Australasian Scale Co Ltd v Commissioner of Taxes (Qld) [1935] HCA 23; (1935) 53 CLR 534 (30 April 1935)

The Australasian Scale Company Limited Appellant; and The Commissioner of Taxes (Queensland) Respondent.

Sir Thomas Bavin K.C. (with him Bowie Wilson), for the Commonwealth, intervening by leave.

Assessments have been made upon the appellant company under the provisions of the second paragraph of sec. 14 (4) (iv.) of the Queensland Income Tax Act 1924. In this appeal the company attacks the validity of that paragraph upon the ground that, as part of an inseverable provision, it imposes a burden upon inter-State commerce contrary to sec. 92 of the Constitution. The first paragraph of the clause provides that the amount of profits made in Queensland shall be the taxable income of a foreign company, that is, of a company with its head or principal office or principal place of business out of Queensland. The second paragraph depends upon the contingency of its being impossible, in the opinion of the Commissioner, to determine such profits otherwise than by means it proceeds to describe. In that event, the taxable income may be assessed by the Commissioner at a sum which bears the same proportion to the total profits of the company as the sales made in Queensland bear to the total sales made by the company. The paragraph goes on to direct an apportionment according to revenue if there are no sales. The third paragraph of this clause deals with the contingency of the Commissioner's being satisfied that the information cannot be obtained, or not being satisfied that the profits returned disclose the true state of affairs. Then he may assess the taxable income of the company at 7½ per cent of the total sales made in Queensland, or, if there are no sales, of the total revenue derived from Queensland. The third paragraph of the clause was used during the argument to illustrate the ground upon which the attack on the second paragraph was based. That ground is that it selects sale of commodities, including inter-State sale, as a criterion of liability to tax; that by doing so it levies a tax upon or in reference to inter-State commerce. It was said that the third paragraph supplied a plain example of the vice ascribed by the argument to the second paragraph. But it was not suggested that the third paragraph was inseparable from the second paragraph which alone was applied to the assessments in question. For the purposes of this case, therefore, the third paragraph of the clause may be put aside.

The validity of the second paragraph appears to us to depend upon the question whether the proportion sum it prescribes actually does adopt as a ground of liability to any part of the tax the making of sales, and so impose a burden on sales made in the course of inter-State commerce. It may be conceded, at once, that in the sales to which the paragraph refers inter-State sales made in Queensland are included, and that the reference to sales is not distributive and is inseparable. But is the making of sales made a ground of liability to any part of the tax? The taxation in cases within the operation of the paragraph is levied upon profits, not on the whole profits, but on a proportion of profits. It is the making of profits which exposes the taxpayer to liability under this paragraph. The company taxed must carry on business in Queensland, otherwise it could make no sales there. This circumstance removes any objection based upon the territorial restriction of the State's legislative power (cf. Colonial Gas Association Ltd. v. Federal Commissioner of Taxation[1]). If the entire profits had been taxed no question of inter-State trade would have arisen. The question arises only out of the ratio prescribed for ascertaining the amount to be taxed of these profits. In adopting as the proportion the ratio borne by the amount of the company's Queensland sales to the amount of its total sales, the second paragraph certainly goes to transactions of commerce to find a basis of calculation. But, unlike the third paragraph, it does not make the volume of those transactions a measure of the tax. It is not the volume but the relation between a part and the whole of the proceeds of the company's selling that affects the amount of tax. This relation forms, moreover, but an element in determining the tax. No doubt the relation is affected to the company's disadvantage by an increase in the volume of the company's sales in Queensland or a decrease in the volume of its sales elsewhere. But this distinction is irrelevant to inter-State trade. Whether a sale does or does not form part of inter-State trade in no way depends upon its being made in or out of the State. It is true that cases may be supposed in which an increase in taxation under this provision is caused by an increase in a company's inter-State operations. But the increase does not occur because the operations are inter-State, nor because they have increased. A disadvantageous consequence is attached to that operation to this extent and no more, namely: the greater the gross proceeds from sales in Queensland the greater is the proportion of the total net profits from all sources assessed as Queensland taxable income. The relation between the sales in Queensland and the total net profits, and between the sales elsewhere and in Queensland, although not accidental, is indeterminate. The liability to tax is, therefore, not necessarily greater because the proceeds of sales in Queensland are greater. On the whole, we think that it is not correct that an appreciable burden is placed upon a transaction of commerce as such, that is, by reference to characteristics which enter into the description "trade, commerce and intercourse" (cf. O. Gilpin Ltd. v. Commissioner for Road Transport and Tramways (N.S.W.)[2]).

