Brett v Barr Smith [1919] HCA 4

High Court of Australia|1919-07-01|Before: Gavan Dufly JJ, Higgins JJ, Gavan Duffy J, Hood J, Another J

BRETT AND ANOTHER . 5 : ' . APPELLANTS : PLAINTIFFS, : AND ; BARR SMITH AND ANOTHER J é . ResPonDENT: : DereNDanNts,

Income Tax - Mortgage - Covenant imposing on mortgagor obligation to pay income H. C. ov A. tax in respect of interest - Income Tax Assessment Act 1915-1916 (No. 34 of 1919. 1915 - No. 39 of 1916), sec. 54, - ~

By a mortgage executed before the passing of the Income Tax Act 1915 the yy. 7. 17

amounting to 4} per cent. on the mortgage debt, would leave a clear remainder

of 44 per cent. per annum, the mortgagee would accept interest at such reduced

Held, by Isaacs and Higgins JJ., Gavan Duffy J. doubting, that the proviso was not and did not contain a covenant or stipulation which had or purported to have the purpose or effect of imposing on the mortgagors the obligation of paying income tax on the interest to be paid under the mortgage within the meaning of sec. 54 of the Income Tax Assessment Act 1915-1916, and therefore that the mortgagors were liable to pay interest at the rate of 5} per cent. reducible as prescribed by the proviso.

Decision of the Supreme Court of Victoria: Brett v. Barr Smith, (1918) V.L.R., 476; 40 A.L.T., 136, affirmed,

Appra from the Supreme Court of Victoria. Tn an action brought in the Supreme Court by Frank Pilkington Brett and Arthur Frederick Hooper against Tom Elder Barr Smith

and Henry Percival Moore, as trustees of the estate of Robert Bar Smith, deceased, the following special case was stated for the opi of the Court and was referred by Hood J. to the Full Court : -

This action was commenced on 2Ist January 1918 by a writ « summons whereby the plaintiffs claimed for money payable by t defendants to the plaintifis for money received by the defend: for the use of the plaintifis, being interest in excess of that prop payable demanded by the defendants from the plaintiffs and by them; and the parties have concurred in stating the que: of law arising in this action in the following case for the opinion of the Court - :

Robert Barr Smith in par. 2 hereof mentioned died on 20th November 1915, and since his death the defendants have at all times material to this case been his executors and the gears his estate.

By a memorandum of mortgage dated 28th February 1913, and registered Number A.13786 under the Real Property Act 1900 of the State of New South Wales, the plaintifis mortgaged to the said Robert Barr Smith, his executors or transferees, the parcels of land - therein described, and situate in the said State, as security for the repayment by the plaintiffs to the mortgagee, his executors or transferees, of the principal sum of £9,000 and interest thereon as _ by the said memorandum provided.

The plaintiffs, the mortgagors, by the said memorandum of | mortgage covenanted with the said Robert Barr Smith the mort- gagee as follows, that is to say : -

" Firstly - That we or one of us our or his heirs executors adminis- trators or transferees will pay in gold to the mortgagee his executors

administrators attorneys or transferees at the Chief Banking House - of the English Scottish and Australian Bank Limited in the City. of Melbourne in the State of Victoria or at such other place in the | same City as the mortgagee his executors administrators or trans- ferees shall direct or appoint in writing the principal sum of £9,000 on 28th August 1913 with interest for the same in the meantime computed from 28th February 1913 at the rate of five pounds

fifteen shillings per centum per annum reducible as hereinafter mentioned.

_"Secondly - That if the said sum of £9,000 or any part thereof H.C. or A.

| remain unpaid after the said 28th August 1913 we or one of pte

s our or his heirs executors administrators or transferees will so Brerr v.

g as the said principal sum or any part thereof shall remain unpaid pane Sarre.

wy in gold to the mortgagee his executors administrators attorneys transferees as aforesaid interest for the said principal sum or so much thereof as shall for the time being remain unpaid at rate of five pounds fifteen shillings per centum per annum

