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High Court of Australia |
FEDERAL COMMISSIONER OF TAXATION v. AUSTRALIAN MUTUAL PROVIDENT SOCIETY [1953] HCA 17; (1953)
88 CLR 450
Income Tax (Cth.)
High Court of Australia
Dixon C.J.(1), Williams(1), Webb(2), Fullagar(1) and Kitto(1) JJ.
CATCHWORDS
Income Tax (Cth.) - Assessment - Assessable income - Deductions - Permissibility - Debt conversion - Mutual life assurance company - "Principal business" - - Interest derived from Commonwealth Government securities - Rebates - "Income from personal exertion" - "Included in his taxable income" - Income Tax Assessment Act 1936-1942 (No. 27 of 1936 - No. 50 of 1942), ss. 6, 50, 51, 113, 115, 160AB - Commonwealth Debt Conversion Act 1931 (No. 18 of 1931), s. 20.
HEARING
Sydney, 1952, November 13, 14;DECISION
April 27.2. It is desirable to set out s. 20 of the Commonwealth Debt Conversion Act in full. It provides: "20. (1) Notwithstanding 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 seven A 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 p461)
3. It is not necessary to set out in full s. 160AB of the Income Tax Assessment Act. It provides that "A taxpayer shall be entitled to a rebate in his assessment of . . . two shillings for every pound of interest which is included in his taxable income and which is derived from" securities of certain specified classes. Interest which is entitled to the benefit of s. 20 of the Commonwealth Debt Conversion Act is excluded from the classes of interest entitled to the benefit of s. 160AB. (at p461)
4. The Society in the accounting period derived large sums by way of interest from securities of the class mentioned in s. 20, and also large sums by way of interest from securities of the classes mentioned in s. 160AB. This is not disputed, but the commissioner maintains that, in calculating the amount to which each section must be applied, certain very substantial deductions must be made from the gross amount received. The Society carries on a very large business of life assurance, and is a mutual life assurance company within the meaning of the Income Tax Assessment Act. The assessment of the taxable income of life assurance companies is the subject of special provisions of the Act. These provisions are contained in Div. 8 of Pt. III of the Act. (at p461)
5. Section 111 provides: "The assessable income of a life assurance company shall not include premiums received in respect of policies of life assurance, or considerations received in respect of annuities granted. The total income shall include such premiums and considerations". Section 112, which may be regarded as the complement of s. 111, provides: "Expenditure incurred by a life assurance company exclusively in gaining such premiums or considerations shall not be an allowable deduction". (at p461)
6. Up to this point the effect of the legislation is that the assessable income of a life assurance company is to be ascertained in the ordinary way subject to s. 111, which excludes what is commonly called "premium income". Allowable deductions are also to be ascertained in the ordinary way subject to s. 112, which excludes expenditure exclusively referable to the gaining of premium income. The Act leaves assessable income to be ascertained in the ordinary way subject to s. 1118 but proceeds, in ss. 113 and 115, to make two special provisions for allowable deductions. Section 113 provides, as the chairman of the Board of Review has pointed out, a convenient method of calculating the amount of a deduction which would have to be calculated in some way in the absence of any express provision. Section 115 contains a provision of a different character. It allows a deduction of a special kind, based presumably on the manner in which life assurance companies, for their own purposes, normally ascertain the "profit" of an accounting period. Sub-section (1) of s. 113 provides that "So much only of the expenditure incurred in the year of income in the general management of the business of a life assurance company, as bears to that expenditure the same proportion as its assessable income bears to its total income, shall be an allowable deduction". Sub-section (2) provides that "For the purposes of this section, the expenditure exclusively incurred in gaining or producing assessable income, or exclusively incurred in gaining or producing income which is not assessable, shall be deemed not to be expenditure incurred in such general management". Section 115 provides that "An amount equal to three per centum of that part of the calculated liabilities of a life assurance company at the end of the year of income, which bears to such calculated liabilities the same proportion as the value at that date of the assets from which the company derives assessable income bears to the value at that date of all the assets of the company, shall be an allowable deduction". Section 116 provides that "When the calculated liabilities at the end of the year of income exceed the value at that date of all the assets of the company, the company shall not be liable to pay income tax in respect of the income derived in that year from the business of life assurance". The method of arriving at "calculated liabilities" for the purposes of ss. 115 and 116 is prescribed by s. 114. Actuarial valuations are, of course, necessary. Nothing in this case turns on the method of arriving at "calculated liabilities". (at p462)
