South Australia v Commonwealth

For the reasons stated by the majority, the immunity from taxation conferred on the States by s. 114 of the Constitution is usually said to be limited to "an exaction made in respect of the holding or ownership of property" [30] . To describe a tax on property as a tax on the holding or ownership of property is a helpful guide in distinguishing a tax on property from a tax on transactions, although the dichotomy is not complete. As Deputy Commissioner of Taxation v. State Bank of New South Wales [31] illustrates, a tax on transactions may sometimes operate in substance as a tax on property. The description of a tax falling within s. 114 of the Constitution as a tax on the holding or ownership of property is not intended to exclude from the scope of the immunity a tax on property which is received, held or owned on revenue account rather than on capital account. Property which is received on revenue account by a State is property belonging to the State, and if a tax be imposed upon the receipt of that property, it is a tax on the ownership of the property received. There is no relevant distinction to be drawn between a tax on receipt of an item on capital account (as in the case of capital gains) and a tax on receipt of an item on income account. The immunity created by s. 114 is from tax on any property which belongs to Commonwealth or State (as the case may be). The immunity is not restricted to taxes on property from or out of which other property of the Commonwealth or a State is derived. A tax which taxes fruit may not tax the tree, but if the fruit belongs to the Commonwealth or a State, s. 114 protects ownership of the fruit as well as ownership of the tree. A tax on either the fruit or the tree is offensive to s. 114.

1. See Attorney-General (N.S.W.) v. Collector of Customs for N.S.W. ("the Steel Rails Case ") (1908), 5 C.L.R. 818, at p. 844. 2. ante, p. 219.

The scope of the s. 114 immunity thus extends to taxation on property of any kind, whether the property be an item of revenue or an item of capital. Indeed, if s. 114 were not to protect the revenue of a State from taxation by the Commonwealth and the revenue of the Commonwealth from taxation by a State, the taxing power of either polity could be undermined by an exercise of the taxing power of the other. The immunity would be illusory if tax revenue could be depleted by adverse taxation. And s. 114 would have an illogical operation if it failed to protect the revenue of a State or the revenue of the Commonwealth from taxation by the other but protected capital held or owned by a State or by the Commonwealth.

To attribute a character to a tax imposed by the Act in reference to items constituting income according to ordinary concepts, it is necessary to identify what it is that attracts the liability to tax. Section 17 of the Act brings to charge taxable income derived during a year of income. Taxable income is defined (s. 6(1)) relevantly to mean "the amount remaining after deducting from the assessable income all allowable deductions". By s. 25(1), a resident taxpayer's assessable income includes the gross income derived directly or indirectly from all sources by the taxpayer, subject to certain immaterial exceptions. Although "taxable income" is defined as an "amount", and is therefore defined as a pecuniary figure rather than as property, the "amount" is the remainder ascertained by deducting all allowable deductions from the assessable income of a taxpayer. The year in which taxable income is derived is therefore the year in which the relevant assessable income is derived, and the tax levied by s. 17 on taxable income is a tax which is imposed on the relevant assessable income although it is calculated upon a net amount after deducting allowable deductions. It is not a tax on the act or transaction of derivation of assessable income; the derivation of assessable income attracts no liability to tax.

Assessable income which is income according to ordinary concepts is property, though its amount be expressed as a pecuniary figure: it is money or money's worth [32] . Money received by a taxpayer during an income year is income derived by the taxpayer if it has been earned or it becomes income derived by the taxpayer when it is earned [33] . Income may also be derived during a year of income though it is not received during that year provided it is a debt owing to the taxpayer [34] , albeit not a debt due for payment during the income year [35] . In short, assessable income, being income according to ordinary concepts, is not derived during a year of income unless the taxpayer has acquired property on revenue account during that year.

1. Federal Commissioner of Taxation v. Cooke (1980), 42 F.L.R. 403, at p. 413; 29 A.L.R. 202, at p. 211. 2. Arthur Murray (N.S.W.) Pty. Ltd. v. Federal Commissioner of Taxation (1965), 114 C.L.R. 314. 3. Henderson v. Federal Commissioner of Taxation (1970), 119 C.L.R. 612, at pp. 650-651. 4. J. Rowe & Son Pty. Ltd. v. Federal Commissioner of Taxation (1971), 124 C.L.R. 421, at p. 450.

