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High Court of Australia |
COMMERCIAL BANKING CO. OF SYDNEY LTD. v. FEDERAL COMMISSIONER OF TAXATION
[1950] HCA 15; (1950) 81 CLR 263
Income Tax (Cth.)
High Court of Australia
Latham C.J.(1), Dixon(2), McTiernan(3), Williams(4), Webb(5) and Fullagar(6)
JJ.
CATCHWORDS
Income Tax (Cth.) - Assessment - Super tax - Company - Further tax on undistributed profits - Assessable income - Deductions - Permissibility - Debt conversion - Commonwealth Government securities - Freedom from future increases of income tax - Interest - Reduced by apportionment of deduction representing expenditure incurred in gaining income, including interest from Commonwealth Government securities - Rebates - New securities - Banking company - "Principal business" - "Lending of money" - Interest on Commonwealth Government securities bought in market - "Income from personal exertion" - "Included in the taxable income" - Income Tax Assessment Act 1936-1944 (No. 27 of 1936 - No. 3 of 1944), ss. 3, 6, 160, 160A, 160B, 160C, 160AA, 160AB, 160AD (a) - Commonwealth Debt Conversion Act 1931 (No. 18 of 1931), s. 20 - Commonwealth Inscribed Stock Act 1911-1940 (No. 20 of 1911 - No. 25 of 1940), s. 52B (2) - Income Tax Acts 1930 (Nos. 51 and 61 of 1930) - Income Tax Act 1944 (No. 36 of 1944), ss. 5 (7), 6.
HEARING
Sydney, 1950, April 13, 14, 17;DECISION
June 8.2. The Board of Review has held that, in respect of the whole amount of interest to which s. 20 applies, the taxpayer is entitled to be free of ordinary tax (6s. in the pound), super tax (1s.) and further tax (2s.) (see Income Tax Act 1944, s. 5 (7) and s. 6) to the extent to which the total of those taxes, namely 9s., exceeds the tax payable (1s. 4d.) which would have been payable if income tax had been imposed upon the taxable income of the taxpayer in accordance with the provisions of the Income Tax Acts 1930. The commissioner has assessed the bank upon the basis that the amount of such interest which (apart from s. 20) would be taxable in respect of the income year 1943-1944 is the amount of interest received, but reduced by an apportionment of deductions representing expenditure made in gaining the income of the company, including the interest to which s. 20 applies. The company contends that the Board has rightly held that under the terms of s. 20 no such deductions are permissible. (at p288)
3. Section 20 of the Commonwealth Debt Conversion Act 1931 is in the following terms: - "(1) Notwthstanding anything contained in the Taxation of Loans Act 1923 or in any other Act or State Act, the interest derived by any person in any financial year from new securities exchanged for existing securities (other than interest which in accordance with the provisions of section fourteen of this Act is free from Commonwealth and State Income Tax) shall be free - (a) from any income tax payable under a law of the Commonwealth to the extent by which the total amount of income tax which but for this section would be payable in respect of that interest exceeds the amount of income tax which would have been payable in respect of that interest if income tax had been imposed upon the taxable income of the person in that year in accordance with the provisions of the Income Tax Acts 1930 (other than section 7A of that Act); and (b) from all income tax under the law of a State. (2) In determining, for the purposes of this section, the amount of income tax which would be payable in respect of interest to which this section applies, the rate of tax shall be applied to the whole amount of that interest included in the income of the taxpayer without any deduction except such part (if any) of the deductions allowable from the income of the taxpayer derived from property as, in the opinion of the Commissioner of Taxation, is properly attributable to the interest. (3) In this section 'income tax' includes any tax imposed in respect of income." (at p288)
4. In the relevant year the bank held securities which were new securities
within the meaning of s. 20 amounting to 4,061,249 pounds,
this amount
representing the monthly average of the relevant stock held during the income
year. The total amount of interest received
upon such stock in that year was
151,371 pounds. The commissioner apportioned expenditure of the company
between that interest and
other receipts of the company from interest-bearing
securities. In the first place, he made a deduction of estimated expenses of
managing &c. the s. 20 securities at one-half per cent - 757 pounds. Secondly,
in that year the bank paid in interest on deposits
an amount of 586,537
pounds. These deposits provided moneys which the bank invested in, inter alia,
"new securities". Accordingly
the commissioner treated a proportion of the
interest paid on deposits as expenditure incurred in gaining the interest on
the "new
securities." The Australian assets of the bank, averaged over the
year, amounted to 84,472,435 pounds. The commissioner ascertained
the part of
586,537 pounds attributable to the new securities by taking the same
proportion of that amount as the proportion represented
by the new securities
to the total Australian assets, thus reaching a sum of 28,199 pounds. The
total of 757 pounds and 28,199 pounds
is 28,956 pounds. The commissioner
treated this amount of the expenditure as incurred in the gaining of the
interest on the new securities,
with the result that only the balance of
122,415 pounds (i.e. 151,371 pounds less 28,956 pounds) was taken as the
amount of interest
which, apart from s. 20, would be taxed in respect of the
income year 1943-1944. This (and not 151,371 pounds) was the amount which
the
commissioner treated as interest which was subject only to the 1930-1931 rate,
that is to a tax only of 1s. 4d. in the pound.
2. Various difficulties arise when it is necessary to ascertain how much of
the residual amount calculated by deducting one or
more amounts from a gross
amount, representing the addition of several amounts, is constituted by one of
the items which enters into
the calculation of the gross amount or, to put the
same question in another form, how much of a particular component item is
included
in the residue left after making deductions from the gross amount.
Such questions have arisen upon particular statutory provisions
in Douglass v.
Federal Commissioner of Taxation [1931] HCA 18; (1931) 45 CLR 95 and Carpenters Investment
Trading Co. Ltd. v. Federal
Commissioner
of Taxation (1949) 79 CLR 341 . No
general principle can be laid down which can be applied in all cases.