The cross-appeal raises questions of interpretation only. By its answers to the sixth and eighth questions in the special case, considered in combination, we understand the Supreme Court of Queensland to have decided (1) that upon objection and appeal in the case of an assessment under the second or third paragraphs of sec. 14 (4) (iv.), the Court of Review should enter into the question whether the profits made by the company in Queensland can be satisfactorily determined otherwise than by the formula stated in the second paragraph, and, if the third paragraph has been applied, whether the information can be obtained and whether the profits returned do disclose the true state of affairs, and (2) that it is not competent to use either of these two paragraphs so as to make the taxable income of the company greater than that amount, if any, which the company succeeds affirmatively in proving to the Court's satisfaction its actual profits made in Queensland did not exceed. In considering this interpretation of the clause, the first question arising is whether it intends that the subject matter of the appeal shall include the correctness of the opinion of the Commissioner upon the possibility of satisfactorily determining the Queensland profits otherwise than by the formula supplied by the second paragraph, and upon the possibility of obtaining the information or upon the truth of the state of affairs disclosed by the returns. Prima facie the whole process of assessment is subject to objection and appeal, and is examinable under secs. 45 (4) and 47 (2). There are no constitutional difficulties in bestowing upon a State Court or Judge a power of reviewing a discretion, although of an administrative character, exercised by a State officer in making an assessment for State taxation. But, notwithstanding the generality of the powers of the Court of Review, a particular provision may intend to invest the Commissioner with a discretion which is confided to him to the exclusion of that Court. Whether it does so is a question which must depend upon the language in which it is expressed and the subject matter with which it deals. The two paragraphs of sec. 14 (4) (iv.) now under consideration deal with a matter notorious for its difficulty, viz., the ascertainment of profits made or derived within a particular territory as a result, it may be, of operations conducted over a wider field. The language of the paragraphs is appropriate to give him an individual discretion. No doubt it is not incapable of the contrary construction, but, having regard to the subject matter and the form of expression, we think it sufficiently appears that the enactment means to withdraw from the consideration of the Court the correctness of the opinion of the Commissioner upon the matters in question. We agree upon this point in the judgment of E. A. Douglas J. Of course this does not mean that the validity of the exercise of the Commissioner's discretion, as opposed to the correctness of his opinion, is not examinable. If he exercises his discretion capriciously, or fancifully, or upon irrelevant or inadmissible grounds, it may be set aside. Upon the present appeal no such question arises.

We think the answer of the Supreme Court to the sixth question is erroneous. As we have already said, for the reasons appearing from this Court's decision in Colonial Gas Association Ltd. v. Federal Commissioner of Taxation[3] no difficulty arises as to the territorial restriction on the power of the State legislation. The reasons upon which the Supreme Court based their answer to the eighth question included the view that otherwise the paragraph of sec. 14 (4) (iv.) would or might be open to objection on this score. In our opinion the eighth answer also should be set aside.

The order of the Supreme Court should, in our opinion, be varied by substituting for the answers given to the sixth and eighth questions the answer: No, to each of those questions.

The appellant company is registered in New South Wales, and has its head or principal office there. Its business is manufacturing, importing, and selling scales. It has a branch office in Queensland, and there carries on business as a seller of scales. The Income Tax Act 1924 of Queensland provides, by sec. 14 (4) (iv.), as follows:—"The taxable income of any other foreign company liable to assessment shall be the amount of the profits made by the company in Queensland, plus any expenses and charges which are not allowable deductions under this Act. If such profits cannot, in the opinion of the Commissioner, be otherwise satisfactorily determined, the taxable income of the company may be assessed by the Commissioner at a sum which bears the same proportion to the total profit made by the company as the sales made in Queensland bear to the total sales made by the company." The appellant company is a foreign company liable to assessment under these provisions.