7. The commissioner notified his original assessment to the Society on 24th April 1944. The taxpayer objected. On the disallowance of its objection, it required the matter to be referred to a Board of Review, and it was referred accordingly. The commissioner notified an amendment of his original assessment on 25th June 1946, and a further amendment on 17th February 1950. Neither of these amendments, however, involved any departure from the basis of the original assessment. There were merely slight differences in the actual figures, and these amendments may, for present purposes, be ignored. On 6th June 1950, however, this Court delivered judgment in the case of Commercial Banking Co. of Sydney Ltd. v. Federal Commissioner of Taxation [1950] HCA 15; (1950) 81 CLR 263 . This case had raised the same questions as those which now arise, and, on 27th April 1951, the Crown Solicitor wrote to the solicitors for the Society a letter, in which he said that the commissioner would, on the hearing before the Board of Review, ask the board "to vary the assessment in accordance with the principles enunciated in" the Commercial Banking Co.'s Case (1950) 81 CLR 263 . Schedules were enclosed setting out the amendments which the commissioner considered should be made. These amendments (which were put forward as subject to possible modification in respect of some of the figures actually adopted) by no means abandoned the view that very substantial deductions ought to be made from the gross amounts received in order to arrive at the amounts of interest in respect of which the Society was entitled to the benefit of s. 20 and s. 160AB respectively. On the contrary, they were, in the result, less favourable to the Society than the original assessment. But they arrived at the result by a different calculation. (at p463)
8. Before examining the commissioner's original and proposed assessments, it is convenient to mention, in order to dispose of it, one argument which was put forward for the Society in connection with what may be called the "s. 20 interest". Apart from premium income (which is not assessable) the Society's main source of income is interest, some of which falls within s. 20, some of which falls within s. 160AB, and some of which falls within neither section. Now, sub-s. (2) of s. 20 clearly contemplates that deductions may have to be made from the gross amount of interest which is prima facie entitled to the benefit of the section. But only deductions which are allowable from the taxpayer's income from property are to be made. If, therefore, the interest derived by the Society is income from personal exertion, it will be clear that no deduction can be made under s. 20 (2). Whether interest is income from personal exertion or income from property depends on the definition in s. 6 of "income from personal exertion". Interest is excluded from that definition "unless the taxpayer's principal business consists of the lending of money". In the Commercial Banking Co.'s Case (1950) 81 CLR 263 it was held that the principal business of a bank was the lending of money. The Society maintains that its principal business also is the lending of money. The argument was, in our opinion, rightly rejected by the board. The Society's principal business is the business of life assurance, that is to say, the making and performance of contracts to pay, in consideration of premiums paid to it, sums of money on death or on the expiration of a period. Its business differs radically from that of a banker. The lending of money is of the essence of the business of a banker. He provides many other facilities for his customers, but it may be said to be the characteristic of his business that he borrows money in order to lend it. If he ceased to lend money, the nature of his business (assuming it to survive) would radically change. A life assurance company lends money, and its lendings are very important, but they are not of the essence of its business. They are operations ancillary to the main business, made primarily because the holding of large funds to cover contingent liabilities is a necessity of that business. If a life assurance company ceased to lend money, the nature of its business would not change. The position would simply be that it would have to charge larger premiums in order to maintain itself in a sound position. Interest derived by a life assurance company on money lent by it is, in our opinion, income from property and not income from personal exertion. (at p464)
9. The Society in the accounting period had no income from dividends, but had
a comparatively very small amount of income which
was treated as personal
exertion income. In his original assessment the commissioner appears to have
begun by applying s. 50 (c)
of the assessment Act to the total of allowable
deductions. He thus arrived at a figure of 2,871,339 pounds as the total of
allowable
deductions from property income. The Society's income from property
was 4,409,312 pounds. The interest derived from s. 20 securities
was 1,162,228
pounds, and the interest derived from s. 160AB securities was 684,407 pounds.
The commissioner used these four figures
in order to arrive at the amount to
be deducted from the gross amount of s. 20 interest and s. 160AB interest
respectively, and he
worked out the following formidable proportion sums:-
Section 20: 1,162,228
--------- of 2,871,339 pounds = 756,842 pounds.