It is
necessary to consider
the precise statutory provisions
under which the
question arises. (at p289)
5. In the first place, s. 20 (1) provides that "interest derived by any person" from certain "new securities" is to be free from a certain amount of income tax. Sub-section (3) provides that "income tax" includes any tax imposed in respect of income. Prima facie such a provision applies to the whole amount of such interest. (at p289)
6. In the second place, the application of the section requires the comparison of two amounts of income tax payable in respect of that interest. The interest is to be free from any income tax so payable to the extent by which the total amount of income tax which, apart from s. 20, would be payable in respect of that interest exceeds the amount of income tax which would have been payable in respect thereof if income tax had been imposed in accordance with the Income Tax Acts 1930. In order to apply the section, therefore, it is necessary to ascertain what tax was payable upon the interest under the 1930 Act, and then to ascertain what tax would be payable in respect of the interest under the income-tax legislation applying to the relevant financial year. The ascertainment of the amount of tax which would be payable apart from s. 20 in 1930 requires merely the application of the relevant rate (1s. 4d. in the pound) to the amount of interest. It would not be possible to ascertain the amount of tax payable at the 1930 rate in respect of that interest by looking at the assessments of any particular taxpayers who happened to hold securities of this class at the time when the Commonwealth Debt Conversion Act 1931 was passed. One taxpayer might have had an income consisting solely of interest derived from those securities. Another taxpayer might have had an income of the same amount derived from those securities but have incurred deductible losses in a business which he carried on which reduced his taxable income to an amount much less than the amount of such interest. Thus the taxable incomes of holders of these securities would vary very greatly. The ascertainment of the tax that would be payable in respect of the interest if income tax had been imposed upon the taxable income in accordance with the Income Tax Acts 1930 must therefore be construed as requiring an ascertainment of the income tax which would have been payable in respect of the whole of that interest apart altogether from any considerations affecting the assessment of an individual taxpayer. (at p290)
7. In the next place, it is necessary, in order to apply the section, to ascertain the amount which would be payable apart from s. 20 in respect of the interest in respect of the financial year as to which the question arises. The ascertainment of this amount necessarily involves the application of the provisions of a current Income Tax Assessment Act, such Acts varying, as we know, from year to year. This was disputed in argument, but for the purpose of determining what tax would be payable apart from s. 20 in respect of the interest it is in my opinion plainly necessary to apply the provisions of the Income Tax Assessment Act and Income Tax Act applying to the relevant year. Otherwise it would be quite impossible to ascertain the amount of tax which "would be payable." It is true that s. 3 of the Income Tax Assessment Act 1936-1944 provides that nothing in that Act shall affect the operation of the Commonwealth Debt Conversion Act 1931. This provision, however, is in my opinion plainly intended to secure the full operation of the 1931 Act, notwithstanding provisions contained in the 1936-1944 Act for increased tax. Section 3 cannot be interpreted as meaning that the provisions of the 1936-1944 Act are to be disregarded in applying s. 20 of the 1931 Act for the simple reason that s. 20 cannot possibly be applied except upon the basis of a comparison of the amount of tax which would have been payable at 1930 rates with the amount of tax which would be payable under the applicable statutes in respect of the year 1943-1944 or of any other year in respect of which the application of s. 20 arises. (at p291)
8. So far the section is dealing with the whole amount of interest. The
calculation of the amount of tax payable in respect of the
interest in
accordance with the 1930 rates is plainly made by calculating tax at 1s. 4d.
in the pound on the whole amount of that
interest. There is no provision in
the introductory words of s. 20 which makes it possible to apply that rate to
some part only of
that interest which is regarded as being included in the
ultimate taxable income (that is assessable income less allowable deductions
-
Income Tax Assessment Act 1936-1944, s. 6) of a taxpayer who happened to hold
in 1930 or 1931 the existing securities for which
the new securities were
substituted. So also the other element of the comparison, in this case the tax
payable in respect of the
interest received in the income year 1943-1944, is
prima facie to be calculated by applying the relevant increased rate to the
whole
amount of interest derived by the taxpayer and not to some part thereof
(which might be little or nothing) which is regarded as represented
by portion
of the taxable income of the taxpayer who then happens to hold the
securities.
3. But this prima-facie construction of s. 20 is modified, but only to a
certain carefully specified extent, by sub-s. (2). This
sub-section confirms
the prima-facie interpretation of the earlier provisions of the section by
providing in the first place that
in determining for the purposes of the
section the amount of income tax which would be payable in respect of the
interest to which
the section applies "the rate of tax shall be applied to the
whole amount of that interest included in the income of the taxpayer
without
any deduction." But a modification or limitation is introduced by the words
following - "except such part (if any) of the
deductions allowable from the
income of the taxpayer derived from property as, in the opinion of the
Commissioner of Taxation, is
properly attributable to the interest." Therefore
in applying the section no deduction from the whole amount of interest is to
be
made unless it is a deduction allowable from the income of the taxpayer
derived from property, and then only if such deduction is
in the opinion of
the commissioner properly attributable to the interest. (at p291)
9. The bank derived income by way of interest from various sources - interest on overdrafts, interest on "new securities," interest on other Commonwealth securities for which the bank subscribed or which it purchased, and interest on a special deposit with the Commonwealth Bank. The bank derived income from property in the form of rents. Any deductions which were allowable from the income derived from rents obviously could not be regarded as properly attributable to the interest. The commissioner contends, however, that the interest was income derived from property. The bank contends that it was interest derived from personal exertion. (at p292)
10. The choice between these propositions depends upon the interpretation to
be given to the definition of "income from property"
contained in s. 6 of the
Income Tax Assessment Act 1936-1944. "Income from property" is defined as
meaning "all income not being
income from personal exertion." "Income from
personal exertion" is defined as meaning income consisting of earnings,
salaries, wages
and various other forms of income including "the proceeds of
any business carried on by the taxpayer either alone or as a partner
with any
other person." This is the only category mentioned in the principal part of
the definition of "income from personal exertion"
which would include
interest. The definition however, continues by providing that income from
personal exertion "does not include
- (a) interest, unless the taxpayer's
principal business consists of the lending of money, or unless the interest is
received in
respect of a debt due to the taxpayer for goods supplied or
services rendered by him in the course of his business." The bank asserts
and
the commissioner denies that the bank's principal business consists of the
lending of money. If the contention of the bank is
sound, then the interest
received by the bank on the "new securities" was income from personal
exertion, so that no deduction of
expenditure attributable to the gaining of
that interest can properly be made in applying s. 20.
4. In the inquiry whether the principal business of the bank consisted of
the lending of money it is in my opinion proper to exclude
from consideration
interest paid by the Commonwealth Government upon stocks purchased in the
market because such interest is not
derived from "the lending of money". The
purchase of stock on the market is not a money-lending transaction. A person
who buys Commonwealth
stock on the market does not lend money to the vendor or
to the Commonwealth. The interest received on the part of the Commonwealth
stock so purchased should therefore not be regarded as interest derived from
the lending of money. It does not necessarily follow,
however, for reasons to
be stated, that this amount of interest should not nevertheless be regarded as
income from personal exertion.
