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

I shall be glad if you will favour me with advice as to whether the income derived by individuals from State securities is taxable under the Commonwealth Income Tax Assessment Act.

I understand that when the matter was debated in the House there was a difference of opinion on the point between the Attorney-General, now Prime Minister, and Sir William Irvine, the former holding the view that they were not taxable and the latter that they were under the Commonwealth law.

I mention this matter subject to correction as the report was conveyed to me verbally.

I am informed also that Mr William Holman, Premier of New South Wales, has made a public announcement to the effect that these securities are not taxable, and I also learn from a private source that a movement is now on foot to resist taxation by appeal to law if the Commonwealth decides to proceed to assessment in this connection.

The Commonwealth law does not expressly exclude the interests from taxation so that a determination on this point will rest upon the interpretation of the powers under the Constitution Act.

In view of the fact that a very large number of persons are directly interested in this matter, and do not know whether to include the interests in their return, I shall be glad if early consideration can be given to this question.

Advice is asked as to whether the Commonwealth Parliament has power to impose income tax on, or to assess for income tax, the Government securities of a State owned by taxpayers.

In my opinion, in view of the American decisions on the subject, and the decisions and dicta of the High Court on which those decisions are based, the Commonwealth Parliament has not that power.

The fundamental principle is that laid down by the High Court in D'Emden v. Pedder 1 C.L.R. 91, and Federal Amalgamated Government Railway and Tramway Service Association v. New South Wales Railway Traffic Employees Association 4 C.L.R. 488. It is that neither Commonwealth nor State may give to its legislative or executive authority an operation which, if valid, would fetter, control, or interfere with the free exercise of the legislative or executive power of the State or of the Commonwealth, as the case may be.

In accordance with that principle, the High Court has held that the States may not (except by permission of the Commonwealth Parliament) impose income tax on the salaries of Federal officers: D'Emden v. Pedder 1 C.L.R. 91; Chaplin v. Commissioner of Taxes for South Australia 12 C.L.R. 375; Baxter v. Commissioners of Taxation (N.S.W.) 4 C.L.R. 1087.

The Privy Council, in Webb v. Outtrim 4 C.L.R. 356, held the contrary; but, in Baxter's Case the High Court declined to follow the Privy Council, the question being one as to which, under the Constitution, the High Court was made the final arbiter.

The principle of D'Emden v. Pedder must, therefore, be taken to be definitely established by the High Court.

In the United States, the same principle has been definitely applied to this precise point, and it has been held that the Federal legislature has no power to tax State Government securities: Pollock v. Farmers' Loan & Trust Co. 157 U.S. 429 at p. 586 where the conclusion is:

that taxation on the interest therefrom would operate on the power to borrow before it is exercised, and would have a sensible influence on the contract, and that the tax in question is a tax on the power of the States and their instrumentalities to borrow money, and consequently repugnant to the Constitution. In my opinion, the case of D'Emden v. Pedder is indistinguishable in principle from this case, and the American decision in Pollock v. Farmers' Loan & Trust Co. is applicable.

This means that neither Commonwealth nor State would have the right to tax interest on the Government securities of the other. It is the principle of mutual non-interference, which is the basis of the rule in D'Emden v. Pedder.

[Vol. 14, p. 136]