 20 interest. If, on the other hand, he employed a trustee company at a com­ mission, or a solicitor at a retaining fee, to collect and handle for him various kinds of income from property, including s. 20 interest, it would, we should suppose, be proper to attribute to the s. 20 interest a proportion of the commission or of the retaining fee.

From this conclusion it follows that the position with regard to the commissioner’s calculations for the purposes of s. 20 (2) is the same as the position with regard to his calculation of deductions for the purposes of s. IGOab. He has attributed to the s. 20 interest a proportion of the deduction allowed under s. 113 of the Assessment Act, and also a proportion of the deduction allowed under s. 115 of that Act. What we have said with regard to both sections in connection with s. IGOab is equally applicable in connection with s. 20. We do not think that there is any justification for the basis of the commissioner’s calculations in either case. In neither case do they produce a figure the deduction of which from the relevant gross amount of interest is warranted by the statute.

I t would not, we think, necessarily follow from the rejection of the commissioner’s apportionments that no deduction should be made from the gross figure either for the purposes of s. 20 or for the purposes of s. IGOab. One would be disposed to think that, in the case of an institution of such magnitude as the Society, some expenditure in the nature of management expenses could be properly attributed to the receipt of s. 20 interest and s. IGOab interest. Records, one supposes, must be kept, payments checked, accounts audited. I t may well be that some expenditure on matters

(I) (19,50) 81 C.L.R. 263.

88 C.L.R.] OF AUSTRALIA.

471

of this kind should be regarded as incurred in the course of gaining H. C. OF A.

the interest and therefore deductible from that interest in accord­1952-19.53.

ance with the general principle of deductibility under s. 51. On F ed er a l

the other hand, the amount which the necessary dissection would

COMHIS- •SIONER OF

show to be attributable to the interest in accordance with the

T axation

principle of the Commercial Banking Co.’s Case (1) would probably

V.

A ustralian

be small, and perhaps, by comparison with the very large figures M utual

involved in this case, almost negligible. We were informed by Mr. Pr o v id en t

Bani'ick during argument that in the Commercial Banking Co.’s

S o c ie t y .

Williams ,1. Dixon ('..T.

Case (1) the banlc was prepared to accept a deduction of about

£1,000 on the basis suggested : we have no means, of course, of

Fnllagar J.

Kitto J.

telling whether such a sum would be reasonable in the case of the bank or in this case. But, however all this may be—and whether or not because of the smallness of the amount thought to be involved —this case was conducted before the Board of Review and before this Court on the footing that, unless the basis of the commissioner’s apportionments could be suppported, no deductions should be made. The decision of the Board of Review must, therefore, be regarded as correct.

One argument, which was put with some force by Mr. Myers, should be noticed in conclusion. He said that the practical result of the view which we have expressed was very unlikely to have been intended by the legislature. The position seems to be as follows. The taxable income of the company is £1,422,204. The s. 20 interest is £1,162,228. This sum is taxed (on the view which we have expressed) at Is. 4d. in the £. This tax works out at £77,481. The balance of the taxable income is £259,976. We begin by taxing this sum at 5s. in the £ (the company rate for the relevant year of tax). This tax works out at £63,674. If we stop there, the tax payable by the Society is £141,155. But the Society is entitled (on the view which we have expressed) to a rebate of 2s. in £ not on £259,976 but on £684,407 (the amount of the s. 160ab interest). This rebate works out at £68,441, which sum must be subtracted from £141,155. The difference is £72,714, which is the tax payable. This sum is something like five per cent of the Society’s taxable income, or Is. in the £.

The real point of the argument emerges, we think, when it is said that the result which the above figures indicate is that a part of the s. 20 interest (the difference between £684,407 and £259,976) really gets the benefit not only of the reduced rate of tax under s. 20 but also of the rebate under s. 160ab—and interest which falls within s. 20 is expressly excluded by the terms of s. 160ab

(1) (1950) 81 C.L.R. 263.

472 HIGH COURT

[1952-1953.

ir.