It may be that, when the principal business of
a taxpayer consists of the lending of money, all the interest received by him
as the
proceeds of his business will be income from personal exertion, even
though some of that interest may itself not be derived from
the lending of
money. (at p293)
11. The income of the bank consisted principally of interest, even if interest received on purchased stocks is excluded. In the year 1943-1944 the amount of interest received on overdrafts, treasury bills, special war-time deposit and Commonwealth stock for which the bank had subscribed was over 1,700,000 pounds. The total income of the bank as returned, including these items and also exchange, commission, fees on current accounts, rents and some other small items, was 2,458,864 pounds. Thus about seventy-five per cent of the income of the bank was derived from the lending of money. (at p293)
12. It is advantageous to a taxpayer to be taxed at the lower personal exertion rates rather than at the higher property rates. The inclusion of certain interest in the definition of income from personal exertion is therefore intended to bring within a lower rate of tax income consisting of interest where the taxpayer's principal business consists of the lending of money. It has been argued for the commissioner that this provision can apply in favour of a taxpayer only when the taxpayer carries on several businesses, one of which can be identified as his principal business. A bank carries on, it is said, only one business, the business of banking and activities incidental thereto, and therefore the exception cannot operate in favour of a bank. But such an interpretation produces strange results. A person who conducted a large money-lending business and who combined with it some other negligible small business would receive the benefit of tax at personal exertion rates upon the interest received. On the other hand, a person who carried on a money-lending business of the same dimensions but no other business would be taxed at the property rate on the same amount of interest. A construction which produces such a result should not be adopted unless the words are compelling. (at p293)
13. I agree with the Board of Review that it is proper to regard the principal income-producing activity of the taxpayer as the relevant matter in determining whether the taxpayer's principal business consists of the lending of money. The exception introduced into the exclusion of interest from personal exertion does not mean that all interest received by a taxpayer having such a principal business is to be treated as income from personal exertion. It has the effect only of bringing back into the definition interest which would otherwise be excluded by the words "but does not include interest." Therefore in order that any interest should be included within the words of exception from the exclusion of interest generally, it must be interest which qualifies under the definition, that is as being income which is the proceeds of a business, there being no other heading in the definition which can apply to it. Two observations, therefore, can be made upon this provision. The words excluding interest in general, taken by themselves, exclude all interest, but the words of the exception from the exclusion bringing interest within the definition of income from personal exertion where the taxpayer's principal business consists of the lending of money only result in leaving within the definition such interest as is interest which, apart from the exception, would be income from personal exertion, that is, if it is the proceeds of a business. Interest which is not the proceeds of a business cannot be income from personal exertion even though it is derived by a taxpayer whose principal business consists of the lending of money. But interest which is the proceeds of a business, even though not derived from the lending of money (e.g. interest received upon purchased securities) is income from personal exertion. (at p294)
14. In determining whether the lending of money is the principal business of
a taxpayer it is proper to look at the business of
the taxpayer in relation to
its proceeds, that is the income which it produces. In the present case
seventy-five per cent of the
income is interest derived from the lending of
money and the activity of gaining that income is, from the point of view of
proceeds
of the business of the taxpayer, the principal business activity of
the taxpayer. In my opinion, therefore, the Board of Review properly
held that
the principal business of the bank was the lending of money and therefore that
the interest derived by the bank from the
lending of money was income from
personal exertion.
5. The commissioner, in applying s. 20, has made a deduction from the amount
of 151,371 pounds of certain expenses and a proportion
of the interest paid on
the money which was invested in the securities which brought in the interest.
These deductions may be properly
attributable to the interest in question, but
they are not allowable as deductions from income from property because that
interest
is not income from property. Accordingly I agree with the Board of
Review that the deductions made by the commissioner were wrongly
made.
6. What has been said deals with the decision of the Board of Review in
relation to income tax and super tax but leaves outstanding
the question of
further tax under Part IIIA of the Income Tax Assessment Act 1936-1944. Part
IIIA provides in s. 160B that further
tax at the rate declared by the
Parliament shall be levied and paid on that portion of the taxable income of a
company which has
not been distributed as dividends or applied in paying
certain taxes or meeting certain losses. The rate declared by the Parliament
in the Income Tax Act 1944 upon such portion of the income of a company was
2s. in the pound. Section 160C provides for the ascertainment
of the portion
of the taxable income of the company which has not been so distributed or
applied. It provides (so far as material)
that for the purpose of the further
tax such portion shall be ascertained by deducting from the taxable income of
the company (1)
certain taxes; (2) losses incurred in carrying on business out
of Australia, except losses of a capital nature; (3) the amount of
dividends
paid out of the taxable income of the year of income within a specified time.
The following table shows the manner in which
the commissioner applied these
provisions in the present case in respect of the income derived from new
securities to which s. 20
of the Commonwealth Debt Conversion Act 1931 was
applicable. (The commencing figure of 122,415 pounds should, for reasons
already
stated, in my opinion be 151,371 pounds, but it is convenient to use
the commissioner's figure for the purpose of explaining the
method which was
applied in the assessment.)
CommonwealthTaxable income assessed 122,415 567,902 690,317
Loan Other
Interest Income Total
Pound Pound Pound
-------------------------------The commissioner therefore charged tax of 2s. in the pound upon 118,239 pounds. (at p295)
120,870 560,732 681,602
" Fed.inc. tax paid 9,224 153,723 162,947
--------------------------------
111,646 407,009 518,655
" Divs. paid as above66,656 288,770 355,426
--------------------------------
44,990 118,239 163,229
Deduct C.L.I. 44,990
--------
Income subject to further tax 118,239 pounds
--------
15. Section 160c requires certain deductions to be made for the purpose of ascertaining the undistributed income of a company for the purposes of the tax. The above table shows that the commissioner distributed these deductions as between, on the one hand, the amount of Commonwealth loan interest which he regarded as entitled to the freedom from tax provided for by s. 20 of the 1931 Act and, on the other hand, the rest of the taxable income of the company. It is not necessary in my opinion to consider the particular method of distribution of these three items of deduction from the Commonwealth loan interest and other income. The result of the calculations of the commissioner was that the amount of s. 20 income included in the taxable income was taken as 44,990 pounds and it was exempted from further tax, but that the balance of 118,239 pounds was treated as income subject to further tax. (at p296)
16. In relation to further tax, what the commissioner has done is to deduct from the s. 20 interest amounts representing a proportion of taxes, losses and dividends and to treat only the remainder of the interest as interest which would have been taxed apart from s. 20. (at p296)
17. In my opinion the statute gives no authority for these deductions because the only deductions which can be made under s. 20 from the whole amount of interest are deductions which are allowable from income from property. The deductions to be made under s. 160C have nothing to do with deductions from income from property. Section 160c is concerned simply with the ascertainment of a portion of taxable income irrespective of whether or not it is income from property. The balance, after the due subtractions have been made, is to be treated as undistributed income for the purpose of the imposition of further tax. No question arises in the application of s. 160c as to whether the taxpayer paid taxes or dividends or met losses out of any particular fund. If such a question had arisen it would have been necessary to consider the applicability of the principle stated in Symon v. Federal Commissioner of Taxation [1932] HCA 31; (1932) 47 CLR 538 . This is the principle that when, if a taxpayer makes a payment out of a particular fund, he obtains a benefit, and he in fact makes a payment out of a mixed fund, the payment should be regarded as made out of that part of the fund which would be most beneficial to the taxpayer. But in the present case for the purpose of making the three subtractions for which s. 160c provides no question arises as to the fund out of which the taxpayer made any payment. It is true that in the case of the third deduction, namely "the amount of dividends paid out of the taxable income of the year of income" within a certain period, it is necessary to ascertain the fund from which the payment was made, and in determining this question the principle of Symon's Case (1) may well be applicable. But, when the amount of such dividends has been ascertained, that amount simply becomes one of the items in the process of subtraction prescribed by s. 160c, and that provision, as already stated, does not involve any appropriation by the taxpayer company to any particular portion of the income. Thus the principle of Symon's Case [1932] HCA 31; (1932) 47 CLR 538 is irrelevant in the application of s. 160c to the present case. (at p297)
18. For the reasons which I have stated, in my opinion the commissioner had
no authority to attribute any of the s. 160c deductions
to the interest
received from the new securities but should have assessed the taxpayer upon
the basis that the whole amount of 151,371
pounds was free from further tax.