"Thirdly - That we or one of us our or his heirs executors _ administrators or transferees will and shall pay all land tax and other taxes charges assessments (including any property tax) _ impositions and outgoings whatsoever whether similar to those now in existence or not and whether imposed by Parliament or otherwise which now are or which may at any time hereafter during _ the continuance of this mortgage become payable in respect of any of the lands comprised in this mortgage as and when the same shall become payable and that we or one of us our or his heirs executors administrators or transferees will repay on demand to the mortgagee his executors administrators attorneys or transferees all and every sums and sum of money which he or they may pay on account of = such tax or taxes or other charges aforesaid with interest thereon up to the time of payment at the rate aforesaid and until every such sum and interest shall be fully paid the same shall be a charge upon 'the lands hereby mortgaged Provided always and it is hereby declared that nothing herein contained shall be deemed or taken extend or apply to any tax charge or assessment which or any of which now is or at any time hereafter shall be required law to be paid or borne by the mortgagee and not by the mort- yr or to bind us our heirs-executors administrators or transferees 'make any payment which we may not lawfully covenant to make which it shall or may at any time hereafter become unlaw ful for

" Seventhly - Provided always and it is hereby agreed and : declared that if we (the mortgagors) or one of us or his heirs executors administrators or transferees shall on every 31st August and 28th February so long as the said principal sum of £9,000 or _ any part thereof shall remain unpaid or within ten days next after each of the said days respectively pay in gold to the mortgagee hi: executors administrators attorneys or transferees at the banking - house aforesaid or at such other place in the said City of Melbourne - as the mortgagee his executors administrators or transferees shall from time to time appoint in writing interest on the said principal sum or on so much thereof as shall for the time being remain unpaid - at such a rate as will after deduction of such sum or sums as under - any existing or future Statute of the Commonwealth of Australia - and of the States forming such Commonwealth or of such Common- 4 wealth and States or any or either of them the mortgagee shall or may be or become liable to pay in respect of the said lands or of the said principal or interest moneys respectively for land tax for property tax for income tax without any exemption on £405 sterling - at the highest rate payable by the mortgagee in each year during the continuance of this loan notwithstanding that such rate may be based on income of which the said sum of £405 forms part only or - for any other rate tax or assessment leave a clear remainder of four pounds ten shillings per centum per annum then the mortgagee his executors administrators and transferees shall and will accept interest for the said principal sum or for so much thereof as shall for the time being remain unpaid at such reduced rate for any and every half-year for which such interest shall be so paid to him or them within the ten days aforesaid in lieu of the higher rate of - interest herembefore mentioned Provided always that the accept- ance of interest at the reduced rate hereinbefore mentioned for any half-year shall not prejudice or affect the rights of the mortgagee - his executors administrators attorneys.or transferees or any of them to require and compel payment of interest at the higher rate herein- before mentioned for any subsequent half-year in case interest at - the reduced rate for such subsequent half-year shall not have been paid within the ten days aforesaid."

5, The said memorandum of mortgage or copies thereof may H- ©. or A. be looked at as part of this case. aa

The plaintiffs contend that the clause numbered seventhly ee in the said mortgage is or contains a covenant or stipulation which parr Surru. has or purports to have the purpose or effect of imposing on the mortgagor the obligation of paying income tax on the interest to be paid under the mortgage within the meaning of sec. 54 of the Income Tax Assessment Act 1915.

The plaintiffs also contend that upon payment by the plaintiffs

within the time and in the manner provided by the said clause R

numbered seventhly of interest at such a rate as will yield a sum equal to 44 per centum per annum upon the principal sum then unpaid plus an amount equal to the income tax which would be payable upon an income consisting solely of £405 in interest the defendants are bound to accept interest at the reduced rate so ' computed in lieu of the higher rate of interest in the said mortgage provided.

3 8. The questions for the opinion of the Court are : -

é (1) Are the plaintifis right in their contention mentioned in ; par, 67

4 2) Are the plaintiffs right in their contention mentioned in q ig 8

(3) What rate or rates of interest are the plaintiffs liable to pay 7 : The Full Court answered the first question in the negative, and

thought it unnecessary to answer either of the other questions: : Brett v. Barr Smith (1).

From that decision the plaintiffs now appealed to the High Court.

ts Pigott, for the appellants, The proviso in the mortgage is a "stipulation " within the meaning of sec. 54 of the Income Tax Assessment Act 1915-1916. That word is the proper term to apply to a condition of a contract (Blackstone's Commentaries, vol. 1, ¢. 20, p. 299). The proviso is a stipulation that if the mortgagors do something the interest will be at a certain rate. The proviso, if taken advantage of. has the effect of imposing upon the mort- gagors an " obligation" within the meaning of sec. 54. The word (1) (1918) V-LR., 476; 40 ALT, 136.

