Ervin v Federal Commissioner of Taxation [1935] HCA 54; (1935) 53 CLR 235 (15 July 1935)

The taxpayer is a resident of the Commonwealth and so liable to taxation upon his income from all sources. His income for the year now in question includes interest received on his behalf by his banker's agent in New York. The interest was paid to him as holder of some bonds issued by the Commonwealth of Australia as part of an external loan. They were issued in New York in 1928. According to the tenor of the bonds, principal and interest is payable in New York in gold coin of the United States of the standard of weight and fineness existing on 1st May 1928, "without deduction for any taxes now or at any time hereafter imposed by the Commonwealth of Australia or by any taxing authority thereof or therein." The prospectus relating to the loan in respect of which the bonds were issued did not declare that the interest derived from them should be liable for Commonwealth income tax.

The question for our consideration is whether the interest derived by the taxpayer from the bonds is part of his assessable income. The question depends entirely upon sec. 52B of the Commonwealth Inscribed Stock Act 1911-1927.

The Taxation of Loans Act 1923 is confined to loans raised in Australia and does not affect the matter.

Sec. 52B is as follows: "The interest derived from stock or Treasury bonds shall not be liable to income tax under any law of the Commonwealth or a State unless the interest is declared to be so liable by the prospectus relating to the loan on which interest is payable." It clearly applies if the bonds held by the appellant are Treasury bonds. If they are not Treasury bonds, it is equally clear that the provision does not apply and the interest derived from them enjoys no statutory immunity from Commonwealth income tax.

Treasury bonds were issued by the Treasurer under the authority of the Governor-General in Council in pursuance of sec. 51A of the Commonwealth Inscribed Stock Act 1911-1927, a provision inserted by Act No. 26 of 1915. It enabled the Governor-General to authorize the Treasurer from time to time to make out and issue Treasury bonds for raising by way of loan any money authority to borrow which is granted by any Act. They might be issued and sold in such amounts and manner, and at such price, and on such terms and conditions, as the Governor-General directed (sec. 51B). Commonwealth Government inscribed stock may be exchanged for Treasury bonds and Treasury bonds for inscribed stock (sec. 51E, sec. 3). Registries for the inscription of stock exist only within the Commonwealth and in London (sec. 14). Treasury bonds may be accepted at their face value in payment of estate duty payable to the Commonwealth (sec. 52C). The form of Treasury bond was prescribed by regulations (Statutory Rules 1927, No. 157, reg. 55, Form 31). In that form it describes itself as a Treasury bond, transferable by delivery. The body of the instrument contains no more than a simple statement that the bond entitles the bearer to payment of the amount expressed, at the specified date, at the offices of the Commonwealth Bank at various cities in Australia. One other form of Treasury bond was prescribed: viz., a war savings certificate. These forms, however, are not exclusive; for sec. 55 (2) of the Commonwealth Inscribed Stock Act provides that no forms other that the prescribed forms shall be used, except with the approval of the Treasurer.

Subject to the regulations, the provisions of the Treasury Bills Act 1914-1915 apply to Treasury bonds as if they were Treasury bills (sec. 51C). Under the provisions of that Act, they must be consecutively numbered, signed by the Treasurer or some other person appointed by the Governor-General, be registered at the office of the Auditor-General, and be redeemable at par on a date fixed by the Governor-General before issue (sec. 4). Provisions are made for the replacement of the instrument in case of defacement, and, in case of total loss, for obtaining a certificate from the High Court (secs. 9 and 10).

The security now under consideration is in a form which does not resemble that prescribed for Treasury bonds. Apart from form, it possesses features peculiar to the particular loan transaction in respect of which it was issued. It begins by expressing a promise on the part of the Commonwealth of Australia to pay the bearer principal and interest. The sum to be paid is expressed in dollars. The place of payment is New York. The currency which the tenor of the instrument demands is gold coin of the United States of a particular weight and fineness. Deduction for Australian taxes is negatived. A description of its nature appears in its text as follows:—"This bond is one of the 4½% Gold Bonds External Loan of 1928 dated May 1, 1928, for an aggregate principal amount of 50,000,000 dollars, issued by the obligor in accordance with the loan contract dated May 7, 1928, entered into by the obligor with the aforesaid J. P. Morgan & Co. and the National City Company as bankers." It is expressly made redeemable on any interest date at the option of the obligor upon sixty days' notice. It is to become negotiable only when countersigned for authentication by a specified New York bank. The instruments appear to have been executed on behalf of the Commonwealth by the High Commissioner. The security was issued under the authority, not of the Commonwealth Inscribed Stock Act, but of the Loans Securities Act 1919. That statute provides that, when under any Act the Treasurer has authority to borrow in accordance with the Commonwealth Inscribed Stock Act 1911-1918, or any Act authorizing the issue of Treasury bills, the Governor-General may, notwithstanding the provisions of those Acts, authorize the Treasurer to borrow the moneys in such amounts and manner and at such prices and on such terms and conditions and issue such securities in such form as he approves (sec. 3). It defines securities to mean any document made out and issued under the Loans Securities Act 1919 for defining or registering the indebtedness of the Commonwealth to lenders, and to include a debenture to bearer, a bond to bearer, and a Treasury bill (sec. 2). It appropriates the Consolidated Revenue Fund for the purpose of paying principal and interest secured (sec. 4). It empowers the Governor-General to establish registries for stock at any place outside the Commonwealth (sec. 5).