The territorial competence of the legislation cannot be doubted; Queensland has competence to impose taxes upon persons, natural or artificial, resident or carrying on business within its territory (Commissioners of Stamps (Q.) v. Wienholt[4]; Barcelo v. Electrolytic Zinc Co. of Australasia[5]; Colonial Gas Association Ltd. v. Federal Commissioner of Taxation[6]). But the provision under which the appellant was assessed, namely, that which provides for the case in which profits cannot in the opinion of the Commissioner be otherwise satisfactorily determined, was attacked on the ground that it infringes sec. 92 of the Constitution: "Trade commerce and intercourse among the States ... shall be absolutely free." A State must not, therefore, burden inter-State trade, by taxation or otherwise; it is burdened if a tax be laid upon an operation or act of inter-State commerce. But it has long been recognized, if not actually decided by this Court, that a general income tax imposed by the States is not obnoxious to the provisions of sec. 92, even in cases—which are many—where the income includes receipts from inter-State trade. The reason is that a general income tax is not imposed upon any operation or act of inter-State commerce; it is laid after inter-State trade is completed, "after all expenses are paid and losses adjusted, and after the recipient of the income is free to use it as he chooses." (Cf. Peck & Co. v. Lowe[7]; United States Glue Co. v. Town of Oak Creek[8].) The Queensland Act (sec. 14 (4) (iv.)), it should be observed, taxes profits made by the company in Queensland, not sales or the gross proceeds of sales. In the case in which those profits cannot, in the opinion of the Commissioner, be otherwise satisfactorily determined, the tax is nevertheless laid upon profits—the total profits made by the company—but they are measured by the proportion that the sales made in Queensland bear to the total sales made by the company. It is simply a means—artificial it may be—of estimating the profits made in Queensland, but no tax is imposed upon the sales or the proceeds of the sales, "either in form or in fact." (Cf. Maine v. Grand Trunk Railway Co.[9].) In my opinion, a tax so levied in no wise contravenes the provisions of sec. 92 of the Constitution. But I express no opinion upon the validity of the third clause of sec. 14 (4) (iv.) providing for the assessment of taxable income upon total sales made in Queensland; it raises other considerations, as may be gathered from the reasons already given.

Another question raised upon this appeal is whether the Commissioner's opinion that the profits could not otherwise be satisfactorily determined was subject to appeal by virtue of the provisions of secs. 45-48 of the Queensland Act. The Court of Review under the Act has very wide powers, but the condition of the authority conferred by the sections is the opinion of the Commissioner. It is his opinion that is required and is to govern. So long as it is honest and not arbitrary or capricious, that opinion is final and not open to appeal.

The result is that the appeal of the Australasian Scale Co. should be dismissed, but the judgment of the Supreme Court should be set aside in so far as it declares that the opinion of the Commissioner was open to review and a judgment should be given in a contrary sense.

This appeal from the Full Court of the Supreme Court of Queensland has been brought pursuant to special leave. The main question in issue is whether sec. 14 (4) (iv.) of the Queensland Income Tax Act of 1924 is repugnant to sec. 92 of the Commonwealth Constitution, which provides that trade, commerce and intercourse among the States shall be absolutely free.

Sec. 14 (4) (iv.) applies to "foreign" companies, that is, companies whose head or principal office, or whose principal place of business is out of Queensland. Its main provision is that the taxable income of foreign companies liable to assessment shall be "the amount of the profits made by the company in Queensland plus any expenses and charges which are not allowable deductions under this Act." But the sub-section goes on to declare that, if the amount of such profits "cannot in the opinion of the Commissioner be otherwise satisfactorily determined" the Commissioner may assess the taxable income at a sum "which bears the same proportion to the total profits made by the company as the sales made in Queensland bear to the total sales made by the company, or, if there are no sales, in the same proportion as the total revenue derived from Queensland bears to the total revenue derived by the company." To the amount so arrived at by the Commissioner, certain other sums are to be added.