4,409,312
Section 160AB: 684,407
--------- of 2,871,339 pounds = 445,685 pounds.
4,409,312 (at p464)
10. The deduction of these respective products from the s. 20 interest and
the s. 160AB interest left 405,386 pounds to receive
the benefit of s. 20, and
238,722 pounds to receive the benefit of s. 160AB. (at p464)
11. The commissioner, as has been said, abandoned this method before the
matter came before the Board of Review, and no attempt
was made to defend it
before us. The new method, which he supported before the board and before us,
proceeded, like the original
method, on an apportionment basis, but it
differed from the original method in two respects. In the first place, it had
regard separately
to s. 113 and s. 115 of the assessment Act, and its object
was to attribute to the s. 20 interest and the s. 160AB interest respectively
a proportion of the deductions from assessable income allowed under s. 113 and
a proportion of the deductions from assessable income
allowed under s. 115. In
the second place, it adopted different bases of apportionment. It is now
necessary to state some further
figures:-
Section 20 interest . . . . . . . . . . . . = 1,162,228 poundsp465)
Section 160AB interest . . . . . . . . . . . = 684,407 pounds
Total income (i.e. including premium income) = 17,437,530 pounds
Management expenses (s. 113) . . . . . . . . = 564,082 pounds
Assets producing s. 20 interest . . . . . . = 29,427,511 pounds
Assets producing s. 160AB interest . . . . . = 23,963,994 pounds
Total assets . . . . . . . . . . . . . . . . = 147,038,833 pounds
3% of "Calculated Liabilities" (s. 115) . . = 3,486,524 pounds (at
12. Taking these figures, the commissioner proceeded to work out the
following even more formidable proportion sums:-
1 (a) Deduction from s. 20 interest by reference to s. 113:-
1,162,228
---------- of 564,082 pounds = 37,597 pounds.
17,437,530
(b) Deduction from s. 20 interest by reference to s. 115:-
29,427,511
----------- of 3,486,524 pounds = 697,773 pounds.
147,038,833
2 (a) Deduction from s. 160AB interest by reference to s. 113:-
684,407
---------- of 564,082 pounds = 22,140 pounds.
17,437,530
(b) Deduction from s. 160AB interest by reference to s. 115:-
23,963,994
----------- of 3,486,524 pounds = 568,224 pounds.
147,038,833 (at p465)
13. The result of the acceptance of these apportionments would be that from
the s. 20 interest (1,162,228 pounds) there would be
deducted a total sum of
735,370 pounds, leaving a balance of 426,358 pounds to receive the benefit of
s. 20. From the s. 160AB interest
(684,407 pounds) there would be deducted a
total sum of 590,364 pounds, leaving a balance of 94,043 pounds to receive the
benefit
of s. 160AB. This result is very slightly more favourable to the
Society than the original assessment in respect of the s. 20 interest,
but
very substantially less favourable to the Society in respect of the s. 160AB
interest. (at p465)
14. We will take first the position under s. 160AB, because that section was considered in the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 , and because the position is not complicated by any reference to the opinion of the commissioner. Similar questions arose under other statutes in Douglass v. Federal Commissioner of Taxation [1931] HCA 18; (1931) 45 CLR 95 and in Carpenters Investment Trading Co. Ltd. v. Federal Commissioner of Taxation [1949] HCA 32; (1949) 79 CLR 341 , the question in each case arising from the use of the words "included in the taxable income". The effect to be given to those words in s. 160AB must be taken to be settled by the Commercial Banking Co's Case [1950] HCA 15; (1950) 81 CLR 263 . In that case, Dixon J. said: - "I construe s. 160AB 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" (1950) 81 CLR, at p 309 . (As is made clear by the context as well as by the authorities cited, this means that he is entitled to a rebate of 2s. for every pound by which, by reason of the inclusion of the interest in his assessable income, his taxable income has been increased.) His Honour proceeded: "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" (1950) 81 CLR, at p 309 . It is clear, from the nature of the income in question, which commonly involves no expense in its collection, that in very many cases no deductions at all can properly be made from the gross amount of interest received. But it is equally clear that it was contemplated that there might be cases in which a deduction would have to be made from that gross amount in order to arrive at the rebateable amount. The nature of such deductions is clearly described in the passage quoted. We add one sentence from the judgment of Fullagar J., in which he said: - "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" (1950) 81 CLR, at p 311 . (at p466)
15. In the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 as in Douglass v. Federal Commissioner of Taxation [1931] HCA 18; (1931) 45 CLR 95 , none of the deductions which the commissioner sought to make were of the character described. And it appears to us that none of the deductions which the commissioner seeks to make in this case are of that character. The commissioner has attributed to the s. 160AB interest a proportion of the deduction allowed under s. 113 of the Assessment Act, and also a proportion of the deduction allowed under s. 115 of that Act. So far as s. 115 is concerned, the deduction allowable thereunder appears to be of a more or less arbitrary nature, though the provision was (as we have said) doubtless inserted in the light of the peculiar nature of the business carried on by the life offices. It appears to us