Waterhouse v Deputy Federal Commissioner of Land Tax, South Australia [1914] HCA 16; (1914) 17 CLR 665 (24 March 1914)

Waterhouse and Another Appellants; and The Deputy Federal Commissioner of Land Tax, South Australia Respondent.

This is an appeal by the appellants, who are husband and wife, from an assessment made against them as joint owners of all the land owned by either of them under the powers purporting to be conferred by sec. 36 (2) of the Land Tax Assessment Act No. 22 of 1910. That section provides as follows:—

In May 1911 Mr. Waterhouse transferred a piece of land to his wife, who was already the owner of other land, for the consideration of £13,000, of which £8,000 was paid to him in cash from the wife's money. The Deputy Commissioner seeks to apply the provisions of sec. 36 on the ground that he is not satisfied that transfer was not made for the purpose of evading land tax.

The appellants contend that the section is invalid as not being within the powers conferred upon the Parliament by the Constitution. It is objected that the section, if valid, operates not as imposing land tax but as imposing a liability upon one person to pay another's debt, and that such an imposition is not within the powers of the Parliament enumerated in the Constitution. Even if it be conceded that Parliament may under the general power of "taxation" impose a pecuniary liability upon any person for any cause it thinks fit, irrespective of the ownership of property, then, it is said, the subject of taxation in such a case is the person taxed, and not property or its ownership. So, in the present case, it is said, the subject matter of taxation of a wife in respect of her husband's property or of a husband in respect of a wife's property is not the same subject matter as the taxation of land. If, then, sec. 36 (2) imposes taxation, the Land Tax Act itself, No. 21 of 1910, which incorporates No 22, would be invalid as contravening the second provision of sec. 55 of the Constitution which provides that laws imposing taxation, except laws imposing duties of customs and excise, shall deal with one subject of taxation only. This point was directly taken in Osborne v. The Commonwealth[1], but was overruled. Referring to the argument based on secs. 36 and 40, I said[2]—I think with the concurrence of all members of the Court—"In the case of each of those sections the provision, if valid, may render a person liable, directly or indirectly, for land tax upon land in which he has no estate legal or equitable. But whether that provision is valid or not, the subject matter of taxation is still land. The utmost effect is that an ineffectual attempt is made to strike a man who cannot be struck."

The provision now attacked cannot, therefore, be supported on the ground that it is within the general power to impose taxation in respect of subject matters other than land.

It was contended for the Commissioner that husband and wife are in law and in fact one person, and that the Parliament, acting on this view, can impose on either an obligation to pay taxes due by the other. The fundamental proposition is contrary to the fact, and no argument can be based on it.

In considering the question of the validity of a federal Act the Court has regard to the substance of the matter. In my judgment sec. 36 is in substance an attempt to impose a pecuniary liability as a consequence of a transfer of land by a husband to his wife, or by a wife to her husband, which is pro tanto imposing a restraint upon such dealings, and the question is whether the Parliament has power to do so. The relations of husband and wife, and the conditions of the transfer of land, as well between them as between them and other persons, are matters which, by the Constitution, are left to the States, and with which the Parliament has no authority to interfere.

It was next sought to support the section as a provision incidental to the collection of land tax, that is, incidental to the prevention of evasion of the tax—in other words, that it is in the nature of a penalty. But the penalty or obligation is not made dependent upon any evasion or attempted evasion of the Act, but upon the mere fact of transfer, which is a lawful act, and which the Parliament has no power to declare unlawful. The fact that the Commissioner has a dispensing power does not alter the plain construction of the words. It is hardly necessary to point out that a bonâ fide alienation of land for the purpose of escaping the liability to taxation incident to its ownership is not an evasion of land tax. This argument, therefore, does not help the respondent.

There is a second fatal objection to the validity of sec. 36. The first part of sec. 55 of the Constitution enacts that "laws imposing taxation shall deal only with the imposition of taxation, and any provision therein dealing with any other matter shall be of no effect." The two Acts Nos. 21 and 22 are, together, an Act imposing taxation. Sec. 36, as we held in Osborne's Case[3], is not a provision imposing taxation upon land, but a provision that persons not the owners of land shall be liable to pay land tax imposed upon owners, which is a provision dealing with a matter other than taxation, and is therefore of no effect.