Accordingly, in my opinion the appeal of the commissioner should be
dismissed.
7. I now come to the appeal of the bank. This appeal relates to the
application of the provisions of s. 160AB of the Income Tax
Assessment Act
1936-1944. So far as relevant, s. 160AB is in the following terms: - "A
taxpayer shall be entitled to a rebate in
his assessment for an amount of two
shillings for every pound of interest which is included in his taxable income
and which is derived
from bonds, debentures, stock or other securities issued
by - (a) the Government of the Commonwealth, except securities to which
section twenty of the Commonwealth Debt Conversion Act 1931 or sub-section (2)
of section fifty-two B of the Commonwealth Inscribed
Stock Act 1911-1940
applies." (at p297)
19. When deductions are made from assessable income in order to determine
taxable income the deductions are made from the whole
of the assessable income
and the balance is the taxable income. If it becomes necessary for some
particular purpose to assign deductions
to particular items of gross income,
prima facie each item in that income must be considered as ratably reduced by
all expenditure
incurred in gaining it which is not definitely attributable to
some particular component thereof and in the latter case that component
should
be considered as reduced by the amount so attributable. Where the general
expenditure of a profit-making business is met out
of all the receipts of the
business, constituting a mixed fund, and no method of appropriation of
expenditure to particular items
is prescribed by law or lawfully applied by
those in control of the business, each item of the mixed fund may properly be
considered
as proportionately reduced in order to arrive at that which must be
deemed to be the part of each item which is left in the residue:
see Resch v.
Federal Commissioner of Taxation [1942] HCA 2; (1942) 66 CLR 198 .
8. There is no dispute as to the amount of the securities held by the bank
from which interest was derived which were included
in the relevant year in
the description contained in quoted par. (a) in s. 160AB. The amount of
interest derived therefrom in the
year was 439,774 pounds. The commissioner
applied s. 160AB in the following manner. He made a deduction at a rate of
one-half per
cent as representing a proportion of general management expenses
- 2,199 pounds. He then took the amount of interest paid by the
bank upon
deposits - 586,537 pounds. He distributed this proportionately according to
values between what may be called the rebatable
stock in respect of which the
rebate under s. 160A was allowable (20,179,473 pounds) and the total value of
Australian assets of
the bank (84,472,435 pounds), thus arriving at an amount
of 140,117 pounds. This amount was taken as representing a fair proportion
of
the interest upon the deposits which provided moneys out of which the
investments in interest-bearing securities were made. These
two sums, making
142,316 pounds, were deducted from 439,744 pounds, leaving a balance of
297,458 pounds. This sum was treated by
the commissioner as the sum in respect
of each pound in which a 2s. rebate was allowable. The contention of the bank
is that a 2s.
rebate should be allowed upon each pound in the amount of
439,774 pounds. (at p298)
20. It was pointed out that the commissioner had used for the purpose of this
calculation the value of all Australian assets irrespective
of whether or not
they produced income and that this basis was more favourable to the taxpayer
than what might be regarded as a more
justifiable basis, namely, taking the
proportion of the value of the rebatable stock to the income-producing assets,
or possibly
taking the proportion of interest derived from the rebatable stock
to the whole income of the bank.
9. The question is whether the commissioner was right in making a deduction
from rebatable interest of amounts representing expenditure
incurred in
earning that interest. The answer to this question depends upon the
interpretation of the words which introduce s. 160AB
- "A taxpayer shall be
entitled to a rebate in his assessment of an amount of two shillings for every
pound of interest which is
included in his taxable income and which is derived
from" certain securities. It is argued for the taxpayer that the section
applies
in respect of every pound of interest, that is, in the present case,
each and every pound included in the amount of 439,774 pounds.
It is argued
that this whole amount is "included in the taxable income" if it enters into
the calculation of the taxable income.
It was not explained how this
interpretation could be adopted if, as might be the case, e.g. a taxpayer
incurred large deductible
losses, with the result that the taxable income was
less than the amount of interest. But perhaps a sufficiently practical reply
to this objection is provided by s. 160AD (a), which provides that
"Notwithstanding anything contained in this or any other Act -
(a) the sum of
the rebates allowable under this Act shall not exceed the amount of tax which
would otherwise be payable by the taxpayer."
(at p299)
21. The argument for the taxpayer is that the whole of the amount of 439,774
pounds is included in the taxable income because it
is taken into account in
calculating that income and it is contended that Douglass v. Federal
Commissioner of Taxation [1931] HCA
18; (1931) 45
CLR 95 established a general rule to this
effect. But the decision in Douglass' Case [1931] HCA 18; (1931) 45 CLR
95 was a decision
upon particular
words which were difficult to construe and it was largely
influenced by consideration
of the policy
of the Act, namely the avoidance
of
double taxation. It may further be observed in relation to Douglass' Case
[1931] HCA 18; (1931)
45 CLR 95 that the deductions sought to be made
in determining what
part of certain dividends was included in the taxable
income
were in that case
deductions which had no relation
to the acquisition of that income. In the
present case the Court is called
upon
to consider the precise words of s.