impossible to attribute a deduction of that nature or any part thereof to the s. 160AB interest, and, unless some part thereof can be so attributed, no part can be deducted for the purposes of s. 160AB. It is nothing to the point to say that the assets from which the company derives assessable income and which are a factor in the proportion sum under s. 115 include the assets which produce the s. 160AB interest. For that matter they are also included in the total assets of the company, which provide the other factor in the proportion sum. But the point is that the deduction allowable under s. 115 bears no relation to the s. 160AB interest in fact derived by the company. Its allowability is a consequence of the interest-bearing character of the s. 160AB securities but not of the presence of the interest which they actually produced in assessable income. The deduction is not connected in any way with the receipt of that interest. It is in no sense and in no part a special deduction which, but for the inclusion of the interest in the assessable income, would not be allowable. Of no part of it can it be said that it only became an allowable deduction because of the inclusion of the interest in the assessable income. The deduction directed to be made under s. 115 depends in no way whatever upon the receipt of s. 160AB interest or of any particular assessable income. (at p467)
16. So far as s. 113 is concerned, the position is, we think, essentially the same, though there may be more, at first sight, to be said for the commissioner's view. We would think it clear that behind s. 113 lies the same fundamental conception that is inherent in s. 51, i.e. that primarily taxable income is to be assessable income less the cost of gaining or producing it. In applying s. 113 you begin by applying sub-s. (2) of that section, and you ask whether any particular expenditure in fact incurred by way of general management expenses can be exclusively referred to any particular assessable income in the sense that it can be isolated as the cost, or part of the cost, of gaining that assessable income. You also ask whether any particular expenditure in the way of general management expenses can be exclusively referred to any particular non-assessable income (e.g. premium income) in the same sense. Having answered those two questions, you attribute to particular assessable income such sums as you have found to be exclusively referable to it, and make a deduction under s. 51 accordingly. You also attribute to non-assessable income such sums as you have found to be exclusively referable to it, and you exclude those sums from the calculation of taxable income, just as you exclude the non-assessable income. You then take the balance of the expenditure actually incurred in general management, and you work out the proportion sum which sub-s. (1) of s. 113 directs you to work out. In effect you apportion the balance of that expenditure between assessable and non-assessable income, and the proportion attributable to assessable income is an allowable deduction in ascertaining taxable income. The attribution is made on the arbitrary, though not apparently unreasonable, basis of the ratio between assessable income and non-assessable income. (at p468)
17. The commissioner says that, when you have ascertained under s. 113 (1) the proportion of general management expenses attributable to assessable income, you must then attribute a proportion of that proportion to the s. 160AB interest, and make a deduction accordingly in order to arrive at the amount rebateable under that section. He says that it would be unreasonable not to take some such course, because the s. 160AB interest is itself taken into account under s. 113 (1) in such a way that the larger the amount of that interest the larger is the deduction to which the company becomes entitled under that sub-section. But we do not think that such a course is contemplated by s. 160AB, and we do not think that such a course accords with the view taken in the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 . That view was that the words "included in his taxable income" require the subtraction of such of the allowable deductions as are specifically referable to the s. 160AB interest, but do not authorize or contemplate any other subtraction. It is true that one consequence of the inclusion of s. 160AB interest in assessable income is that the amount of general management expenditure which s. 113 makes an allowable deduction is greater than it would otherwise have been. But, while that means that a proportion of the s. 113 deduction is attributable as a matter of arithmetic to the presence of the s. 160AB interest in assessable income, it does not mean that the commissioner can point to any particular portion or constituent of that deduction as being an amount which answers the description of a deduction made allowable by the inclusion of the s. 160AB interest in the assessable income. In truth the s. 113 deduction is but a figure, arrived at by an arithemetical process, and made an allowable deduction in place of so much of the general management expenditure ascertained in accordance with s. 113 (2) as would otherwise have been an allowable deduction under s. 51. No part of the deduction for which it is thus substituted could have satisfied the test laid down in the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 for all amounts capable of satisfying that test must necessarily have been excluded in the course of ascertaining the amount of the general management expenditure. A fortiori, no proportion of the artificial figure substituted by s. 113 (1) can satisfy the test. The answer to the argument for the commissioner on this part of the case is that there is no identifiable amount forming part of the s. 113 deduction, which can be distinguished from the remainder of that deduction as being specially referable to the s. 160AB interest. (at p469)