" obligation " in that section is not used in a conveyancer's sens in a business sense, that is, as including an obligation of pra

is stipulated for only for the purpose of compelling the mortg

to pay the income tax and other taxes. Taking all the provisi as to interest, the proper construction is that the obligation upon the mortgagors is to pay interest at the rate fixed by the proviso. words " the interest to be paid under the mortgage " in sec. 54 me in this case, where the interest is paid punctually, the interest in fa

the mortgage and, as an indulgence, the lower rate will accepted on punctual payment (Wallingford v. Mutual Society (3). There is no obligation to pay the lower rate.

Isaacs J. Sec. 54 of the Income Tax Assessment Act 1915 enacts as follows : - " A covenant or stipulation in a mortgage of land, which - has"or purports to have the purpose or effect of imposing on the - mortgagor the obligation of paying income tax on the interest to be paid under the mortgage" is to have certain consequences according as the mortgage was made before or after the commence: ment of the Act. If the mortgage was made after the commence ment of the Act, the covenant or stipulation is to be absolutely void but if the mortgage was made before that time, it is not wholly abrogated but is modified. The effect of the modification is, in s! : stance, that instead of paying the amount of tax which the mortgagee is bound to pay the Crown in respect of the interest, and perhaps on

(1) 19 C.L.R., 33, ab p. 41. (2) 22 V.LR., 1255. 18 A.L.T. 25: (3) 5 App. Cas., 685, at p. 702.

the basis of being part of a larger income, and therefore on a higher aduated scale, the mortgagor pays in respect of the mortgagee's income tax only such sum as he would pay if his own income amounted only to the sum he pays for interest.

The first thing is to interpret the enactment. It has been argued _ that its terms, particularly the word " obligation," are to be read ina popular sense. Its subject matter, however, is a " mortgage of land, which is a term of art, and the expressions which are used _ with respect to the mortgage are legal and technical terms, namely, _ "covenant," " stipulation," "imposing the obligation" and _ "interest to be paid under the mortgage." It is a cardinal rule of interpretation that technical words must have their legal effect _ unless the contrary is made perfectly clear. It was so held by the Privy Council in Lalit Mohun Singh Roy v. Chukkun Lal Roy (1), which was the case of a will. 'The principle applies @ fortiori to a

Statute (see Burton v. Reevell (2); The Queen v. Commissioners of Income Tax (3), and Attorney-General v. Glossop (4)). In the last- _ mentioned ease Collins M.R. applied the principle to the Finance Acts, notwithstanding an argument very similar to that addressed to us, that words primarily technical should be read from a popular standpoint. This principle applies with "special cogency," said Lord Robertson in Lord Advocate v. Stewart (5), "when the words in question present only legal conceptions. The popular use of such _ words does not represent the primary meaning of the words, but some half understanding of them." I therefore read the governing portion of the section in a legal sense. So reading it, we must, in order to assent to the appellants' contention, find a stipulation having the "effect " of imposing on the appellants the obligation of paying
income tax on the interest to be paid under the mortgage.

Turning to the mortgage, it is one made before the commencement of the Act. The principal sum is £9,000, and by the first clause of the mortgage the mortgagors covenant to repay that sum and _ interest "at the rate of five pounds fifteen shillings per centum per annum reducible as hereinafter mentioned." The " herein- after " consists of clause 7, which says: " Provided always and it is (1) 24 Cale., at p. 846; LR. 24 Ind. (3) 22 Q.B.D., 296, at p. 309.

App., 76. (4) (1907) 1 K.B., 163, at (2) 16 M. & W., 307, at p, 309. (5) (1902) A.C., 344, at p. 356.

hereby agreed and declared that" if the mortgagors shall on the

a rate as will, after deducting certain taxes, which include Common- - wealth income tax on £405 at the highest rates the mortgagee may be liable to pay on that sum, leave a clear remainder of £4 10s. pe cent., the mortgagees will receive that in lieu of the interest men- tioned in clause 1.

