The Secretary to the Treasury has submitted the following minute for advice whether the State Commissioner of Taxes in refusing to allow deductions on account of interest paid by a taxpayer is in effect taxing the interest on Commonwealth securities, contrary to the provisions of Commonwealth law:

Messrs Balfour & McCutcheon, Accountants, and Younghusband Limited assert that the Victorian Income Tax Commissioner is taxing the interest from Commonwealth securities.

1. In each case the complaint refers to the action of the Commissioner in assessing the tax of companies which have investments in Commonwealth loans and at the same time have overdrafts on which they are paying interest. The complaints were referred to the Premier of Victoria, for advice as to the action taken by the Commissioner.
2. The Commissioner takes the view that those companies have borrowed money in order to invest it in Commonwealth loans. He therefore does not allow such a company to deduct the interest on the overdraft from the income subject to tax.
3. Younghusband Limited contends that the amounts subscribed to the War Loans formed part of the company's capital and reserves and, in effect, that the company incurred the overdraft for ordinary business purposes, and should be allowed to deduct the interest on the overdraft from its ordinary business profits. This company applies to the Commonwealth for a refund of the amount of tax which it claims has been overcharged by the State.
4. I suggest that the papers be referred to the Solicitor-General for advice whether the State Commissioner, in refusing to allow the deductions claimed in these cases, is in effect taxing the interest on Commonwealth securities, contrary to the provisions of the Commonwealth law.

The position appears to be that a taxpayer, having money invested in Commonwealth securities and also paying interest on loans effected by him, is allowed, as a deduction under section 19 of the State Act, deductions only to the extent of the amount by which the interest paid by him exceeds the interest received in respect of his Commonwealth securities.

The relevant portion of section 19 of the State Act is as follows:

... all interest actually paid by the taxpayer . . . upon money borrowed and actually used or invested in Victoria . . . shall be deducted from the gross amount of such taxpayer's income.

Section 52B of the Commonwealth Inscribed Stock Act 1911-1918 provides that:

The interest derived from Stock or Treasury Bonds shall not be liable to income tax under any law of the Commonwealth or a State unless the interest is declared to be so liable by the prospectus relating to the loan on which the interest is payable.

It is assumed that the prospectus relating to the issue of the securities contained no declaration such as that referred to in section 52B.
The expression 'interest . . . shall not be liable to income tax' has been construed by Knox C.J. in Commonwealth v. State of Queensland 29 C.L.R. 1 at p. 9 as meaning that the receipt of such interest shall not be made the criterion of liability to pay any sum of money whatever by way of tax.

The result of the Commissioner's assessment is that the taxpayer has to pay a greater sum by way of income tax than he would otherwise have had to pay because he is in receipt of income from Commonwealth securities.

In my opinion the State Commissioner's action is in effect the taxation of the interest from Commonwealth stock or bonds in contravention of section 52B of the Commonwealth Inscribed Stock Act 1911-1918 and illegal.

[Vol. 18, p. 321]

1. Date in Opinion Book incomplete.