The Secretary to the Treasury has forwarded to me the following letter from the Taxpayers Association of Queensland and requests advice as to the validity of section 3 (4) of the Queensland Act No. 19 of 1921:

On behalf of The Taxpayers Association of Queensland, I have the honour to direct your attention to the provisions of the Queensland Income Tax Amendment Act of 1921 whereby in section 3 sub-section (4) it is provided that if any income is received by a company from any of the State or Commonwealth securities mentioned inparagraph (viii) of section 12 of the Principal Act (copy herewith enclosed) the Commissioner shall deduct from the profit the income so earned and shall also deduct from the paid-up capital so much of the actual amount invested in such securities as he thinks reasonable when determining the rate of tax.

You will recollect that the Parliament of Queensland in 1920 by the Income Tax Amendment Act of 1920, section 7 sub-section (12), assumed to increase the rate of tax by including the income from Commonwealth securities. This provision was held to be invalid by the High Court and the Parliament of Queensland subsequently repealed the provision on 4 January this year.

The same object is now sought to be attained by the latest amendment whereby the rate of tax is raised at the will of the Commissioner by permitting this official to deduct from the capital of the company the whole or any part of the amount which the company holds in Commonwealth securities. Under the Act capital does not include reserves but is limited to the amount subscribed by shareholders-section 7 (3). The reduction of the amount of the capital increases the percentage of profit-section 7 (5)-and thereby renders a larger amount payable as tax.

Many companies have invested in the War Loans and Peace Loans upon the guarantee that these securities were not taxable by the State.

Certain companies notably banking, insurance and trustee companies hold large portion of the reserves which are necessary for their business in such securities.

The profits which are made in the business are only rendered possible by the existence of such reserves.

By arbitrarily reducing the amount of the capital by deducting therefrom the amount of Commonwealth securities the State does in effect make the taxpayer pay a greater tax than he otherwise would have done prior to such enactment. If this is lawful the State can evade its present limitations by taxing any company at a higher rate on its taxable income because portion of the total income is derived from non-taxable sources such as Commonwealth securities. This we submit should not be permitted.

We would be glad if you would place the matter before the Attorney-General with a view to taking such action as he may deem advisable.

I enclose copy of the prospectus of the second Peace Loan issued by the Common-wealth Government, also copy of the prospectus of the Queensland Government loan of £2,000,000 issued by the Queensland Treasury under date 16 December 1920, in each of which appears the wording 'Interest will be free of State Income Tax'.

Sub-section (4) of section 3 of the Income Tax Act Amendment Act 1921 (Queensland) adds a further proviso to paragraph (vii) of section 7 of the principal Act. The relevant portions of that paragraph as amended are as follows:

(vii) For the purposes of paragraph (v) and paragraph (vi) of this subsection, the Commissioner may accept the total profits as ascertained and shown by a company to be its total profits:

Provided . . .

Provided also that, if any income is received by a company from any of the State or Commonwealth securities mentioned in paragraph (viii) of section twelve of this Act, the Commissioner shall deduct from the profit the income so earned, and shall also deduct from the paid-up capital so much of the actual amount invested in such securities as he thinks reasonable when determining the rate of tax chargeable on the taxable income.

Paragraphs (v) and (vi) fix the rates of tax payable.

Seeing that a deduction of income derived from Commonwealth securities is contemplated by the proviso, I am doubtful whether the statement of the Taxpayers Association, that by reducing the amount of the capital by deducting the amount of Commonwealth securities the State makes a taxpayer pay a greater tax than he otherwise would have done prior to the enactment, is correct as a general rule.

It does however appear that in particular cases the proviso might operate in that way; so that a company might be required to pay more tax by reason of holding Commonwealth securities exempt by law from State taxation. In so far as it may so operate, I think that the proviso would be ultra vires the Queensland Parliament.

[Vol. 18, p. 259]