By an Executive minute, dated 12th May 1928, the Governor-General in Council authorized the loan in respect of which the bonds held by the taxpayer were issued. The minute began by reciting sec. 3 of the Loans Securities Act 1919, and then, after reciting the provisions of the special Acts authorizing the raising of the money and some other matters going to the description, purpose and amount of the loan, proceeded to authorize the Treasurer, pursuant to sec. 3 of the Loans Securities Act 1919, to borrow the money. It authorized him to do so "by borrowing United States gold dollars to an equivalent of" the sum required "in the manner and at the prices and on the terms and conditions contained in the loan agreement" which it proceeds to identify. The minute further authorizes the Treasurer to issue securities in respect of such loan in the form of security which had been settled and approved between the High Commissioner on behalf of the Treasurer and the other parties to the loan contract.

It thus appears that the bonds held by the taxpayer were not issued under the authority of the statute which authorizes Treasury bonds. They are not in the form prescribed for Treasury bonds. Their form is not one substituted therefor by the Treasurer, but is the result of special agreement and depends on the authority of the Governor-General in Council. They are not in Australian currency and could not be used to pay estate duty. There is no provision for converting them into inscribed stock, and, if there were, it must be by means of a registry established otherwise than under the Commonwealth Inscribed Stock Act. They are not transferable by delivery until specially authenticated by a foreign bank. They are not payable in Australia.

In our opinion, it follows that they are not Treasury bonds within the meaning of sec. 52B of the Commonwealth Inscribed Stock Act 1911-1927, and we think that they were never intended by either party to the contract of loan to be Treasury bonds.

The question whether the instruments fell within sec. 52A was raised by counsel for the Crown in Perpetual Trustee Co. v. Federal Commissioner of Taxation[1], but, as the majority of the Court held that the section gave no immunity from Commonwealth estate duty to instruments to which it related, the matter did not require decision.

The appellant, the taxpayer, is a resident of New South Wales. During the financial year which ended on 30th June 1932, he derived income from sources in Australia and elsewhere, including interest upon certain gold dollar bonds issued by the Commonwealth of Australia. The interest on these bonds was collected in dollars in New York, converted into Australian currency, and credited to the taxpayer's banking account in Sydney, New South Wales. It amounted to £337. The Commissioner included this sum in the taxpayer's assessment to income for the financial year 1932-1933. The question stated is whether this sum forms part of the income of the taxpayer assessable to income tax for the financial year 1932-1933.