One observation must be made at the outset. No question arises under sec. of the Act, and learned counsel at the Bar expressly stated that that section was not relied on. It is, therefore, a ques- tion not of whether the document should be reformed or whether it

embodies any transaction struck at by sec. 53, but only whether, taking it as it stands, it contains a covenant or stipulation of the nature described in the opening words of see. 54. The document has: to be construed according: to well settled rules. The anomaly of the. rule of higher interest reducible on punctual payment being good, and of lower interest being increased for unpunctuality, is well known, In the note to Strode v. Parker (1) it is truly said that the agreement of the parties seems to be the same in either case, and the only - difference-is in the mode of expressing one and the same thing. theless, the difference has important results, which equity has - firmly established. '

The mortgage before us is carefully drawn so as to conform to the -

rule that maintains in certain cases the higher rate as the true interest to be paid under the mortgage. This rule the 54th section in no way seeks to alter, and therefore the effect of the mortgage, both at law and in equity, is that the interest to be paid under the mortgage is primarily 5} per cent., but that, on punctual payment within the limits mentioned in clause 7, a reduced rate of interest is _ all that can be demanded. That is an instance of what is termed by Lord Hardwicke, m Nicholls v. Maynard (2), an''abate . . . for prompt payment," and by Lord Hatherley, in Wallingford v. Mutual Society (3), an " indulgence " to the mortgagors. If they comply > with the condition of payment, the reduced rate (if it be a reduced f rate) becomes the rate of interest to be paid under the mortgage, but

(1) 2 Vern., 316, at p. 317. (2) 3 Atk,, 519, at p. 520. (3) 5 App. Cas., at p. 702.

only if the condition is performed. If taxation exceeds 1} per cent. H.C. or A. on the principal borrowed, there would be no "reduced rate." A 191% good deal of argument has taken place as to whether payment of nace income tax by the mortgagors is compulsory or voluntary on their pee Sore. part. As I view the matter, that is entirely beside the question. The only condition for reduced interest is prompt payment within the period specified by clause 7. That prompt payment, and even more prompt payment, has already by clause 2 been expressly covenanted for by them. But in order to induce them to adhere to that covenant, and perform what they are already under an obligation to do, with a slight extension in their favour, a reduced rate of interest is promised.

y But here, again, we must observe that it is not correct to say the reduced rate of interest is 44 per cent. It is a variable rate. On prompt payment the mortgagors are entitled to pay only a sum

~ for interest calculated at such a rate as will provide for two factors, one variable and the other constant, neither of which, however, in itself constitutes the reduced interest, but both of which, added together, constitute the amount: which will be accepted as interest,

and therefore will determine the reduced rate. The variable factor

is such amount as will pay (iter alia) the morigagee's highest

income tax on £405, stated as a fixed amount, but not identified as the interest under the mortgage, and the constant factor is a clear remainder of 44 per cent. per annum, and obviously part of the 5} per cent. per annum, the unreduced interest.

But it is very important to remember that the mortgagee does not agree to accept under any condition whatever 44 per cent. as reduced interest. His reduced interest is 44 per cent. plus the variable factor, and the total of the two, namely, 44 per cent. plus the rate

required to produce the variable factor, is what he receives as the reduced rate of interest under the mortgage. How he chooses to

apply the amount of the variable factor when he gets it, is immaterial to the mortgagors and immaierial to the Crown. It may be an interesting question what sum he returns to the Crown for income tax purposes as being the interest-he gets under the mortgage. The document is drawn having in view secs. 30 and 63 of the Land Tax : Assessment Act 1910-1911, and very adroitly and carefully to exclude,

