Brett v Barr Smith [1919] HCA 4; (1919) 26 CLR 87 (17 March 1919)

Brett and Another Plaintiffs, Appellants; and Barr Smith and Another Defendants, Respondents.

Sec. 54 of the Income Tax Assessment Act 1915 enacts as follows:—"A covenant or stipulation in a mortgage of land, which has or purports to have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage" is to have certain consequences according as the mortgage was made before or after the commencement of the Act. If the mortgage was made after the commencement of the Act, the covenant or stipulation is to be absolutely void; but if the mortgage was made before that time, it is not wholly abrogated but is modified. The effect of the modification is, in substance, that instead of paying the amount of tax which the mortgagee is bound to pay the Crown in respect of the interest, and perhaps on the basis of being part of a larger income, and therefore on a higher graduated scale, the mortgagor pays in respect of the mortgagee's income tax only such sum as he would pay if his own income amounted only to the sum he pays for interest.

The first thing is to interpret the enactment. It has been argued that its terms, particularly the word "obligation," are to be read in a popular sense. Its subject matter, however, is a "mortgage" of land, which is a term of art, and the expressions which are used with respect to the mortgage are legal and technical terms, namely, "covenant," "stipulation," "imposing the obligation" and "interest to be paid under the mortgage." It is a cardinal rule of interpretation that technical words must have their legal effect unless the contrary is made perfectly clear. It was so held by the Privy Council in Lalit Mohun Singh Roy v. Chukkun Lal Roy[1], which was the case of a will. The principle applies à fortiori to a Statute (see Burton v. Reevell[2]; The Queen v. Commissioners of Income Tax[3], and Attorney-General v. Glossop[4]). In the last-mentioned case Collins M.R. applied the principle to the Finance Acts, notwithstanding an argument very similar to that addressed to us, that words primarily technical should be read from a popular standpoint. This principle applies with "special cogency," said Lord Robertson in Lord Advocate v. Stewart[5], "when the words in question present only legal conceptions. The popular use of such words does not represent the primary meaning of the words, but some half understanding of them." I therefore read the governing portion of the section in a legal sense. So reading it, we must, in order to assent to the appellants' contention, find a stipulation having the "effect" of imposing on the appellants the obligation of paying income tax on the interest to be paid under the mortgage.

Turning to the mortgage, it is one made before the commencement of the Act. The principal sum is £9,000, and by the first clause of the mortgage the mortgagors covenant to repay that sum and interest "at the rate of five pounds fifteen shillings per centum per annum reducible as hereinafter mentioned." The "hereinafter" consists of clause 7, which says: "Provided always and it is hereby agreed and declared that" if the mortgagors shall on the dates mentioned or within ten days afterwards pay interest at such a rate as will, after deducting certain taxes, which include Commonwealth income tax on £405 at the highest rates the mortgagee may be liable to pay on that sum, leave a clear remainder of £4 10s. per cent., the mortgagees will receive that in lieu of the interest mentioned in clause 1.

One observation must be made at the outset. No question arises under sec. 53 of the Act, and learned counsel at the Bar expressly stated that that section was not relied on. It is, therefore, a question not of whether the document should be reformed or whether it embodies any transaction struck at by sec. 53, but only whether, taking it as it stands, it contains a covenant or stipulation of the nature described in the opening words of sec. 54. The document has to be construed according to well settled rules. The anomaly of the rule of higher interest reducible on punctual payment being good, and of lower interest being increased for unpunctuality, is well known. In the note to Strode v. Parker[6] it is truly said that the agreement of the parties seems to be the same in either case, and the only difference is in the mode of expressing one and the same thing. Nevertheless, the difference has important results, which equity has firmly established.