OF A.

from the heiieiit of tfiat section. We do not think it is correct to say tluit this result follows. The fallacy in the argument seems to

F k u f r a i . us to lie in the fact that it treats the amount of interest calculated

Co m m i s ­

under and for the purposes of s. 20 as if it were an identifiable

si on HR

Ol'’

T ax a t i o n part of the taxable income for all purposes and not merely for the

r.

purposes of s. 20. This does not seem to us to be right. When

A f s t r a i . ian

M FTF ai , taxable inconu'. lias been calculated, the items which went to make

I’r o vi d h n t up assessable income have (at least in such a case as the present)

S oriHTV.

lost their identity for all purposes except the purposes of some special

D i x o n C. . I . provision (such as s. 160a b ) which requires an identification of

W i l l i a m s

,1.

I■'̂ llasrar .1. some item.

Where an identification is required, it must be made in

K i l l ) )

J .

the manner required, and the manner required must be ascertained by construction of the special provision. But the identification can be made only for the purposes of the special provision. Section 20 and s. IGOab in effect prescribe—each for its own purposes— methods of calculation for the purpose of arriving at sums in respect of which two concessions of a different kind are to be allowed to the taxpayer. I t is wrong to say that what has been characterized for the purposes of s. 20 should be treated as bearing the same character for all purposes. Each calculation must be worked out independently, and it cannot be said with truth that any part of any factor which enters into the calculation under s. IGOab has already been taken into account in the calculation under s. 20.

The figures in the present case are, of course, very striking. But the same result must often occur on a smaller scale. Take the case of an individual taxpayer, whose assessable income consists simply of £1,000 of s. 20 interest and £1,000 of s. IGOab interest. His only deductions are £250 in respect of his wife and children, and a loss of £150 incurred in a business—a total of £400. His taxable income is thus £1,G00. I t would seem very clear that neither of the allowable deductions is “ attributable ” to the s. 20 interest. He is therefore taxed at Is. 4d. in the £ on the £1,000 of s. 20 interest. Section

IGOab must then be applied. We can see no justification whatever

for saying that only £600 of s. IGOab interest is “ included in his taxable income ”. The commissioner would presumably say that the deductions of £400 should be apportioned, and £200 attributed to the £1,000 of s. IGOab interest. But this leads to the very same result as that which is the subject of Mr. Alyers’s argument in the present case. That result occurs unless the whole of the £400 is attributed to the s. IGOab interest so as to leave only £600 entitled to the rebate.

88 C.L.R.] OF AUSTRALIA.

473

H. C. OF A.

It would probably be unjust to attribute to Mr. Myers an argument the major premiss of which is that there is a strong presumption

1952-1953.

that the legislature would not intend to tax so large an income as

F ed ek al

that of the Society at so low a rate as Is. in the £. If such an argu­Com m is­

sio n e r OF

ment were put, we do not think that any such presumption should

T axa tion

be recognised, and, even if experience suggests that there may be

V.

A ustralian

something to be said for it, the reasons given for the view adopted

M utual

in the Commercial Banking Co.’s Case (1) appear to us to be very P r o v id en t

strong. That view seems to us to give their natural meaning to S o c ie t y .

provisions which were framed and put forward as an inducement Uixon C.J.

Williams J .

to individuals and corporations to take a course which it was

Pullagar

J .

K itto J .

conceived to be in the public interest that they should take. The occurrence of a possibly unexpected result in a particular case cannot prevail against such considerations.

The questions submitted by Williams J. should be answered :—

1.

(a)Yes.

(b)

(i) No. (ii) No.

2 .

(a)Yes.

(i) No. (ii) No.

(b)

W e b b J. th e sam e reasons as th o se g iven above.

I agree w ith th e answ ers p roposed ;

b u t n o t for e x a c tly

As to s. 160ab in terest: in Commercial Banking Co. of Sydney Ltd. v. Federal Commissioner of Taxation (1), I took the view that the expression “ included in his taxable income ” in s. IGOab of the Income Tax Assessment Act 1935-1942 was elliptical and meant “ included in the calculation of the taxable income ” . For that view I relied on the rebate being in respect of “ every pound of interest ”, and not merely in respect of income from the in terest; and also on the decisions of this Court in Douglass v. Federal Com­ missioner of Taxation (2) and Carpenters InvesUnent Trading Co. Ltd. V. Federal Commissioner of Taxation (3). I t followed that, in my opinion, the whole amount of the interest was included in the taxable income within the meaning of s. IGOab, which makes no express provision for a deduction. But this view was not taken by Dixon J. (as he then was) who delivered the judgment that prevailed in Commercial Banking Co.’s Case (1). As I now understand his Honour’s reasons for judgment in Douglass’ Case (2)—and, indeed, as I should always have understood them—he has never regarded

(1) (1950) 81 C.L.R. 263.(3) (1949) 79 C.L.R. 341.