Even apart from sec. 55 of the Constitution it is not, in my judgment, within the competence of Parliament, having imposed a tax upon the owners of land, to declare that persons who are not in any sense owners shall be deemed to be owners for the purpose of payment of the tax. I cannot find in the Constitution any power to declare that the true shall be regarded as false, or the false regarded as true, except for the limited purpose of definition of a word or phrase which the Parliament uses in dealing with a subject matter wholly within its competence.

In the case of Attorney-General for the Commonwealth of Australia v. Colonial Sugar Refining Co. Ltd.[4], generally known as the Sugar Commission Case, the Judicial Committee of the Privy Council, in discussing the Royal Commissions Acts of the Commonwealth, pointed out that the question was whether they were within the powers transferred by the Constitution to the new central Parliament, for if such powers were not so transferred they remained exclusively vested in the States. This, they said, resulted from the broad principle laid down in sec. 51, but they also quoted sec. 107. They thought it clear that the powers which the Royal Commissions Acts (the terms of which are now of common knowledge) affected to exercise of imposing, under penalties, new duties on the subjects or people residing within the individual States, were before federation vested in the legislatures of these States. Then comes this passage: "If so, the burden rests on those who affirm that the capacity to pass these Acts was put within the powers of the Commonwealth Parliament." Their Lordships did not think the burden had been discharged in argument, and on this principle the Acts were held invalid.

The same principle applies when it is an individual section which is challenged, whether it be severable, if ultra vires, from the rest of the Act in which it occurs, or not.

That the capacity to pass sec. 36 (2) is a valid exercise of the legislative powers of the Commonwealth is therefore a proposition that it lies upon the respondent in this appeal to establish.

If sec. 36 (2) of the Land Tax Assessment Act is invalid, it is unnecessary to answer other questions raised in the case stated, as the extent to which it may affect the parties becomes immaterial unless it has some binding force. But the effect of the enactment that the husband and wife shall be deemed to be joint owners in a certain event can only be shown by reference to sec. 38, which, so far as it is material to this case, may be shortly stated as providing by sub-sec. 1 that "joint owners of land shall be assessed and liable for land tax in accordance with the provisions of" that section, and by sub-sec. 2 that they shall be jointly assessed and liable "in respect of the land" as if it were owned by a single person.

The first duty of the Court is to construe sec. 36 (2) by its actual terms, having in view the fact that when it enacts that the husband and wife shall in the circumstances stated be deemed to be joint owners, the consequence plainly intended is that they "shall be assessed and liable for land tax in accordance with the provisions" of sec. 38. There cannot be a doubt, therefore, that the intention of sec. 36 (2) is that the parties to the transfer shall be assessed as if they were in truth joint owners, with the result that they are to pay land tax as such. We are not concerned with motives. Parliament appears from the words to have had no other sort of impost or obligation in sight. If it could not subject the husband and wife to land tax by reason of the transfer (failing dispensation by the Commissioner), it used no words which indicate that it meant to subject them to any other charge. The legislature, if we attribute to it, as we should, the belief that it was acting within its powers, must have been of opinion that the persons concerned could be validly brought within the area of land taxation by this statutory fiction. If its estimate of its powers was a mistaken one, that affords no reason to construe the provision as if it meant something different from a statement of intention as clear as words can make it. To control that meaning, some context at least as clear as the provision impeached would have to be found; but there is no such context, nor even any in virtue of which a different interpretation can reasonably be suggested.

