The Commissioner of Taxation has forwarded for my advice the following memorandum:

Section 72 of the Income Tax Assessment Act, 1936–1940, provides for the deduction from assessable income of the amount of State Income Tax for which the taxpayer is personally liable and which is paid during the year of income.

The question has arisen whether it would be possible in a rearrangement of Commonwealth and State Income Taxes for this State tax to be made an allowable deduction from the amount of Commonwealth Income Tax as assessed instead of from Commonwealth assessable income.

Before proceeding to an examination of other aspects of the question it is desired to know whether any constitutional difficulties exist to providing in the Income Tax Assessment Act for the deduction to be made in this way.

Section 51 of the Constitution empowers the Parliament to make laws for the peace, order and good government of the Commonwealth with respect to:

(ii) Taxation; but so as not to discriminate between States or parts of States.

Whatever difficulties may present themselves in the interpretation of this placitum, the foremost and undeniable prohibition contained therein is that the Commonwealth might not impose rates of taxation which differ as between the States. In effect, the question on which my advice is now sought is whether the Commonwealth could circumvent this clear and unambiguous prohibition by imposing a uniform rate of taxation but allowing rebates differing as between the taxpayers of each of the six States. In my opinion, this proposal would be to endeavour to do indirectly what the Constitution forbids and would constitute a discrimination between States. I am therefore of the opinion that the proposed amendment would be invalid.

Mention is made in the memorandum of section 72 of the Income Tax Assessment Act 1936–1940, sub-section(1) of which reads:

Sums for which the taxpayer is personally liable and which are paid in Australia by him in the year of income for—

1. rates which are annually assessed;
2. Federal land tax or land tax imposed under any law of a State or of a Territory being part of the Commonwealth; or
3. income tax imposed under any law of a State or of a Territory being part of the Commonwealth

(other than taxes which are deductible under section seventeen of the Estate Duty Assessment Act 1914–1928) shall be allowable deductions.

I am not asked to advise on the validity of this sub-section but I infer from the memorandum that the existence of this provision is regarded as lending some support to the validity of the proposal against which I have advised. In my opinion, the questions involved are quite different.

Before any income tax is imposed, it is necessary to ascertain the net or taxable income on which the tax is to be imposed. It may be that, in prescribing the manner of ascertaining taxable income, the Parliament has gone beyond a purely scientific idea of ‘net income’ but, in my opinion, there can be no doubt of the power of Parliament to decide what income is to be taken into account and what deductions are to be deducted therefrom in order to arrive at that income upon which Parliament considers the tax ought to be imposed.

Many of the allowable deductions prescribed by Parliament must necessarily vary as between States, either because of geographical differences or of differences in the laws of the different States (as, for example, rates and taxes under State laws, or deductions allowed to an employer by reason of wages paid by him under State Arbitration Awards). It is not necessary for me to express an opinion as to the effect of these differing deductions on the validity of the provisions of the Act prescribing them, but I am strongly of the opinion that the question of the validity of deductions prescribed for the purpose of ascertaining taxable income is quite unconnected with the validity of a provision which, whether directly or indirectly, requires a differing amount of tax to be paid by taxpayers of different States in respect of the taxable income so ascertained.

[Vol. 34, p. 14]