160AB and the
deductions which the commissioner seeks to make are deductions
which represent
expenditure incurred in gaining the relevant income
so that
they may well be regarded as deductions properly made before the amount
of
that income which is included in taxable income
can be ascertained. In my
opinion Douglass' Case [1931] HCA 18; (1931) 45 CLR
95 should not be regarded as conclusive
of the present case.
10. The taxable income of the company was 690,309 pounds. As already stated,
the interest derived from rebatable stock was 439,774
pounds. The whole of
this amount, it was said, was included in the taxable income of 690,309
pounds. An amount of 151,371 pounds
was interest on other securities not
rebatable. But reasoning identical with that submitted on behalf of the
taxpayer would reach
the conclusion that the whole of this amount of 151,371
pounds also was included in the taxable income. Accordingly upon that
reasoning
the sum of these amounts would be included in the taxable income of
690,309 pounds. The sum of those amounts (439,774 pounds plus
151,371 pounds)
is 591,145 pounds. The balance of the taxable income was therefore 99,172
pounds. The assessable income was 2,458,864
pounds. If 591,145 pounds is
subtracted from this amount of assessable income, the remainder is 1,867,719
pounds. The result, therefore,
of the reasoning of the taxpayer is that of the
amount of 1,867,719 pounds only 99,172 pounds was included in the taxable
income,
whereas, of the taxable income consisting of 591,145 pounds derived
from Commonwealth interest, the whole amount was included in
the taxable
income. Such a result does not incline the mind towards accepting the
reasoning which produces it. (at p299)
22. In my opinion this reasoning on behalf of the taxpayer in effect strikes out of s. 160AB the words "which is included in his taxable income" and treats the section as if it read "A taxpayer shall be entitled in his assessment to a rebate of 2s. for every pound of interest . . . which is derived from" certain securities. In other words the argument treats the section as applying to the amount of interest simpliciter without inquiring how much of the interest is included in the taxable income. No effect whatever is given by the argument to the words "which is included in his taxable income." (at p300)
23. When it is intended to give a rebate upon a specific amount of money received by a taxpayer the legislature made definite provision to that effect. I refer for an example in the first place to s. 160, which refers to concessional rebates. That section contains this provision - "A taxpayer shall be entitled to a rebate in his assessment of tax equal to an amount ascertained by applying - (a) to each of the amounts set forth" the rate of tax appropriate to taxable incomes from personal exertion or to a company, as the case may be. There can be no doubt as to the interpretation of this provision. The amounts specified are taken and then a rebate is ascertained by applying a rate of tax to that amount. Similarly, in s. 160AA provision is made that a taxpayer shall be entitled to "a rebate" in his assessment of the amount obtained by applying to the amount of certain calls a particular rate of tax. Here again it is clear that the rebate is applied to the whole of a particular amount. But s. 160AB is quite different in character. It does not provide that a taxpayer shall be entitled to a rebate of 2s. for every pound of interest derived by him from certain securities. The rebate is allowed only upon every pound of such interest which is included in his taxable income. In my opinion the only way in which effect can be given to these words in the process of ascertaining for the purposes of s. 160AB how much of the interest to which the section relates is included in the taxable income of a taxpayer is to make some apportionment of deductions from assessable income between that interest and other income. It is not denied that if any apportionment is permissible the particular method adopted by the commissioner is not unfair to the company. (at p300)
24. Accordingly I am of opinion that the appeal of the bank should be dismissed. (at p300)
DIXON J. These are cross appeals from a decision of a Board of Review given by the Board upon an appeal by a taxpayer from an assessment. The taxpayer is the Commercial Banking Co. of Sydney Ltd. and the assessment is upon the income derived by the banking company during the year ended 30th June 1944. Section 20 of the Commonwealth Debt Conversion Act 1931 (No. 18) provided a protection from taxation for the interest upon "new securities" exchanged under the Commonwealth debt conversion plan for existing securities as defined in that Act: see s.3. The banking company held a large amount of such securities during the financial year in question and the interest from those securities is included in its income. The protection from Federal income tax is not absolute. It is a protection to the extent by which the total amount of income tax which, but for s. 20, would be payable in respect of that interest exceeds the amount of income tax which would have been payable in respect of that interest if income tax had been imposed upon the taxable income of the person in the year of tax in accordance with the provisions of the Income Tax Acts 1930. The provision directs that, notwithstanding anything contained in any other Act, the interest derived by any person in any financial year from "new securities" exchanged for existing securities shall be free from any income tax payable under a law of the Commonwealth to that extent. It will be seen that to give effect to the provision it is necessary to ascertain the amount of income tax which would have been payable in respect of the interest if income tax had been imposed upon the taxable income in accordance with the provisions of the Income Tax Acts 1930. That having been done it becomes the limit, beyond which the interest upon the "new securities" is free of any income tax payable under a law of the Commonwealth. The expression "income tax" includes any tax imposed in respect of income. The limit having been fixed, therefore, it is to the advantage of the holder of the securities to bring as much as possible of the tax which, except for the operation of s. 20, he would pay as a result of his assessment under the words of exclusion or immunity, namely the words "free of any income tax . . . to the extent by which the total amount of income tax which but for this section would be payable in respect of that interest exceeds" the limit. (at p301)
2. But these words do not operate according to their natural meaning. They are subject to a special provision contained in sub-s. (2) of s. 20. That sub-section provides that in determining for the purposes of the section the amount of income tax which would be payable in respect of interest to which the section applies, the rate of tax shall be applied to the whole amount of the interest from "new securities" included in the income of the taxpayer without any deduction except such part, if any, of the deductions allowable from the income of the taxpayer derived from property as in the opinion of the Commissioner of Taxation is properly attributable to the interest. This provision deals explicitly, though artificially, with the problem necessarily involved in ascertaining how much of the taxable income represents interest included in the assessable income. Such a problem is inherent in a system which ascertains taxable income by massing all gross income on one side and all deductions on the other side and treating the taxable income as the excess of the former over the latter. Sub-section (2) deals with it simply. It takes the amount of interest included in "the income," that is, gross income, of the taxpayer and it forbids any deduction from that interest except deductions of the character the sub-section describes. It being to the advantage of the taxpayer to apply the limited immunity to as large a part of the taxable income as possible, it follows that his interests are best served by showing that there are no such deductions and the whole of the interest therefore obtains the qualified immunity. (at p302)
3. Two of the questions in these cases arise from a contention of the commissioner that in ascertaining the extent of the freedom conferred deductions should be thrown against the interest upon "new securities" held by the bank. One contention concerns the assessment for the purposes of ordinary tax; the other for the purposes of the assessment of the further tax provided for by Part IIIA, that is ss. 160A to 160E. The deductions which sub-s. (2) of s. 20 authorizes by way of exception are such part of the deductions allowable from the income of the taxpayer derived from property as in the opinion of the Commissioner of Taxation is properly attributable to the interest. (at p302)