The result, then, of such a transfer as is mentioned in the section is to be a land tax, which is to fall upon the parties to the transfer as if each owned all the other person's land as well as his or her own. It is true that the Commissioner has power to exempt them from the consequences if he is satisfied that the purpose was not to evade the tax, but this is not to say that the clause means to make the parties immune from the tax if the transaction is an innocent one. Innocence is no safeguard, and the liability automatically ensues unless the Commissioner intervenes, and in the absence of such intervention it must follow a transfer which is entirely lawful. For where the object of the transaction is, as in this case, "to reduce the amount of tax" to which the transferor's land as a whole would be liable in his or her hands, there is not an illegal evasion of land tax, nor in any sense an illegal act (Payne v. The King[5]; Simms v. Registrar of Probates[6]).

Attributing to Parliament, then, a knowledge of the course of legal decision in the ultimate Court of appeal, it intended to tax the parties to an innocent transaction unless the Commissioner intervened. The provision must be considered, first in its relation to sec. 55 of the Constitution, and next in its relation to the extent of the legislative powers granted to the Commonwealth.

Taking it as established that sec. 36 (2) purports to impose a tax, the Assessment Act may still be regarded as dealing only with "the imposition of taxation," for its machinery provisions would not give it another character: Osborne v. The Commonwealth[7]. But the Land Tax Act incorporates the Assessment Act (ibid.). Even so, the position would not be different. The second paragraph does not stand in the way. The subject matter of taxation in sec. 36 is "still land, and only land," as we said of it in the case just cited. Neither of these Acts, therefore, can be said to offend against the second paragraph of sec. 55. But that does not end the matter. Sec. 36, no doubt, is an attempt to bring certain persons, in a certain event, within the area of taxation. Still, if an effective tax at all, it would be a land tax. But to be effective as a land tax it must be imposed in respect of actual ownership. See Morgan v. Deputy Federal Commissioner of Land Tax, N.S.W.[8]. Sec. 10 of the Assessment Act makes it clear that the tax imposed by the other Act is to be "levied and paid upon the unimproved value of all lands ... which are owned by taxpayers" and not exempted. The raison d'être of the tax is the ownership of land. But the section is an attempt to impose the tax on persons who are not owners by saying they shall be "deemed to be" owners. To say that a person shall be deemed to be the owner of land does not vest the ownership in him. The legislature may, no doubt, have mistakenly thought that it did, and that the provision was therefore consistent with sec. 10. The attempted tax, then, fails as a tax because it lacks the one essential condition. But, not being a land tax, it plainly intends, even if the motive be the keeping up of the revenue, to restrict the transfer of land in certain cases. This the Commonwealth has no constitutional power to do. In that aspect the provision is invalid.

It was suggested in support of the clause that it might be read as an attempt to impose on one person a mere pecuniary obligation, not being a tax, dependent on the act of another. First, I do not think the words are fairly open to that construction. Secondly, there are two clear objections to the construction, if open. It would render the clause an attempt to exercise a power not given to the Commonwealth, and, in addition, the legislation would in this respect not be dealing with taxation only, and the provision would be of no effect (sec. 55 (1)).

Then it was suggested that the clause merely intended to impose a penalty. There, again, I answer that it does not say so. But if it did, then it would be an attempt to penalize, and therefore to prohibit, certain transfers of land, and these again it is not within the legislative competence of the Commonwealth to forbid.

The endeavour to justify the provision as incidental to the power of taxation granted by sec. 51 (ii.) was, of course, hopeless, and I do not discuss it.

The question is whether sec. 36 (2) of the Land Tax Assessment Act 1910-1911 is valid or invalid. In my opinion it is invalid, for the reason I am about to state.

In Osborne's Case[9] it was held that the Act No. 22 did not impose taxation within the meaning of sec. 55 of the Constitution. As to sec. 36 itself I observed[10], it "is said to be invalid as taxing a person in respect of land in which he has no interest. But it is not a tax primarily considered." That was sufficient for the purpose of the case. I went on to add: "It is a penalty for doing what is intended to evade the Act, because, if the parties can satisfy the Commissioner there was no such intention, the section has no application." That is quite true in a broad sense. There is a penalty attached to the act indicated, but it is not a penalty in the strict sense of a fine or money punishment.