18. It is necessary now to turn to the s. 20 interest. We have now to deal with a section expressed in very different terms, and the question which arises is not covered by the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 . But, except that an opinion of the commissioner (for which, of course, a Board of Review could substitute its opinion) is or may be involved, we think that the position under s. 20 is substantially the same as the position under s. 160AB. We think that the reasons which led the majority of the Court to their conclusion on s. 160AB in the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 apply - perhaps a fortiori - to s. 20. It is on sub-s. (2) of s. 20 that the question turns, and the important words are "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". (at p469)
19. Obviously the first step in applying s. 20 (2) to any particular case must be to ascertain the deductions allowable from the taxpayer's income from property. Again, we think that it is not s. 50 of the Income Tax Assessment Act but the conception that underlies s. 51 that is relevant. Section 50 is a subsidiary provision which is ultimately concerned with the application of rates of tax. It speaks of the making of deductions in the course of the process of assessment: it has nothing to do with their allowability. The conception behind s. 51, on the other hand, is fundamental. The "deductions allowable from the taxpayer's income from property" are, in our opinion, to be ascertained in precisely the same way as deductions under s. 160AB. That is to say, they must be special deductions which, but for the inclusion of the taxpayer's income from property in the assessable income, would not be allowable. They must be deductions which only became allowable deductions because of the inclusion of the taxpayer's income from property in his assessable income. (at p470)
20. The allowable deductions from the taxpayer's income from property having been ascertained on this basis, the next step must be for the commissioner to form an opinion as to what part (if any) of the amount so ascertained is properly attributable to the s. 20 interest. The important point here is to see what it is that the commissioner must form an opinion about. Again, in our opinion, the test to be applied is the test laid down in the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 . If, for example, the taxpayer employed an agent to collect rents but incurred no expense in collecting his s. 20 interest, it would not be open to the commissioner to attribute a proportion of the agent's commission to the s. 20 interest. If, on the other hand, he employed a trustee company at a commission, or a solicitor at a retaining fee, to collect and handle for him various kinds of income from property, including s. 20 interest, it would, we should suppose, be proper to attribute to the s. 20 interest a proportion of the commission or of the retaining fee. (at p470)
21. From this conclusion it follows that the position with regard to the commissioner's calculations for the purposes of s. 20 (2) is the same as the position with regard to his calculation of deductions for the purposes of s. 160AB. He has attributed to the s. 20 interest a proportion of the deduction allowed under s. 113 of the Assessment Act, and also a proportion of the deduction allowed under s. 115 of that Act. What we have said with regard to both sections in connection with s. 160AB is equally applicable in connection with s. 20. We do not think that there is any justification for the basis of the commissioner's calculations in either case. In neither case do they produce a figure the deduction of which from the relevant gross amount of interest is warranted by the statute. (at p470)
22. It would not, we think, necessarily follow from the rejection of the commissioner's apportionments that no deduction should be made from the gross figure either for the purposes of s. 20 or for the purposes of s. 160AB. One would be disposed to think that, in the case of an institution of such magnitude as the Society, some expenditure in the nature of management expenses could be properly attributed to the receipt of s. 20 interest and s. 160AB interest. Records, one supposes, must be kept, payments checked, accounts audited. It may well be that some expenditure on matters of this kind should be regarded as incurred in the course of gaining the interest and therefore deductible from that interest in accordance with the general principle of deductibility under s. 51. On the other hand, the amount which the necessary dissection would show to be attributable to the interest in accordance with the principle of the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 would probably be small, and perhaps, by comparison with the very large figures involved in this case, almost negligible. We were informed by Mr. Barwick during argument that in the Commercial Banking Co.'s Case (1) the bank was prepared to accept a deduction of about 1,000 pounds on the basis suggested: we have no means, of course, of telling whether such a sum would be reasonable in the case of the bank or in this case. But, however all this may be - and whether or not because of the smallness of the amount thought to be involved - this case was conducted before the Board of Review and before this Court on the footing that, unless the basis of the commissioner's apportionments could be supported, no deductions should be made. The decision of the Board of Review must, therefore, be regarded as correct. (at p471)