4. The commissioner says that deductions of this character should be made falling under two heads. He says, first, that the general management expenses should be apportioned so that a small part should be attributed to the receipt of the interest. He fixes this at one-half per cent of the interest received. In the next place he says that as the bank obtains at interest a great part of the funds which are laid out in the securities in question as well as in the various investments and other employments of money by which the bank gains interest, a proper proportion of the interest paid by the bank should be thrown against the interest received by the bank on "new securities" as a deduction. The commissioner arrives at what he considers a proper ratio by taking that proportion which the amount of the "new securities" bore to the amount of the total Australian assets of the banking company. It, of course, produced a large deduction. (at p302)
5. The question for consideration is whether this can be justified as a deduction allowable from the income derived from property. The meaning of the expression "income . . . derived from property" in s. 20 (2) is perhaps not beyond dispute, but I think it must be taken to refer to the distinction made by the Income Tax Assessment Act applicable to any given year with reference to which an assessment must be made between income from property and income from personal exertion. It is true that that distinction is not relevant to the taxation of a company except during the times when a further tax was payable upon the taxable income derived by any person from property. It is also true that in one sense ultimately all deductions are allowable from the income of a taxpayer derived from property in the same sence as all deductions are ultimately allowable from his income derived from personal exertion. The distinction, however, must be made for the purposes of rate in the case of an individual. Obviously sub-s. (2) refers to a distinction existing for the purposes of administering the Income Tax Assessment Acts. The purpose of the distinction is immaterial. It is therefore necessary to turn to the definition of "income from property" contained in the Income Tax Assessment Act. (at p303)
6. The definition is, of course, "all income not being income from personal exertion." That throws one back on the definition of "income from personal exertion." It includes the proceeds of any business carried on by the taxpayer. But there is a special exclusion of interest unless the taxpayer's principal business consists of the lending of money or unless the interest is received in respect of a debt due to the taxpayer for goods supplied or services rendered by him in the course of his business. I think that if a taxpayer is brought within what I may call the "unless" clause, that is the exception to the exclusion of interest, the result is simply that his case is not governed by the peremptory exclusion of interest from income from personal exertion. In other words, it is not an absolutely necessary consequence that the interest is derived from personal exertion. It just becomes a question to be decided by a proper application of the rest of the definition of "income from personal exertion." (at p303)
7. In the present cases the bank claims that it does come within the "unless" clause because it is a taxpayer whose principal business consists of the lending of money. This the commissioner denies. The matter must in some degree depend on an analysis of the business of banking or of the business of this particular bank but in the end it depends less on this than upon a proper understanding of the meaning of the provision. It is, of course, true that the lending of money is a most important part of the general business of banking. It is also true that the business of banking considered as a separate business and not as forming simply one example of the business of lending money is not easily capable of definition. But the plain object of this particular provision of the definition is to allow a taxpayer the benefit of the rate for personal exertion where in truth the obtaining of interest is the substantial purpose of his business, if the interest is obtained by the lending of money. When, in ordinary understanding, what in point of law is interest is in substance a profit dependent upon the pursuit of organized business activities it is income from personal exertion. The word "principal" is introduced in order to exclude incidental and subsidiary activities in a business, but if the chief part of the business from which the profit is obtained consists of the lending of money that is enough. A banker's business may be said to be that of dealing in money. A great part of organized banking consists in the performance of services for customers which result in the banker having at his command large funds. But, extensive and important as those services are, and indispensable as they are to the acquisition of funds, if it stopped at that the banker would make no profit. The profit-making side of his activities is in putting out the money so as to increase it, and that substantially means to obtain interest. If attention is riveted upon the relations of the banker to his customer and the amount of work done in that respect it might be thought that to say that the principal business consists of the lending of money is to ignore all the business done with customers whose accounts are in credit as well as much else besides. But if attention is riveted on the activities of banking in which the money is used or laid out it would seem correct to say that the decisively profit-making side of the business is concerned with the lending of money. Doubtless the distinction is not irrelevant between advances on overdraft, the deposits with the Commonwealth Bank pursuant to the National Security Regulations and, after the period with which we are concerned, the Banking Act 1945, the discount of treasury bills, the taking up of Australian Government securities on issue and the purchase of them in the market. But of these various kinds of outlay to obtain interest I think the only one which does not amount to the lending of money in point of law is the purchase of Australian Government securities in the market. There a security representing money lent is purchased. But I do not think that because a business seeking its profit in interest does not stop at lending but also includes the taking over, so to speak, of a loan already made at interest, it can for that reason be said to be a business which does not principally consist of the lending of money. On the whole I think the Board of Review was right in holding that the taxpayer's principal business consisted of the lending of money. (at p305)
8. I am therefore of opinion that the deductions made by the commissioner do not come within the exception expressed in sub-s. (2) of s. 20 of the Commonwealth Debt Conversion Act 1931 and do come within the prohibition contained in the words "without any deduction." (at p305)
9. The problem of the application of s. 20 to the further tax under Part IIIA is affected by the conclusion I have stated, but it is not the same problem. Part IIIA levies a further tax at the rate declared by the Parliament on that portion of the taxable income of a company which has not been distributed as dividends: s. 160B. But again that is an artificially defined conception. The taxable income of a company not distributed as dividends is ascertained under s. 160C. It is done by taking the taxable income of a company and making from it prescribed deductions. The relevant deductions are (1) taxes paid in the year of income; (2) the net loss incurred in carrying on the taxpayer's business out of Australia; and (3) the amount of dividends paid out of the taxable income of the year of income before the expiration of six months after the close of that year. The further tax is paid upon the balance, that is to say the excess of the taxable income over these deductions. Clearly enough s. 20 gives an immunity from further tax so far as it relates to an amount of interest included in the income of the taxpayer and, having regard to what I have already decided, that must be without any deduction. (at p305)