as far as words can exclude, the notion that the reduced interest 4} per cent., and that the mortgagors are compelled to pay th mortgagee's income tax on that or any tax of the mortgagee. is drawn so as to provide that the mortgagors do not pay tax interest at all, but pay nothing but interest, measured, if reduced, adding (inter alia) a sum corresponding to what the mortgagee has to pay on £405 of his income to the amount calculated at the rate of 44 per cent. on the £9,000. For all that legally concerns the mort- _ gagors, the sum which is to govern the reduced rate of interest might : have been measured by such sum as will pay the mortgagee's rent, or purchase a motor car, and leave him £100 clear. The total so ascertained is the reduced interest on the mortgage in the event of - punctual payment, and the reduced rate is such rate as will produce that total sum. Consequently, the appellants are not under any - obligation to pay income tax on "the interest to be paid under the : mortgage." They are not under any obligation to pay income tax at all. They are bound only to pay interest at the rate of 5} per - cent. or on prompt payment such a smaller rate as will produce - the same sum as, having regard to the existing law, will amount - to the sum of the two factors I have mentioned. s : That being the legal construction of the instrument, we are not at liberty to paraphrase or reconstruct it, and treat it as if it were a mortgage reserving 44 per cent. interest with an added covenant or stipulation by the mortgagors to pay the mortgagee's income tax on the interest so reserved. There is no such stipulation, and we - are not at liberty to create one. The interest reserved is not 4} j per cent., and we not at liberty to prescribe that rate. There is no covenant even making it obligatory to pay the 44 per cent. plus the variable sum necessary to make up the reduced rate of interest, - and we are not at liberty to frame one. If such an instrument is - to be dealt with for the purpose of testing its reality, or its validity, having regard to what is behind it, sec. 53 must be resorted to, not sec. 54, But sec. 53, as I have stated, has not been relied on in this case. For the reasons mentioned, this case is not within sec. 54 as that - at present stands. If the intention of the Legislature were to include _ such a case as the present, the language of the enactment does not -

carry out the intention, and a Court can only judge of intention H. ©. or A. from the language actually used. More particularly should this be - _

salts ww observed where ex post facto legisla'ion alters contracts already Brerr

Hicers J. The only section on which the appellants rely is Higgins 3. sec. 54; and they are not entitled to succeed unless they show that inthe mortgage there is something imposing on the mortgagors an " obligation " to pay the mortgagee's income tax on the interest to be paid under the mortgage. Where is there any such obligation ? "Obligation" is a technical term of law, with a clear definite meaning ; and Statutes which make law must primd facie be treated as using technical words in their technical sense. There is no ground here for treating " obligation " as meaning moral obligation, or social obligation, or business obligation (in the sense of commercial pressure or expediency), or anything but legal obligation. The test is: Is there any legal sanction - would an action lie (if there were no sec. 54) against the mortgagors for failure to pay the income tax ? " Obligation " involves binding ; and there is nothing here to bind the mortgagors to pay the amount of the tax. There is merely an obligation on the part of the mortgagors to pay 5} per cent. interest on the £9,000, unless they pay punc'ually - not even 44 per cent. plus the income tax in addition, but such a rate as will, after deduction of an amount equivalent to income tax and other taxes relating to the property, yield a net 44 per cent. to the mortgagee. If, for instance, the mortgagee's income tax as to the mortgage were £30, the land tax £25, the property tax £20, the mortgagors would be relieved of the burden of paying 5} per cent. (£517 10s.) by paying punciually £480 (£405 plus £75). But there is no " obligation " to pay the income tax. Mr. Pigott admits that an agreement of A

to give a horse to B if B pay A's income tax or an amount equal

to that tax, does not impose on B an " obligation " to pay the tax ;

and that really settles the question. The case of Hider v. Dennis

(1), cited by Cussen J. in the Supreme Court, is an @ fortiori case, and

one of the many demonstrations that the man who needs money,

even if aided by the parliamentary draftsman, is no match for the ~ man*who has money with his skilled conveyancer.

Gavan Durry J. During the argument I was in some doubt as to whether the effect of clauses 1 and 7 of the memorandum of mortgage was not to prescribe 44 per cent. per annum as the rate of interest to be paid under the mortgage, and in addition to impose on the mort- gagors a further obligation of paying either income tax on such - interest and certain other imposts, or in the alternative of paying an annual sum equal to 1} per cent. on the money advanced by the mort- gagee, which he might of course allocate to the payment of such imposts or any part of them. This doubt has not been removed from my mind, but I am not prepared to differ from the other members of the Court, who are of opinion that not 44 per cent. but 5} per cent. is the rate of interest which in form and substance is to be paid on the money advanced by the mortgagee. If this is so, I agree that the memorandum of mortgage contains no covenant or stipulation which has or purports to have the purpose or effect of imposing on the mortgagee the obligation of paying income tax on the interest to be paid under the mortgage.

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

Solicitors for the appellants, Blake & Riggall. Solicitors for the respondents, Maileson, Stewart, Stawell &

At a glance

Court

Decision date

Before

Source

Judgment (75 paragraphs)

Cited By (1)