Mutual Life and Citizens' Assurance Co Ltd v Commissioner of Taxation

The High Court of Australia considered an appeal by The Mutual Life and Citizens' Assurance Company Limited (the company) against an amended assessment of income tax. The dispute concerned whether certain income derived by the company from United Kingdom investments was exempt from Australian income tax under section 23(q) of the *Income Tax Assessment Act 1936* (Cth). This section exempts income derived by a resident from sources outside Australia if that income is not exempt from income tax in the country where it is derived.

The legal issues before the Court were: (1) whether the company's income from certain United Kingdom war loan securities and securities of British possessions was "not exempt from income tax" in the United Kingdom within the meaning of section 23(q); and (2) if not all of it, then what proportion of that income was "not exempt" for the purposes of the Australian Act. The company argued that because this income was used in a formula to calculate its United Kingdom tax liability, it was not exempt. The Commissioner of Taxation contended that the income was specifically exempted from United Kingdom tax under certain provisions of the *Income Tax Act 1918* (Imp.), and therefore, it was exempt for the purposes of section 23(q).

A majority of the Court, comprising Dixon C.J., McTiernan, Fullagar, and Taylor JJ., held that the entirety of the company's income from the specified United Kingdom securities was *not* exempt from income tax in the United Kingdom for the purposes of section 23(q). This was because, despite specific exemptions under UK law for certain types of interest, the company was liable to pay UK tax calculated under a formula that included this income. Menzies J. dissented, finding that only a proportion of the income, determined by the UK tax formula, was "not exempt" within the meaning of section 23(q).