(2) (1931) 45 C.L.R. 95.

474 HIGH COUKT

[1952-1953.

i r . (' .

OK A.

the expiT'ssioii “ included in the taxa))le income ” as elliptical, a,nd as m('aninf>; “ included in the calculation of the taxable income ”, I'Acokkai,or, as Slarlr S. stat(*d it in Doufilass' Case (1), as “ included in

( 'OMAI is-

account in a.sccrtaining tin; taxable income ” ; and so his Honour

SiONHK Ol''

Taxationhas lelt oblio(>d to hold that for the purposes of the rebate there

r.

shoidd 1)(‘ suhtra-ctcd from the whole amount of the interest what

Akstrauan

Motkai,

he described as “ s[)ecial deductions which, but for the inclusion

I’UOX'imONT

of the interest in the assessable income, would not be allowable

Socl lOTV.J am, of course, bound by the majority decision, and I accept the Wi'bli .1.exphuiation of the reasons for it given by their Honours who

constituted the majority ; otherwise 1 would have held that the class of “ special” deductions included those provided for by ss. 113 and 115, as I would not have been able to see any distinction in principle between them for the purposes of determining the amount of interest on which the rebate is granted within the limits imposed by the expression “ included in his taxable income ” in s. IGOa b , if that expression is not elliptical. I t would have appeared to me that the amount of interest “ included in his taxable income ” was determined as much by the one deduction as by the other, as nothing in the terms of s. IGOab would have suggested any distinction to me. In fact, s. IGOab makes no express reference to any deduction of any kind. I t would have appeared to me that there was no material distinction between s. 113 and s. 115, because the deduction under s. 115 is based on assets and not on income ; as the assets include these Commonwealth securities, and as a result the amount of interest included in the taxable income would have appeared to be determined by the operation of s. 115 as well as by the operation of s. 113 ; and further that the one deduction would be as “ special ” as the other. After all the concession in s. IGOab is to the holder of the securities as such ; it is not extended to the assignee of the interest coupons.

The merit is in the investment of assets in the security. As Dixon J. (as he then was) pointed out in Commercial Banking Co.’s Case (2) : “ The assurance is held out to him in order to induce him so to invest, because it is to the public advantage that investments of that character should be made ” .

So I have found it difficult to see how there could be a difference between special and general deductions for the purposes of s. IGOab : each appeared to me to have the effect of reducing the taxable income, and necessarily the amount of any interest included in it. Yet this difference must be insisted upon if the concession is to be regarded as a real concession : if general deductions were taken

(1) (1931) 45 C.L.R., at p. 103.

(2) (1950) 81 C.L.R., at p. 309.

88 C.L.R.] OF AUSTRALIA.

475

H. C. OF A. 1952-1953.

into account there would be no difference between s. 160ab interest

and any other kind of interest or income.

I t was because of this

difficulty that I was driven to conclude that “ included in his taxable F ed era l

income ” Avas an elliptical expression, as Starke J. also appeared Com m is­

sio n er OF

to regard it.

T axation

V.

As to s. 20 in terest: if ss. 113 and 115 deductions are not special deductions for the purposes of s. 160ab, I cannot see how they can

Au stralian M utual

P r o v id en t S o c ie t y .

nevertheless be regarded as attributable to the s. 20 interest.

Questions submitted to the Full Court by order

V"ebb J .

of Williams J. made on 11th November

1952 answered as follows :—

1. (a) Yes. 2. (a)

Yes.

(6) {i) No.

(6) (i) No.

(ii) No.

(ii) No.

Case remitted to Williams J.

Solicitor for the appellant, D. Z). Bell, Crown Solicitor for the Commonwealth.

Solicitors for the respondent, Stephen, Jaques cfe Stephen.

J. B.