If the purport of the section were to impose a new pecuniary obligation, by deliberately making a husband pay a tax in respect of land which is assumed not to belong to him but to his wife alone, or as to a wife in respect of what is assumedly her husband's land, I should think that was new taxation. It would be immaterial that the tax was payable as the consequence of or contingent upon a stated event. And such an imposition could not be called a land tax. It would not be a land tax as that term is ordinarily understood, and to call it so, would be in the words of the Judicial Committee in Bank of Toronto v. Lambe[11], when speaking of another tax, to "run counter to the common understanding of men on this subject, which is one main clue to the meaning of the legislature." If such a new obligation were imposed either directly, or contingently, I should consider it a personal tax, or a land transfer tax, but not a land tax; and this would, in my opinion, at once bring the Assessment Act within sec. 55 (2), with disastrous effect.

Now, as I read the section, critically, as it must now be read, and with the caution required to guard against unnecessary invalidity (Osborne's Case[12]), I am of opinion it is intended as an evidentiary section of a conclusive character. The legislature had palpably no design of imposing any tax but a land tax; that tax was imposed by Act 21 and had direct reference to the owner; No. 22 defines the owner (sec. 3), and the owner is the person to pay (sec. 11). The owner is to be reached directly or indirectly. I should require express words to indicate a change of that intention, even if Osborne's Case[13] had not already decided it.

So as to penalty in the strict sense it is definitely laid down by the Judicial Committee in The Gauntlet[14] that a person charged with an alleged offence has a right to say that the thing charged though within the words is not within the spirit of the enactment.

There are strong considerations why I do not think it was ever intended by sec. 36 to regard the mere transfer of husband to wife, or wife to husband, as an offence defeasible on getting the favourable opinion of the Commissioner. The first is that the consequence of the act of transfer, a perfectly innocent act, and not attempted to be invalidated by the section, attaches not merely to the land included in the transfer, but to all land included or not, which is owned by both transferor and transferee in severalty. The next is that sec. 70 directly deals with the question of penalty for wilfully attempted evasion, and, together with sec. 73, touches both parties. The penalty is pecuniary, or is forfeiture of the land concerned. But it is in the highest degree unlikely that the further supposed penalty should have been so intended, and intended to extend to all land held in severalty by either party, while exempting land in fact held by them jointly,—and this for mere failure to satisfy the Commissioner. Express words would be necessary to convince me to the contrary. In my opinion, if the legislature had expressly said that sec. 36 was not intended either as a new tax or as a pecuniary penalty by way of new tax, the position would not be plainer.

The view I take of the section is this. It was intended as an incidental provision—incidental, that is, to the land tax already enacted by Act No. 21. The legislature, I gather, intended to make a provision to safeguard it by ensuring that land really owned jointly by husband and wife, though nominally standing in the separate name of either, should be taxed jointly according to the fact. And, recognizing the difficulty of establishing the reality, an arbitrary rule of evidence was devised, namely, that if a husband or wife were found transferring land to the other, or in trust for the other, that should be conclusive evidence that all the land nominally held in severalty was really held jointly and subject to the tax already imposed.

No doubt the legislature has always enormous incidental powers of enacting evidentiary provisions. The federal Parliament has, in relation to the subjects with which it deals, equal powers, in this respect, with any other legislature, provided the matter is really incidental to the main power. The matter has been reasoned out in several American cases, and I think the reasoning satisfactory: See The Thomas and Henry[15], per Marshall C.J., and Li Sing v. United States[16], where many authorities are collected.

The use of the word "deemed" is a common legislative expedient to safeguard and enforce enactments, by making certain facts conclusive evidence. A number of instances are collected in Taylor on Evidence, 10th ed., p. 73 and following pages.

In this case—as by the proper construction of the Statute, the legislature has excluded all idea of acting upon any power but that of enacting a land tax—we are, I think, restricted to the single enquiry whether sec. 36 is really incidental to such a tax. In my opinion it is not, because the fiction it creates, namely, that the given person is to be deemed owner of certain land not in his name, is accompanied by an acknowledgment on the very face of the section itself, that the person in question has no interest whatever in the land.