The third and last part of the sub-section is as follows:—"If the Commissioner is satisfied that this information cannot be obtained or is not satisfied that the profits returned disclose the true state of affairs, he may assess the taxable income of the company at a sum equal to seven pounds ten shillings per centum of the total sales made in Queensland, or, if there are no sales, at a sum equal to seven pounds ten shillings per centum of the total revenue derived from Queensland."

Over a long period of years, the Courts throughout Australia have been required to deal with the difficult problem of attributing to one State or territory a proportionate part of the income or profits of a person or company who carries on business in more than one State or territory, the problem arising from the fact that a particular legislature has made the subject matter of taxation income or profits made within, or arising from, sources in its own territory. Many illustrations of the resulting difficulties of apportionment are to be found in the decided cases, all of which were discussed recently in Federal Commissioner of Taxation v. W. Angliss & Co. Pty. Ltd.[10].

It is to this very problem that sec. 14 (4) (iv.) is addressed. The Legislature decided to render subject to taxation the amount of the profits made by a foreign company in Queensland. But it was perceived that difficulties would arise in ascertaining the precise amount of such profits. If the difficulties proved so considerable that the profits could not in the Commissioner's opinion be "otherwise satisfactorily determined," the formula set out in the second paragraph of sec. 14 (4) (iv.) is to become operative. That formula requires the ascertainment of the total profits of the company and the fixing of such proportion of those total profits as is represented by the ratio which the company's Queensland sales bears to its total sales or, if there are no sales, by the ratio which the company's Queensland revenue bears to its total revenue.

It is contended by the respondent that the application of the formula places an unlawful burden on trade and commerce among the States. At first sight, the contention appears fanciful, because there does not appear to be any relation between such trade and commerce and the ascertaining of the subject matter of taxation by reference to the formula. But the argument is that, in the case of sales, the result of adopting a formula is this: that, if the amount of a company's sales in Queensland increases, there will be an increase in the subject matter of taxation. But this is a very inaccurate way of expressing the true position. No doubt, in the case of a foreign company which is conducting sales in Queensland, some of such sales may be made in the course of trade and commerce among the States, just as they may be made in the course of domestic or overseas trade. It follows that, if every other transaction of sale is excluded from the calculation or is treated as irrelevant, an increase in the company's sales in Queensland will tend to increase the ratio of total sales which has to be ascertained under the formula. But this argument overlooks the fact that, even upon the assumption already mentioned, the increase in the ratio which results from an increase of the inter-State sales in Queensland will not be directly proportionate to the increase of such sales; it also overlooks the fact that inter-State sales by a foreign corporation in other States of the Commonwealth have to be taken account of in the denominator, not in the numerator, of the fraction which represents the required ratio. The last mentioned fact shows that increases in the inter-State trade of the foreign company in States other than Queensland will tend to reduce, and not to increase, the subject matter of taxation if recourse must be had to the formula of sec. 14 (4) (iv.).

This analysis of the formula reinforces the fact which first impression conveys, viz., that the formula of sec. 14 (4) (iv.) is devised without any reference to inter-State trade and commerce. In order to obtain a fair comparison of the foreign company's Queensland activities with the totality of its business activities, sales are selected as a method of comparison, and, failing sales, a comparison of revenue is to be made; and the formula is only to be used as a matter of last resort, when the Commissioner is satisfied that otherwise it will not be possible to determine in any satisfactory way the profits made in Queensland. It follows that the adoption of such formula cannot be regarded as infringing in the slightest degree upon sec. 92 of the Commonwealth Constitution.

Finally, it was contended that the third portion of sec. 14 (4) (iv.) is an infringement of sec. 92 because, under it, the taxable income of the company is fixed at 7½ per cent of the total sales made in Queensland, or, if there are no sales, the total revenue derived from Queensland. It was argued that this provision imposes a direct burden upon inter-State trade. It is unnecessary to examine this provision further in the present case, because it has not been applied and it is clearly severable. But it should be emphasized that the provision applies only where essential information cannot be obtained by the Commissioner, or where the Commissioner is not satisfied that the profits returned disclose the true state of the company's affairs. In other words, the provision takes its place in the statutory scheme as a mere proviso to meet a very special class of case. There is certainly no intention to burden that part of the company's inter-State trade which is conducted in the State of Queensland, and any effect upon such trade which the adoption of the provision produces may fairly be described as casual and accidental.