23. One argument, which was put with some force by Mr. Myers, should be noticed in conclusion. He said that the practical result of the view which we have expressed was very unlikely to have been intended by the legislature. The position seems to be as follows. The taxable income of the company is 1,422,204 pounds. The s. 20 interest is 1,162,228 pounds. This sum is taxed (on the view which we have expressed) at 1s. 4d. in the pound. This tax works out at 77,481 pounds. The balance of the taxable income is 259,976 pounds. We begin by taxing this sum at 5s. in the pound (the company rate for the relevant year of tax). This tax works out at 63,674 pounds. If we stop there, the tax payable by the Society is 141,155 pounds. But the Society is entitled (on the view which we have expressed) to a rebate of 2s. in the pound not on 259,976 pounds but on 684,407 pounds (the amount of the s. 160AB interest). This rebate works out at 68,441 pounds, which sum must be subtracted from 141,155 pounds. The difference is 72,714 pounds, which is the tax payable. This sum is something like five per cent of the Society's taxable income, or 1s. in the pound. (at p471)
24. The real point of the argument emerges, we think, when it is said that the result which the above figures indicate is that a part of the s. 20 interest (the difference between 684,407 pounds and 259,976 pounds) really gets the benefit not only of the reduced rate of tax under s. 20 but also of the rebate under s. 160AB - and interest which falls within s. 20 is expressly excluded by the terms of s. 160AB from the benefit of that section. We do not think it is correct to say that this result follows. The fallacy in the argument seems to us to lie in the fact that it treats the amount of interest calculated under and for the purposes of s. 20 as if it were an identifiable part of the taxable income for all purposes and not merely for the purposes of s. 20. This does not seem to us to be right. When taxable income has been calculated, the items which went to make up assessable income have (at least in such a case as the present) lost their identity for all purposes except the purposes of some special provision (such as s. 160AB) which requires an identification of some item. Where an identification is required, it must be made in the manner required, and the manner required must be ascertained by construction of the special provision. But the identification can be made only for the purposes of the special provision. Section 20 and s. 160AB in effect prescribe - each for its own purposes - methods of calculation for the purpose of arriving at sums in respect of which two concessions of a different kind are to be allowed to the taxpayer. It is wrong to say that what has been characterized for the purposes of s. 20 should be treated as bearing the same character for all purposes. Each calculation must be worked out independently, and it cannot be said with truth that any part of any factor which enters into the calculation under s. 160AB has already been taken into account in the calculation under s. 20. (at p472)
25. The figures in the present case are, of course, very striking. But the same result must often occur on a smaller scale. Take the case of an individual taxpayer, whose assessable income consists simply of 1,000 pounds of s. 20 interest and 1,000 pounds of s. 160AB interest. His only deductions are 250 pounds in respect of his wife and children, and a loss of 150 pounds incurred in a business - a total of 400 pounds. His taxable income is thus 1,600 pounds. It would seem very clear that neither of the allowable deductions is "attributable" to the s. 20 interest. He is therefore taxed at 1s. 4d. in the pound on the 1,000 pounds of s. 20 interest. Section 160AB must then be applied. We can see no justification whatever for saying that only 600 pounds of s. 160AB interest is "included in his taxable income". The commissioner would presumably say that the deductions of 400 pounds should be apportioned, and 200 pounds attributed to the 1,000 pounds of s. 160AB interest. But this leads to the very same result as that which is the subject of Mr. Myers's argument in the present case. That result occurs unless the whole of the 400 pounds is attributed to the s. 160AB interest so as to leave only 600 pounds entitled to the rebate. (at p472)
26. It would probably be unjust to attribute to Mr. Myers an argument the major premiss of which is that there is a strong presumption that the legislature would not intend to tax so large an income as that of the Society at so low a rate as 1s. in the pound. If such an argument were put, we do not think that any such presumption should be recognised, and, even if experience suggests that there may be something to be said for it, the reasons given for the view adopted in the Commercial Banking Co.'s Case [1950] HCA 15; (1950) 81 CLR 263 appear to us to be very strong. That view seems to us to give their natural meaning to provisions which were framed and put forward as an inducement to individuals and corporations to take a course which it was conceived to be in the public interest that they should take. The occurrence of a possibly unexpected result in a particular case cannot prevail against such considerations. (at p473)
27. The questions submitted by Williams J. should be answered:-
1. (a) Yes.