The provision therefore shows ex facie that it is not and cannot possibly be incidental to a land tax, because the idea of a person admittedly unconnected with the land in any way whatever being required personally to pay a tax upon it already imposed upon the owner, is ex vi termini foreign to the very idea of a land tax.

For this reason I am of opinion that the section is invalid, but that its invalidity does not infect any other enactment, and does not violate sec. 55 of the Constitution.

Sec. 36 (2) of the Land Tax Assessment Act 1910, when read with the other sections of that Act and with the incorporating Land Tax Act 1910, was, in our opinion, designed to impose a tax on persons having no interest in the land in respect of which the tax is assessed. How should such an enactment be described? Is it an attempt to impose a tax dealing with land; or is it an attempt to impose a tax other than a land tax so as to bring the Land Tax Act within the mischief of the second part of sec. 55 of the Constitution as dealing with more than one subject of taxation? The answer to this question may be found in a case already decided by this Court. All the Judges who took part in the decision in Osborne v. The Commonwealth[17] expressed the opinion that the Land Tax Act 1910 incorporating the Land Tax Assessment Act 1910 does not deal with any subject of taxation other than land. It cannot, therefore, be said that those Acts are, or any section of them is, bad under the second part of sec. 55 of the Constitution as dealing with more than one subject of taxation. The result is that the legislature must be taken to have made an attempt to levy a land tax in respect of persons having no interest in the land, and the question is whether such an attempted exercise of power is valid. It seems to have been assumed by all the Judges who took part in the decision in Morgan v. Deputy Federal Commissioner of Land Tax, N.S.W.[18] that such an enactment would be unlawful, because not warranted by the gift of legislative power in the Constitution. Both the arguments and judgments in Morgan's Case[19] are based on the hypothesis that the Commonwealth Parliament has no power to tax a person in respect of land in which he has no beneficial interest. Indeed, in view of the prior decision in Osborne's Case[20] no argument could have arisen except on that hypothesis.

We think, accordingly, that the provisions of sec. 36 (2) of the Land Tax Assessment Act 1910 are not obnoxious to the provisions of sec. 55 of the Constitution, but are invalid as being beyond the powers conferred by the Constitution on the Commonwealth Parliament, for any Commonwealth power must be based on a provision of the Constitution, and the onus of proving the existence of such a power lies on those who seek to rely on it.

Our answer to the first question must be in the affirmative. It is unnecessary to answer the other questions.

Solicitors, for the appellants, Bakewell, Stow & Piper, Adelaide, by Madden & Butler.

Solicitor, for the respondent, Gordon H. Castle, Crown Solicitor for the Commonwealth.

[1] [1911] HCA 19; 12 C.L.R., 321.

[2] [1911] HCA 19; 12 C.L.R., 321, at p 340.

[3] [1911] HCA 19; 12 C.L.R., 321.

[4] [1913] UKPCHCA 4; (1914) A.C., 237; 17 C.L.R., 644.

[5] (1902) A.C., 552.

[6] (1900) A.C., 323.

[7] [1911] HCA 19; 12 C.L.R., 321.

[8] [1912] HCA 88; 15 C.L.R., 661.

[9] [1911] HCA 19; 12 C.L.R., 321.

[10] [1911] HCA 19; 12 C.L.R., 321, at p. 370.

[11] 12 A.C., 575, at p. 582.

[12] [1911] HCA 19; 12 C.L.R., 321, at p. 364.

[13] [1911] HCA 19; 12 C.L.R., 321.

[14] L.R. 4 P.C., 184, at p. 191.

[15] 1 Brock., 367.

[16] [1901] USSC 48; 180 U.S., 486.

[17] [1911] HCA 19; 12 C.L.R., 321.

[18] [1912] HCA 88; 15 C.L.R., 661.

[19] [1912] HCA 88; 15 C.L.R., 661.

[20] [1911] HCA 19; 12 C.L.R., 321.

High Court of Australia

Waterhouse v Deputy Federal Commissioner of Land Tax, South Australia [1914] HCA 16; (1914) 17 CLR 665 (24 March 1914)

HIGH COURT OF AUSTRALIA