The tax levied by s. 17 is attracted by the surplus of the value of property answering the description of assessable income derived during an income year over the amount of the allowable deductions for that income year. The tax is not imposed on the act or transaction of derivation but on property which the taxpayer has acquired on revenue account. In one sense, the tax may be said to be a tax on the ownership of the property acquired but, as we are not here concerned to distinguish a tax on property from a tax on transactions, we would prefer to say simply that income tax on income according to ordinary concepts derived by a taxpayer during a year of income (including interest derived from the lending of money) is a tax upon that income and that such a tax is a tax on property [36] .

1. Cf. the approach taken by the Supreme Court of Canada in Nowegijick v. The Queen, [1983] 1 S.C.R. 29, at pp. 38-39; (1983) 144 D.L.R. (3d) 193, at p. 200, where the statutory context was somewhat different.

We would therefore answer questions 3 and 4 of the questions reserved as follows:

As to income tax on interest derived from money lent and as to income tax on net capital gains - Yes. In accordance with the parties' agreement, there should be no order as to costs. Dawson J.

I agree with the reasons for judgment of Mason C.J., Deane, Toohey and Gaudron JJ. and with the answers which they propose. I desire only to add the following observations.

Section 114 of the Constitution precludes the Commonwealth from imposing any tax on property of any kind belonging to a State. There is a reciprocal prohibition against a State imposing any tax on property of any kind belonging to the Commonwealth. The phrase "tax on property" cannot be interpreted literally. A tax on property is a tax upon a taxpayer in relation to property. It is the relationship between the tax and the property which will, if it is sufficiently direct and substantial, characterize the tax as a tax on property. In Queensland v. The Commonwealth (the First Fringe Benefits Tax Case) [37] Mason, Brennan and Deane JJ. held that a tax upon the holding or ownership of property is a tax on property and that some taxes upon the use of property may also amount to a tax on the property itself. I also agreed [38] that a tax upon the holding or ownership of property is a tax on property. Further, I expressed the view [39] that otherwise a tax will only be of that character if it is tantamount to a tax upon the holding or ownership of property; the example I gave was a tax upon the proceeds of sale of property.

1. (1987) 162 C.L.R. 74, at p. 98. 2. ibid., at p. 104. 3. ibid., at p. 105.

The view which I expressed gave a somewhat narrower scope to the concept of a tax on property than has been given to the like concept in s. 125 of the Canadian Constitution, but I adhere to that view. However one approaches the problem, it is a question of distinguishing between a tax on property and a tax which is not upon the property itself but merely upon a transaction affecting the property. The expression a tax "upon property qua property" was used by the Court in D'Emden v. Pedder [40] to describe the kind of tax that falls within the prohibition contained in s. 114 of our Constitution. Difficulties have been expressed about the use of that expression [41] , but it seems to me to be an apt enough means of distinguishing between a tax which is a tax upon the holding or ownership of property or its equivalent and a tax upon a transaction affecting the property.

1. (1904) 1 C.L.R. 91, at p. 108. 2. See the First Fringe Benefits Tax Case (1987), 162 C.L.R., at p. 88, per Gibbs C.J.; Superannuation Fund Investment Trust v. Commissioner of Stamps (1980), 25 S.A.S.R. 35, at p. 38, per King C.J.

The distinction was, perhaps, made clearer in Attorney-General (N.S.W.) v. Collector of Customs for N.S.W. ("the Steel Rails Case ") [42] where a majority appear to have held that customs duties were not a tax on property (i.e. goods) because they were a tax upon the act of importation rather than a tax on the goods themselves. Isaacs J., on the other hand, took the view that customs duties were a tax on goods and were, therefore, a tax on property and it is by contrasting his judgment with those of the majority that the real distinction is to be seen. No doubt customs duties and, for that matter, excise duties, may be said to be taxes on goods because the incidence of the tax is determined by some step taken in relation to goods. But because the taxes are levied upon a step taken in relation to the goods - a transaction - and not upon the goods themselves, as in the case of a tax upon the simple holding or ownership of the goods, they are not a tax upon property qua property. The phrase "tax on goods" is elliptical, as is the phrase "tax on property", but the distinction between a tax on property as such and a tax upon a transaction involving property is a real one. It has consistently been held in this country, the most recent decision being the First Fringe Benefits Tax Case, that a tax which is not, or does not amount to, a tax upon the holding or ownership of property is not a tax upon the property itself. Thus it is that a tax on property is distinguished from a transaction tax.

