Magrath v Commonwealth [1944] HCA 14

Magrath v Commonwealth [1944] HCA 14 - HCA 1944 case summary — Zoe

[39]

Sugerman K.C. (with him Dignam), for the defendant. There has not been any breach of the contract on the part of the Commonwealth, The Commonwealth did not make any promise in the terms alleged by the plaintiff. The prospectus in respect of the bonds was addressed not to investors at large but to American investors, The promise made by the Commonwealth was that the bonds would be paid without deduction by it at the source. The words " without deduction " apply only to the moment of payment. They cannot be interpreted in accordance with a supposed business meaning. The whole obligation is satisfied when the interest has been paid in full. The obligation has then been performed and there cannot be a subsequent breach. The decision in Perpetual Trustee Co. (Ltd.) vy. Federal Commissioner of Taxation (2), that the value of the bonds was properly included in the estate for purposes of estate duty, applies a fortiori to the inclusion in assessable income of interest from the bonds for purpose of income tax. Zhe Commonwealth v. Queensland (3) is distinguishable because (a) of the difference in the words used, namely, "shall not be liable to income tax," and (0) the bonds were issued to American investors and were addressed in the first instance to them. The general principles of tax exemption practice in the United States of America, including the principle that tax exemptions should be construed strictly, are shown in T'ucker v. Ferguson (4) ; Seton Hall College v. South Orange (5) - See also Digest of the United States Supreme Court Reports, (1929), vol. 8, pp. 5954- 5956. The very long-settled course of authority in America shows that this is not the sort of contract into which would be read an implica- tion. The words should be given their ordinary natural meaning, that is, that the amount is to be paid in full without deduction. A distine- tion is drawn in the English cases between the gift of an annuity pay- able without deduction of tax and the gift of an annuity payable free of tax. Where the words used are " without deduction of tax " or "without deduction of income tax," super-tax, not being deductible, is not included, that is, the gift is not free of super-tax or sur-tax.

[42]

H. C. or A. When the gift is free of income tax as in In re Reckitt (1) then the 1944. words "income tax" are construed as including non-deductible E M nae super-tax : See also In re Hooper; Phillips v. Steel (2). The ten- con dency of the courts in England is to read the words quite literally, - Com, A promise to pay free of tax is just as much a promise relating only weartH, to payment as a promise to pay without deduction. The promise is transferred with the bonds. There is no continuing promise to - persons in respect of bonds transferred by them ; the only real nevus is between the Commonwealth and the holder for the time being, That promise is that the Commonwealth will pay without deduction - for tax. The meaning of the words is indicated upon a realization that it cannot be said that a person who, having received payment of interest, subsequently sells his bonds, retains the benefit of the promise. The bonds are negotiable instruments payable to bearer. The particular contractual duty sought to be enforced by the plaintiff is so inconsistent with the nature of a negotiable instru- ment that he could not get the right to have that duty performed in the capacity of bearer of a negotiable instrument. The promise was not made to the world at large. The promise is that upon due date the specified amount, neither more nor less, shall be paid to the bearer. The promise does not extend beyond that. A promise which did so extend cannot subsist in a negotiable instrument. One does not find in instruments which are negotiable a promise which not only sounds in damages but which sounds differently in the hands of various persons into whose hands interest may come. Upon the plain meaning of the document the promise relates entirely to payment and is satisfied and fully performed once payment has been made. The element " without deduction " is simply one of a number of elements in the matter of payment. The Commonwealth has no power by a term in a contract to prevent a State or a local governing authority from imposing a tax. Perpetual Trustee Co. (Ltd.) v. Federal Commissioner of Taxation (3) concludes the matter in favour of the defendant.

[63]

In Perpetual Trustee Co. (Ltd.) v. Federal Commissioner of Taxation (1) the Court considered a promise in the same terms as in the case of the present bonds. In that case the value of the bonds was included in an assessment for estate duty. It was contended for the executors of the deceased person that the imposition of estate duty was a breach of the contract to pay without deduction for taxes, and that the inclusion of the bonds in the assessment was for that reason unlawful. The time for payment of the principal had not arrived, and, accordingly, it could not be said, as is contended for the Commonwealth in the present case, that the relevant contract had been performed by the Commonwealth. The argument presented to the Court was to the effect that the terms of the con- tract prevented the imposition of any tax upon or in relation to the principal sum payable in pursuance of the bonds. As to this argument Gavan Duffy C.J., Starke J. and Evatt J. said that there was nothing in the bonds which excluded or rendered inoperative the power of the Parliament with respect to taxation, " though if a tax were imposed contrary to the terms of the bonds, a breach of the contractual obligation would arise which would sound in damages equivalent to the amount of tax" (2). Their Honours then went on to consider whether, even if estate duty could, under the statute, be lawfully imposed on the value of the estate of the deceased including therein the value of the bonds, such imposition would infringe the obligation of the bonds. It was pointed out that the obligation was to pay in New York in gold coin an amount of dollars without deduc- tion, and it was said " if that amount is paid there without deduction, then the obligation of the bonds is performed according to its tenor and effect" (3). Dizon J., with whose reasons for judgment McTiernan J. agreed, expressed the same opinion (4). Rich J. dissented. The case did not require a decision upon the question whether there was or was not a breach of the contractual obligation. The actual decision was that the contract did not limit the taxing power of the Commonwealth Parliament. But I agree with the views expressed by the majority of the Court as to the meaning of the particular contract - namely, that the obligation then and now in question is fully performed if the contractual amount is paid

[121]

It was contended that this Court had already decided this question in favour of the Commonwealth in Perpetual Trustee Co. (Ltd.) Federal Commissioner of Taxation (1). In that case H. R. W. R. Haege, the holder of similar bonds, died domiciled in Australia, - and the question arose whether the bonds formed part of his estate for the purposes of Federal estate duty within the meaning of the - Estate Duty Assessment Act 1914-1928. This Court held that the bonds formed part of the estate for the purposes of duty within the - meaning of the Act and were not exempted by s. 52a of the Common- wealth Inscribed Stock Act 1911-1927. This was all that it was necessary for the Court to decide in order to dispose of the appeal, but four out of the five Justices who sat discussed the question whether to impose the tax was a breach of the promise contained in the bonds to pay the principal sum at maturity without deduction of any Commonwealth tax. In their joint judgment Gavan Duffy C.J., Starke and Evatt JJ. said : - " Further, as the matter was argued at length, we think it right to say that the levy of an estate duty on the value of the estate of the deceased, including the value of the gold bonds, would not infringe the obligation of the bonds ; that obligation is to pay in New York in gold coin of the United States of America the dollars and interest mentioned, and if that amount is paid there without deduction, then the obligation of the bonds is performed according to its tenor and effect. The imposition of an estate duty upon the estate of a domiciled Australian lessens the amount of that estate which is distributable, but his executor is still entitled to and will receive, under such bonds as these, the precise number of dollars, in gold coin of the United States, therein stipulated " (2). Dixon J. said : - 'I think it is not inconsistent with the obligation expressed by this clause to include the value of such bonds in ascertaining the estate of a person dying domiciled in Australia for the purpose of assessing estate duty. The primary purpose of the provision is to confer upon the bondholder a right to repayment in full and in cash. The provision may well carry with it an implication that the Commonwealth shall by no use of its taxing power impair the obligation of the bond but, in my opinion,

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Court

Decision date

Before

Source

Judgment (174 paragraphs)