It was argued on the cross-appeal that the answers given by the Full Court to questions 6 and 8 of the special case were erroneous. In the first place, it was held by the Full Court that the decision of the Commissioner of Taxes as to whether the profits of the appellant could not be satisfactorily determined otherwise than by the adoption of the statutory formula, was open to review by the Court of Review. The better opinion is that such a decision was not open to review. The principal object of sec. 14 (4) (iv.) was to meet the difficulty involved in allocating to Queensland that part of the total profits of the company which should be properly attributed to its business activities in that State. Accordingly, the Commissioner was made the final judge in determining whether recourse should be had to the formula. In a general sense, the Commissioner's decisions are open to objection and appeal, but the particular matter as to which he gives a decision has to be examined in order to ascertain from the legislative scheme whether the general rule applies to that matter.

The other point to which the cross-appeal relates is question 8 of the special case. The Full Court held that if the Court of Review was of opinion that if, by the adoption of the formula in the second part of sec. 14 (4) (iv.), the assessment resulted in the inclusion of profits made out of Queensland within the subject matter of taxation, the assessment could, and should, be set aside. The Full Court was greatly impressed by the argument that invalidity would attach to sec. 14 (4) (iv.) if by any chance profits made out of Queensland were included in the assessment as a result of applying the formula. It must be conceded that the adoption of the formula makes it possible that the subject matter of taxation will include profits not confined to those made within Queensland itself. But the Queensland Legislature is clearly entitled to impose an income tax upon foreign corporations doing business in Queensland, without being limited by any rigid doctrine of territorial competence to the profits made in Queensland alone. The Full Court referred to several cases dealing with this problem of territorial competence, but they do not appear to have considered such cases as Commissioner of Stamp Duties (N.S.W.) v. Millar[11]; Trustees, Executors and Agency Co. v. Federal Commissioner of Taxation[12], and Colonial Gas Association Ltd. v. Federal Commissioner of Taxation[13]. In those cases the problem was fully discussed. So long as the Legislature of Queensland in its taxation measures is seen to be legislating for the peace, order and good government of the State of Queensland no additional restriction based upon mere territorial considerations should be placed upon its constitutional powers.

Appeal dismissed with costs. Cross appeal allowed with costs. Order of the Supreme Court of Queensland varied by substituting the answer given to the 6th and 8th questions the answer "No" in each case.

Solicitors for the appellant, Hawthorn, Cuppaidge & Co., Brisbane, by Stephen, Jaques & Stephen.

Solicitor for the respondent, H. J. H. Henchman, Crown Solicitor for Queensland.

Solicitor for the Commonwealth, W. H. Sharwood, Crown Solicitor for the Commonwealth.

[1] [1934] HCA 12; (1934) 51 C.L.R. 172, at p. 187.

[2] [1935] HCA 8; (1935) 52 C.L.R. 189, at pp. 204 et seq.

[3] [1934] HCA 12; (1934) 51 C.L.R. 172.

[4] [1915] HCA 49; (1915) 20 C.L.R. 531, at pp. 540, 541.

[5] [1932] HCA 52; (1932) 48 C.L.R. 391, at p. 409.

[6] (1934) 51 C.L.R., at pp. 181-187.

[7] [1918] USSC 127; (1918) 247 U.S. 165, at p. 175; [1918] USSC 127; 62 Law. Ed. 1049, at p. 1052.

[8] [1918] USSC 146; (1918) 247 U.S. 321; 62 Law. Ed. 1135.

[9] [1891] USSC 289; (1891) 142 U.S. 217; 35 Law. Ed. 994.

[10] [1931] HCA 32; (1931) 46 C.L.R. 417.

[11] [1932] HCA 63; (1932) 48 C.L.R. 618.

[12] [1933] HCA 32; (1933) 49 C.L.R. 220.

[13] [1934] HCA 12; (1934) 51 C.L.R. 172.

High Court of Australia

Australasian Scale Co Ltd v Commissioner of Taxes (Qld) [1935] HCA 23; (1935) 53 CLR 534 (30 April 1935)

HIGH COURT OF AUSTRALIA