Under the Income Tax Assessment Act 1936 Cth income tax is levied upon the taxable income derived by the taxpayer during the year of income: s. 17. Taxable income is relevantly defined to mean the amount remaining after deducting from the assessable income all allowable deductions: s. 6(1). The assessable income of a taxpayer who is a resident includes the gross income derived directly or indirectly from all sources whether in or out of Australia which is not exempt income: s. 25(1). Taxable income is therefore a net amount expressed in terms of money which can only be calculated by reference to a period of time (namely, a year of income). That is to say, it can only be calculated at the end of a period, when all allowable deductions are known, and for that reason it is not possible to identify particular sums of money as representing the taxable income of the taxpayer at any point during the period. Whilst property in the form of money may flow in and out of the taxpayer's hands during the period, no particular sum can be said to constitute property in the form of taxable income. Nor is it possible to say that income tax is a tax upon property in the form of assessable income to the extent that it represents taxable income. True it is that taxable income represents a proportion of the money or money's worth in the form of assessable income derived by the taxpayer during the year of income, but the proportion cannot be known until the end of the year when allowable deductions have been taken into account. Moreover, at the time when the taxable income of the taxpayer is calculated, that is, at the end of the year of income, the money or money's worth may have ceased to be the taxpayer's property. It would be artificial in those circumstances to speak of income tax as a tax on property represented by money or money's worth. So, taxable income is a concept of the Income Tax Assessment Act, being an amount which is calculable only by the deduction of allowable amounts from the assessable income.

In Nowegijick v. The Queen [43] the Supreme Court of Canada concluded that a section of the Indian Act 1970 Can., which provided that no Indian should be subject to taxation in respect of any of his personal property situated upon a reserve, exempted the wages of an Indian from taxation. Dickson J., who delivered the judgment of the Court, said [44] :

Although the Crown recognizes that "salaries" and "wages" can be classified as "personal property" it submits that the basis of taxation is a person's "taxable" income and that such taxable income is not "personal property" but rather a "concept", that results from a number of operations. This is too fine a distinction for my liking. If wages are personal property it seems to me difficult to say that a person taxed "in respect of" wages is not being taxed in respect of personal property. It is true that certain calculations are needed in order to determine the quantum of tax but I do not think this in any way invalidates the basic proposition. However, in that case the Court was concerned not with a provision such as s. 114, but with a provision of a very different kind which, being included in a statute relating to Indians, was to be liberally construed in favour of the Indian if its meaning was doubtful [45] . Moreover, the words "in respect of" were clearly of crucial importance [46] . It is clear that a tax may be in respect of property but not upon property. The former notion does not require fine distinctions to be made but the latter does. Indeed, Dickson J. was prepared to recognize that there may be a distinction between a tax upon property and a tax on persons in respect of property [47] . 1. [1983] 1 S.C.R. 29; (1983) 144 D.L.R. (3d) 193. 2. ibid., at pp. 38-39; p. 200. 3. [1983] 1 S.C.R., at pp. 38-39; (1983) 144 D.L.R. (3d), at p. 200. 4. ibid., at p. 36; p. 198. 5. ibid., at p. 41; p. 202.

In summary, income tax is not levied upon the property in the form of money or money's worth which flows in and out during the year of income. It is levied upon the taxable income which is an amount calculated by reference to that flow upon the principles laid down by the Income Tax Assessment Act. It is the derivation of income to the extent of that amount, rather than the holding or ownership of money or money's worth, which is taxed, so that income tax is a tax upon an activity involving property rather than a tax upon the property itself. Of course, the mechanisms used to impose income tax may be used to impose a tax which is not truly an income tax, of which the capital gains tax imposed in this case is an example. But, speaking generally, income tax is, I think, of the character which I have described.