The mortgage before us is carefully drawn so as to conform to the rule that maintains in certain cases the higher rate as the true interest to be paid under the mortgage. This rule the 54th section in no way seeks to alter, and therefore the effect of the mortgage, both at law and in equity, is that the interest to be paid under the mortgage is primarily 5¾ per cent., but that, on punctual payment within the limits mentioned in clause 7, a reduced rate of interest is all that can be demanded. That is an instance of what is termed by Lord Hardwicke, in Nicholls v. Maynard[7], an "abate ... for prompt payment," and by Lord Hatherley, in Wallingford v. Mutual Society[8], an "indulgence" to the mortgagors. If they comply with the condition of payment, the reduced rate (if it be a reduced rate) becomes the rate of interest to be paid under the mortgage, but only if the condition is performed. If taxation exceeds 1¼ per cent. on the principal borrowed, there would be no "reduced rate." A good deal of argument has taken place as to whether payment of income tax by the mortgagors is compulsory or voluntary on their part. As I view the matter, that is entirely beside the question. The only condition for reduced interest is prompt payment within the period specified by clause 7. That prompt payment, and even more prompt payment, has already by clause 2 been expressly covenanted for by them. But in order to induce them to adhere to that covenant, and perform what they are already under an obligation to do, with a slight extension in their favour, a reduced rate of interest is promised.

But here, again, we must observe that it is not correct to say the reduced rate of interest is 4½ per cent. It is a variable rate. On prompt payment the mortgagors are entitled to pay only a sum for interest calculated at such a rate as will provide for two factors, one variable and the other constant, neither of which, however, in itself constitutes the reduced interest, but both of which, added together, constitute the amount which will be accepted as interest, and therefore will determine the reduced rate. The variable factor is such amount as will pay (inter alia) the mortgagee's highest income tax on £405, stated as a fixed amount, but not identified as the interest under the mortgage, and the constant factor is a clear remainder of 4½ per cent. per annum, and obviously part of the 5¾ per cent. per annum, the unreduced interest.

But it is very important to remember that the mortgagee does not agree to accept under any condition whatever 4½ per cent. as reduced interest. His reduced interest is 4½ per cent. plus the variable factor, and the total of the two, namely, 4½ per cent. plus the rate required to produce the variable factor, is what he receives as the reduced rate of interest under the mortgage. How he chooses to apply the amount of the variable factor when he gets it, is immaterial to the mortgagors and immaterial to the Crown. It may be an interesting question what sum he returns to the Crown for income tax purposes as being the interest he gets under the mortgage. The document is drawn having in view secs. 30 and 63 of the Land Tax Assessment Act 1910-1911, and very adroitly and carefully to exclude, as far as words can exclude, the notion that the reduced interest is 4½ per cent., and that the mortgagors are compelled to pay the mortgagee's income tax on that or any tax of the mortgagee. It is drawn so as to provide that the mortgagors do not pay tax on interest at all, but pay nothing but interest, measured, if reduced, by adding (inter alia) a sum corresponding to what the mortgagee has to pay on £405 of his income to the amount calculated at the rate of 4½ per cent. on the £9,000. For all that legally concerns the mortgagors, the sum which is to govern the reduced rate of interest might have been measured by such sum as will pay the mortgagee's rent, or purchase a motor car, and leave him £100 clear. The total so ascertained is the reduced interest on the mortgage in the event of punctual payment, and the reduced rate is such rate as will produce that total sum. Consequently, the appellants are not under any obligation to pay income tax on "the interest to be paid under the mortgage." They are not under any obligation to pay income tax at all. They are bound only to pay interest at the rate of 5¾ per cent. or on prompt payment such a smaller rate as will produce the same sum as, having regard to the existing law, will amount to the sum of the two factors I have mentioned.

That being the legal construction of the instrument, we are not at liberty to paraphrase or reconstruct it, and treat it as if it were a mortgage reserving 4½ per cent. interest with an added covenant or stipulation by the mortgagors to pay the mortgagee's income tax on the interest so reserved. There is no such stipulation, and we are not at liberty to create one. The interest reserved is not 4½ per cent., and we not at liberty to prescribe that rate. There is no covenant even making it obligatory to pay the 4½ per cent. plus the variable sum necessary to make up the reduced rate of interest, and we are not at liberty to frame one. If such an instrument is to be dealt with for the purpose of testing its reality, or its validity, having regard to what is behind it, sec. 53 must be resorted to, not sec. 54. But sec. 53, as I have stated, has not been relied on in this case.