10. But it is not easy to apply the conception of s. 20 to a further tax on a part only of the taxable income. In terms s. 20 (2) forbids the making of deductions. It seems an easy solution to say that in applying the immunity given by s. 20 the deductions directed by s. 160C must therefore be ignored and in the end I have come to the conclusion that it is the right solution. But the view of the commissioner has been that it is necessary to trace into the taxable fund the interest which is entitled to the protection and that that is the first step. He accordingly places what he considers a due proportion of the loss incurred in overseas trading against the interest, a due proportion (somewhat differently ascertained) of the taxes paid in a previous year and an aliquot or proportionate part of the amount distributed in dividend. The rest of the interest, he says, is reflected in or represented in the taxable fund and is alone entitled to the limited tax immunity. In the case of the proportion of tax he takes that amount of tax which became payable in the previous year by reason of the possession of the same or like securities. The other two deductions are proportioned upon the basis that when deductions are made from a total fund a proportionate part is made from each pound in that fund. In my opinion this reasoning cannot be justified. There is, I think, a distinction between the dividend and the other two deductions. The dividend is a payment made by the company in whose choice it was to declare it out of any available source. In declaring it out of the taxable income from the year, as appears to have been done, an intention to declare it ratably out of each and every part of the taxable income may perhaps be presumed or imputed. The other two deductions are made by statute. That is s. 160C seems to have no intention except to prescribe an arithmetical sum consisting of the aggregation of a number of deductions and a subtraction thereof from a prescribed total, namely the taxable income. There is in my opinion no foothold for the commissioner's assertion that these deductions are to be imputed ratably to the interest as well as the other ingredients in the assessable income. The effect is to detract from both the policy of s. 20 (2) and the provision in which it is expressed by diminishing the amount of interest which is to obtain the advantage. There is more to be said for the commissioner's view in the case of the dividend for the reason I have given. As against it the taxpayer resorts to the alleged presumption that a taxpayer allocates payments in such a way as will not expose him to tax. I have expressed my views upon this presumption in Symon's Case (1932) 47 CLR, at pp 549 et seq and Resch's Case (1942) 66 CLR, at pp 229, 230 , and I see no reason to depart from the views I then expressed. But the presumption that the taxpayer intended to distribute the dividend ratably out of each and every part of the fund depends upon a legal principle which I do not think is applicable to the question that we have to decide. That question is not how much of the interest is contained in the taxable subject resulting from the application of s. 160C. It is how far the provisions of s. 160C are overreached by the provisions of s. 20 (2) of the Commonwealth Debt Conversion Act. On the whole I think that s. 20 (2) must be construed and applied according to its terms and therefore as forbidding the making of any deduction from the interest including the deduction of a ratable part of the dividend. (at p306)
11. I now turn to a third question covered by the appeals. Included in the assessable income is a large sum of interest upon securities which do not fall within s. 20 of the Commonwealth Debt Conversion Act 1931. It is therefore interest which is entitled to the benefit of a rebate under s. 160AB. That provision directs that a taxpayer shall be entitled to a rebate in his assessment of an amount of 2s. for every pound of interest which is included in his taxable income and which is derived from bonds, debentures, stock or other securities issued by the Commonwealth Government, except securities to which s. 20 of the Commonwealth Debt Conversion Act 1931 or s. 52B (2) of the Commonwealth Inscribed Stock Act 1911-1940 applies, or by the Government of a State or by certain other public bodies. In ascertaining the amount of interest included in the taxable income the commissioner has thrown against the interest deductions which he considers appropriate to it. Again he has taken an amount of the administration expenses and adopted one-half per cent of the amount received as a proper proportion. He has, however, made a very large deduction consisting of what he considers an appropriate proportion of the interest paid by the banking company on deposits bearing interest. He has arrived at this by taking the proportion which the total of the securities held by the bank to which s. 160AB applies bears to the total of the Australian assets. This proportion is applied to the interest paid on interest-bearing deposits. The theory is that some expenditure upon interest is a necessary result of the holding of the securities which produce the interest on which the rebate is claimed. The commissioner says that how much of the interest is included in the taxable income within the meaning of s. 160AB can only be ascertained by taking the interest contained in the assessable income and throwing against it deductions which are attributable to the interest. Only the residue of the interest is contained in the taxable income. (at p307)
12. When it is asked how much of an item forming an ingredient in a gross sum from which deductions are made is "included" in the net sum the question must immediately be provoked - What do you mean by included? In Douglass' Case (1931) 45 CLR, at p 105 I pointed out that there appeared to be two methods of answering a question how much of the item is included in the net residue and that it was a question of interpretation, dependent largely upon the subject matter and the context, which of the two methods was intended. One way is to treat the question as meaning by how much is the net residue increased by reason of the presence of the item in the gross sum. If that is the meaning of the question the deductions must be divided into two contrasted classes. There may be deductions which would not be allowable but for the inclusion of the item of assessable income in the assessable income. In other words they may be expenses which would not be allowable deductions were it not for the fact that the income is included. It is not easy to imagine any important expenses of that character in relation to interest. But let it be supposed that for some exceptional reason the taxpayer had employed an agent to collect interest on his Government securities. The commission or remuneration of the agent for so doing would not be allowable except by reason of the inclusion of the interest in the assessable income and, accordingly, would be indissolubly associated with it. That is one class of deductions. The other class of deductions would be all those that would be allowable against the assessable income independently of the presence in the assessable income of the given item (in this case interest). If the meaning of "included in the taxable income" is that stated, viz. a reference to the amount by which the net balance is increased by reason of the presence of the item in the gross sum, then the second class of deductions must be ignored. No part of them can be thrown against the item. The first class of deductions should be made from the item because the net balance is only increased by the inclusion of the net amount of the item. (at p308)
13. The other possible interpretation to be attached to the word "included" is that it means the proportion of the given item of the assessable income which remains in the taxable income after all the deductions have been made. In arriving at that proportion the same division of deductions into two parts must be made, but for a different purpose. The first class of the deductions would be thrown altogether against the particular item. The remaining deductions would be dealt with as follows. They would be examined to see if any particular one of them was in like manner indissolubly associated with some other particular item of revenue included in the assessable income. If so, it would be thrown against that item. That process having been gone through, the deductions which were, so to speak, common to the whole would then be ratably apportioned. (at p308)
14. It will be seen that the commissioner has not done exactly either of these things. He has not chosen one or other of the rival interpretations and applied it inflexibly. For myself I do not see a logical justification for the exact thing that he has done. I suspect that he has pursued a line of reasoning which is more in accordance with the first of the above-suggested interpretations, but in carrying it out has attempted to find a proportionate part of expenditure by the bank which he thinks the bank could not have avoided while at the same time retaining the interest-bearing securities. It is necessary to decide which of the possible interpretations is to be attached to s. 160AB when it uses the expression "which is included in the taxable income." (at p309)