(b) (i) No.
(ii) No.
2. (a) Yes.
(b) (i) No.
(ii) No. (at p473)
WEBB J. I agree with the answers proposed; but not for exactly the same reasons as those given above. (at p473)
2. As to s. 160AB interest: in Commercial Banking Co. of Sydney Ltd. v. Federal Commissioner of Taxation [1950] HCA 15; (1950) 81 CLR 263 , I took the view that the expression "included in his taxable income" in s. 160AB of the Income Tax Assessment Act 1935-1942 was elliptical and meant "included in the calculation of the taxable income". For that view I relied on the rebate being in respect of "every pound of interest", and not merely in respect of income from the interest; and also on the decisions of this Court 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] HCA 32; (1949) 79 CLR 341 . It followed that, in my opinion, the whole amount of the interest was included in the taxable income within the meaning of s. 160AB, which makes no express provision for a deduction. But this view was not taken by Dixon J. (as he then was) who delivered the judgment that prevailed in Commercial Banking Co.'s Case (1950) 81 CLR 263 . As I now understand his Honour's reasons for judgment in Douglass' Case [1931] HCA 18; (1931) 45 CLR 95 - and, indeed, as I should always have understood them - he has never regarded the expression "included in the taxable income" as elliptical, and as meaning "included in the calculation of the taxable income", or, as Starke J. stated it in Douglass' Case (1931) 45 CLR, at p 103 , as "included in account in ascertaining the taxable income"; and so his Honour has felt obliged to hold that for the purposes of the rebate there should be subtracted from the whole amount of the interest what he described as "special deductions which, but for the inclusion of the interest in the assessable income, would not be allowable". I am, of course, bound by the majority decision, and I accept the explanation of the reasons for it given by their Honours who constituted the majority; otherwise I would have held that the class of "special" deductions included those provided for by ss. 113 and 115, as I would not have been able to see any distinction in principle between them for the purposes of determining the amount of interest on which the rebate is granted within the limits imposed by the expression "included in his taxable income" in s. 160AB, if that expression is not elliptical. It would have appeared to me that the amount of interest "included in his taxable income" was determined as much by the one deduction as by the other, as nothing in the terms of s. 160AB would have suggested any distinction to me. In fact, s. 160AB makes no express reference to any deduction of any kind. It would have appeared to me that there was no material distinction between s. 113 and s. 115, because the deduction under s. 115 is based on assets and not on income; as the assets include these Commonwealth securities, and as a result the amount of interest included in the taxable income would have appeared to be determined by the operation of s. 115 as well as by the operation of s. 113; and further that the one deduction would be as "special" as the other. After all the concession in s. 160AB is to the holder of the securities as such: it is not extended to the assignee of the interest coupons. (at p474)
3. The merit is in the investment of assets in the security. As Dixon J. (as he then was) pointed out in Commercial Banking Co.'s Case (1950) 81 CLR, at p 309 : "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". (at p474)
4. So I have found it difficult to see how there could be a difference between special and general deductions for the purposes of s. 160AB: each appeared to me to have the effect of reducing the taxable income, and necessarily the amount of any interest included in it. Yet this difference must be insisted upon if the concession is to be regarded as a real concession: if general deductions were taken into account there would be no difference between s. 160AB interest and any other kind of interest or income. It was because of this difficulty that I was driven to conclude that "included in his taxable income" was an elliptical expression, as Starke J. also appeared to regard it. (at p475)
5. As to s. 20 interest: if ss. 113 and 115 deductions are not special deductions for the purposes of s. 160AB, I cannot see how they can nevertheless be regarded as attributable to the s. 20 interest. (at p475)
ORDER
Questions submitted to the Full Court by order of Williams J. made on 11th November 1952 answered as follows:-1. (a) Yes. 2. (a) Yes.
(b) (i) No. (b) (i) No.
(ii) No. (ii) No.
Case remitted to Williams J.
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