For the reasons mentioned, this case is not within sec. 54 as that at present stands. If the intention of the Legislature were to include such a case as the present, the language of the enactment does not carry out the intention, and a Court can only judge of intention from the language actually used. More particularly should this be observed where ex post facto legislation alters contracts already made.

The only section on which the appellants rely is sec. 54; and they are not entitled to succeed unless they show that in the mortgage there is something imposing on the mortgagors an "obligation" to pay the mortgagee's income tax on the interest to be paid under the mortgage. Where is there any such obligation? "Obligation" is a technical term of law, with a clear definite meaning; and Statutes which make law must primâ facie be treated as using technical words in their technical sense. There is no ground here for treating "obligation" as meaning moral obligation, or social obligation, or business obligation (in the sense of commercial pressure or expediency), or anything but legal obligation. The test is: Is there any legal sanction—would an action lie (if there were no sec. 54) against the mortgagors for failure to pay the income tax? "Obligation" involves binding; and there is nothing here to bind the mortgagors to pay the amount of the tax. There is merely an obligation on the part of the mortgagors to pay 5¾ per cent. interest on the £9,000, unless they pay punctually—not even 4½ per cent. plus the income tax in addition, but such a rate as will, after deduction of an amount equivalent to income tax and other taxes relating to the property, yield a net 4½ per cent. to the mortgagee. If, for instance, the mortgagee's income tax as to the mortgage were £30, the land tax £25, the property tax £20, the mortgagors would be relieved of the burden of paying 5¾ per cent. (£517 10s.) by paying punctually £480 (£405 plus £75). But there is no "obligation" to pay the income tax. Mr. Pigott admits that an agreement of A to give a horse to B if B pay A's income tax or an amount equal to that tax, does not impose on B an "obligation" to pay the tax; and that really settles the question. The case of Elder v. Dennis[9], cited by Cussen J. in the Supreme Court, is an à fortiori case, and one of the many demonstrations that the man who needs money, even if aided by the parliamentary draftsman, is no match for the man who has money with his skilled conveyancer.

During the argument I was in some doubt as to whether the effect of clauses 1 and 7 of the memorandum of mortgage was not to prescribe 4½ per cent per annum as the rate of interest to be paid under the mortgage, and in addition to impose on the mortgagors a further obligation of paying either income tax on such interest and certain other imposts, or in the alternative of paying an annual sum equal to 1¼ per cent. on the money advanced by the mortgagee, which he might of course allocate to the payment of such imposts or any part of them. This doubt has not been removed from my mind, but I am not prepared to differ from the other members of the Court, who are of opinion that not 4½ per cent. but 5¾ per cent. is the rate of interest which in form and substance is to be paid on the money advanced by the mortgagee. If this is so, I agree that the memorandum of mortgage contains no covenant or stipulation which has or purports to have the purpose or effect of imposing on the mortgagee the obligation of paying income tax on the interest to be paid under the mortgage.

Appeal dismissed. First and second questions answered in the negative. Third question answered thus: At the rate prescribed by clause 1 of the mortgage, reducible as prescribed by clause 7. Appellants to pay costs of appeal.

[1] 24 Calc., at p. 846; L.R. 24 Ind. App., 76.

[2] [1847] EngR 142; 16 M. & W., 307, at p. 309.

[3] 22 Q.B.D., 296, at p. 309.

[4] (1907) 1 K.B., 163, at p. 172.

[5] (1902) A.C., 344, at p. 356.

[6] [1694] EngR 19; 2 Vern., 316, at p. 317.

[7] 3 Atk., 519, at p. 520.

[8] 5 App. Cas., at p. 702.

[9] 22 V.L.R., 125; 18 A.L.T., 25.

High Court of Australia

Brett v Barr Smith [1919] HCA 4; (1919) 26 CLR 87 (17 March 1919)

HIGH COURT OF AUSTRALIA