15. I think the decision must be reached on broad lines of statutory interpretation. The purpose of s. 160AB is to ensure to a taxpayer who invests in particular loans a definite rebate. The assurance is held out to him in order to induce him so to invest, because it is to the public advantage that investments of that character should be made. The purpose is in effect to say - If you make this interest from those securities a form of your income, from the tax upon that income you will obtain a rebate. The point of view both of the legislature and of the taxpayer who acted upon the assurance would more naturally be that he was to be assured of a rebate on the amount by which his income is increased by the inclusion of interest upon the specified securities. I construe s. 16AB as in effect meaning that a taxpayer is to be entitled to a rebate in his assessment of an amount of 2s. for every pound of interest by reason of the inclusion of which in his assessable income his taxable income has been increased. It will be seen that upon this meaning the rebate cannot be upon more than the taxable income which, of course, is obvious enough, and, further, that if there are any special deductions which, but for the inclusion of the interest in the assessable income, would not be allowable, they are to be thrown against it. None of the deductions, however, in the present cases are of this character. The result of the views I have expressed is that in my opinion two declarations should be made. The first is a declaration that for the purposes of s. 20 (2) of the Commonwealth Debt Conversion Act 1931, both in its application to the ascertainment of ordinary tax and of further tax, no deduction should be made from the amount of interest to which s. 20 applies. The second declaration is that for the purpose of ascertaining the rebate under s. 160AB upon the amount of interest to which s. 160AB applies derived by the taxpayer during the year of income the whole of the interest is to be taken to be included in its taxable income. I think that the taxpayer's appeal should be allowed with costs and the commissioner's appeal should be dismissed with costs. (at p309)
MCTIERNAN J. In my opinion the taxpayer's appeal should be allowed with costs and the commissioner's appeal should be dismissed with costs. (at p309)
2. I agree with the reasons of Dixon J. (at p309)
WILLIAMS J. On both these appeals I am in substantial agreement with the reasons of Dixon J. I also agree with the declarations which he proposes. In my opinion the appeal of the bank should be allowed and the appeal of the Commissioner of Taxation dismissed. (at p310)
WEBB J. The bank's appeal: I am unable to distinguish this case from Douglass v. Federal Commissioner of Taxation [1931] HCA 18; (1931) 45 CLR 95 or Carpenters Investment Trading Co. Ltd. v. Federal Commissioner of Taxation [1949] HCA 32; (1949) 79 CLR 341 . As counsel for the appellant bank pointed out, the exemption in s. 160AB, is of interest, and not of income from interest, and to give effect to the exemption in those words it is necessary to treat the word "included" in s. 160AB as referring to the amount by which the taxable income is increased by reason of the presence of the interest in the assessable income. The choice is between regarding the expression "included in the taxable income" as elliptical, that is as meaning "included in the calculation of the taxable income," and attributing to the legislature the use of an expression that conveys that the items included in the aggregate sum from which the deductions are made continue to be identifiable in the remainder. But even if each pound of interest could be viewed as truncated or shrunken - to employ expressions used by the Chief Justice and counsel for the bank in the course of the argument - so as to be identifiable in the remainder I think the exemption would still be in respect of every pound of interest in its reduced form. However, I think that, even if there were no deductions from the interest, or other item of assessable income, it would not be identifiable in the single figure that represents the taxable income; you must go back further in the calculation for that. The interest then is included in the taxable income in the sense that it is to be taken into the calculation in arriving at the taxable income. But it is a rebate from the taxable income that is granted, and, of course, it is limited by the taxable income. (at p310)
2. In Douglass' Case [1931] HCA 18; (1931) 45 CLR 95 and Carpenters Case [1949] HCA 32; (1949) 79 CLR 341 the Court gave the words their ordinary meaning: there was no straining of language to avoid double taxation. The words of exemption given their natural meaning secured that result. (at p310)
3. I would allow the bank's appeal. (at p310)
4. The commissioner's appeal: I think the decision of the Board of Review was right, and I have nothing to add to the reasons for sustaining it given by the Chief Justice and Dixon J. (at p310)
5. I would dismiss the commissioner's appeal. (at p310)
FULLAGAR J. I have read the judgment of my brother Dixon in this case, and, as to all three of the questions involved in the two appeals, I agree with it. On two of those questions I do not wish to add anything. On the question arising under s. 160AB I wish to add two observations. (at p311)
2. In the first place, the argument of the taxpayer did not, as I understood it, invite us to ignore the words "included in the taxable income" in s. 160AB, or to read the words "taxable income" as if they were "assessable income." I took it to concede that, for the purpose of calculating the rebate on the interest under s. 160AB, it would be proper to subtract from the gross amount of interest any amount which only became an allowable deduction from assessable income because of the inclusion of the interest in the assessable income. The average investor probably simply collects his interest or has it paid into his bank, and incurs no deductible expenditure in so doing. But there must be many cases in which an agent or trustee collects interest for a client or beneficiary and charges a commission for so doing. I should suppose that the commission so charged would be deductible both for the purpose of calculating the taxable income of the client or beneficiary and for the purpose of calculating his rebate under s. 160AB. Where, but only where, no expenditure can be actually attributed to the receipt of the interest so as to be deductible because of the receipt of the interest, the rebate is to be calculated on the gross amount of the interest. (at p311)
3. The second observation I would make is this. Under our system taxable income is arrived at by subtracting allowable deductions from assessable income. In the "difference" which results from the subtraction the items which went to make up the assessable income have commonly lost their identity. There is, therefore, a degree of inaccuracy in speaking of an amount which entered into the assessable income as being "included in the taxable income": cf. the example given by Dixon J. in Douglass v. Federal Commissioner of Taxation (1931) 45 CLR, at p 105 . But, as Starke J. said in that case (1931) 45 CLR, at p 103 it has been "included in account," and it seems to me to be the natural and proper way of reading the critical expression in s. 160AB to read it as referring to the amount by which the taxable income is increased through the inclusion of the interest in the calculation. Any other paraphrase of words which cannot be applied with absolute strictness seems to me to depart from the meaning really conveyed by those words. (at p311)
4. In my opinion, the appeal of the taxpayer should be allowed, and the appeal of the commissioner discmissed, and I agree that the declarations proposed by Dixon J. should be made. (at p312)
ORDER
Appeal allowed with costs. Declare (1) that for the purpose of s. 20 (2) of
the Commonwealth Debt Conversion Act 1931, in its application
to the
ascertainment of ordinary tax and of further tax, no deduction should be made
from the amount of interest to which s. 20 applies;
(2) that for the purpose
of ascertaining the rebate under s. 160AB of the Income Tax Assessment Act
1936-1944 upon the amount of
interest to which s. 160AB applies derived by the
taxpayer during the year of income the whole of the interest is to be taken to
be included in its taxable income. Assessment remitted to the commissioner for
amendment in accordance with these declarations.
FEDERAL COMMISSIONER OF TAXATION v. COMMERCIAL BANKING CO. OF SYDNEY LTD. -
Appeal dismissed with costs.
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