The Income Tax Assessment Acts 1922-1933 impose an income tax for each financial year upon the taxable income derived directly or indirectly by every resident from all sources, whether in Australia or elsewhere. But the taxpayer relies for his exemption upon the provisions of the Commonwealth Inscribed Stock Act 1911-1932, or those of the Loans Securities Act 1919. The Commonwealth Inscribed Stock Act 1911-1927, sec. 52B provided: "The interest derived from stock or Treasury bonds shall not be liable to income tax under any law of the Commonwealth or a State unless the interest is declared to be so liable by the prospectus relating to the loan on which the interest is payable." It has been assumed that the Act, 1932 No. 25, which commenced on 12th September 1931 and omitted from sec. 52B the words "the Commonwealth or," has no application to the case. It looks as if the words were omitted in consequence of the passing of the Commonwealth Debt Conversion Act 1931. But I doubt the assumption, and incline to the view that the omission of these words would deprive the taxpayer of the exemption which he claims if his gold dollar bonds were Treasury bonds within the meaning of sec. 52B as it stood before their omission. Despite the assumption or expression of opinion in Perpetual Trustee Co. v. Federal Commissioner of Taxation[2] that gold dollar bonds, such as those held by the taxpayer, were Treasury bonds within the meaning of sec. 52A of the Commonwealth Inscribed Stock Act 1911-1932, the argument addressed to the Court in this case and further consideration of the matter have satisfied me that the gold dollar bonds held by the appellant are not Treasury bonds within the meaning of sec. 52B of the Act. The legislation of the Commonwealth before the Commonwealth Debt Conversion Act 1931 provided for Commonwealth inscribed stock, Treasury bonds, Treasury bills, and some anomalous securities called war savings certificates and peace savings certificates. The Act of 1911, No. 20, provided for the creation of capital stock called Commonwealth Government inscribed stock. It must be issued and sold in such amounts and manner and at such price and on such terms and conditions as the Governor-General decided. It was inscribed in a ledger in the name of the owner, and might be transferred, in the prescribed form. The owner might, however, obtain what was called a stock certificate to bearer in respect of any stock standing in his name, and the stock certificate was transferable by delivery. An Act of 1914, No. 33, provided for the issue of Treasury bills. They were payable to bearer and transferable by delivery and were issued and sold in such amounts and manner and at such prices and on such terms and conditions as the Governor-General directed. They entitled bearer to payment of the amount stated therein at the Commonwealth Treasury (Statutory Rules 1927, No. 156, Form). An Act of 1915, No. 26, provided for the issue of Treasury bonds; the provisions of the Treasury Bills Act applied to them as if they were Treasury bills issued under the Treasury Bills Act. They were payable at the Commonwealth Bank in the capital cities of Australia (Statutory Rules 1927, No. 157, Form 31). Inscribed stock might be exchanged for Treasury bonds and Treasury bonds for stock, stock might be accepted at par, and Treasury bonds at their face value, in payment of estate duty payable under any law of the Commonwealth (Act, 1915, No. 26). The moneys secured by stock, bonds or bills were all expressed in the monetary unit in use in Australia, and were redeemable or repayable in the currency of Australia. The gold dollar bonds held by the taxpayer do not conform to any of the descriptions in the Acts of stock, bonds or bills, nor are the same rights or obligations attached to them. The sum secured is expressed in the monetary unit of the United States of America. The bonds are payable in New York in gold coin of the United States, of a certain weight and fineness, with interest in the meantime on the principal sum secured, also payable in gold coin of the United States. They are not inscribed, nor are they convertible into inscribed stock or Treasury bonds under the Commonwealth Inscribed Stock Act 1911-1932. They are not negotiable unless countersigned in manner prescribed. They were not issued pursuant to any authority contained in the Commonwealth Inscribed Stock Act 1911-1932. Nor could they be tendered at par, or their face value, or at all, in payment of estate duty payable under any law of the Commonwealth. It follows, in my opinion, that the gold dollar bonds do not answer the description "Treasury bonds" as those words are used in the Commonwealth Inscribed Stock Act 1911-1932. Treasury bonds in that Act and in sec. 52B refer to bonds issued under and in accordance with the authority and provisions of that Act. The authority under which the gold dollar bonds were issued is contained in the Loans Securities Act 1919, sec. 3: "When under any Act the Treasurer has authority to borrow moneys in accordance with the provisions of the Commonwealth Inscribed Stock Act 1911-1918, or in accordance with the provisions of any Act authorizing the issue of Treasury Bills, the Governor-General may, notwithstanding the provisions of those Acts, authorize the Treasurer to borrow the moneys in such amounts and manner and at such prices and on such terms and conditions and issue such securities in such form as the Governor-General approves." By an Executive minute of 12th May 1928 the Governor-General in Council was empowered, pursuant to this Act, to raise a gold dollar loan in the United States of America, and to issue securities in respect of such loan in the form of gold dollar bonds. The bonds held by the taxpayer were issued accordingly, and are warranted by the Act and the minute, including the provision that the principal sum and interest secured by the bonds shall be paid in gold coin of the United States of a certain weight and fineness "without deduction for any taxes now or at any time hereafter imposed by the Commonwealth of Australia or by any taxing authority thereof or therein." It is argued that the terms of the bonds issued in accordance with this authority operate as a statutory exemption from income tax imposed by the Commonwealth. But there is nothing in the Acts or the bonds, as was said in Perpetual Trustee Co. v. Federal Commissioner of Taxation[3], which excludes or renders inoperative the powers of Parliament with respect to taxation or which exempts the bonds from income or other tax. The bonds constitute a contract between the Commonwealth and the bondholders. And for any breach of that contract the Commonwealth will be responsible. The case stated does not raise the question whether the collection of income tax in respect of income arising from the bonds will constitute a breach of the contractual provisions of the bonds. The Commonwealth should not assume too readily, however, that such cases as Perpetual Trustee Co. v. Federal Commissioner of Taxation[4] and Murdock v. Ward[5] settle the matter in its favour.

[1] [1932] HCA 19; (1932) 47 C.L.R. 402.

[2] [1932] HCA 19; (1932) 47 C.L.R. 402.

[3] (1932) 47 C.L.R., at p. 409.

[4] [1932] HCA 19; (1932) 47 C.L.R. 402.

[5] (1900) 178 U.S., at p. 148; 44 Law. Ed., at p. 1013.

High Court of Australia

Ervin v Federal Commissioner of Taxation [1935] HCA 54; (1935) 53 CLR 235 (15 July 1935)

HIGH COURT OF AUSTRALIA