Opinion Number. 737

Subject

INCOME TAX PRE-FEDERATION AGREEMENT BETWEEN COMPANY PROVIDING TELEGRAPHIC SERVICES AND STATES FOR RECOUPMENT OF STATE TAXES PAID BY COMPANY: WHETHER COMMONWEALTH INCOME TAX IS CAUGHT BY RECOUPMENT PROVISION: EXTENT TO WHICH COMMONWEALTH SUCCEEDS TO STATE OBLIGATIONS

Date
Client
The Commissioner of Taxation

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

By section 19 of an Agreement dated 14th April 1900, made between the Governments of South Australia, Western Australia and Tasmania, on the one part, and the Eastern Extension Australasia and China Telegraph Company Limited on the other part, it is provided that:

The contracting governments shall also repay to the Extension Company such sums as will be sufficient to recoup the Extension Company any income tax and any rates and taxes, Parliamentary or otherwise, which the Extension Company shall be required to pay any such respective contracting Colony except rates and taxes on premises occupied as local offices for the purpose referred to in clause 16 hereof.

A similar Agreement between the Company and the Government of New South Wales, dated 16th January 1901, contains in clause 18 a similar undertaking.

There is no Agreement with the States of Victoria and Queensland, as in these two States the Government handles the business and adjusts with the Company in Adelaide.

At the inception of Federation the Commonwealth Government assumed the powers and liabilities the States exercised previously, and it is assumed by the Company that the Commonwealth Government is subject to the condition laid down in the State Agreement. Should this assumption be correct the Company would probably be held either to be exempt from income tax under the Commonwealth scheme, or it may under the terms of the Agreement require to be recouped to the amount of tax paid if it were demanded by this Department.

So far as the liabilities of shareholders of the Company are concerned there is no specific exemption that could be extended to them under the terms of the Agreements that have been exhibited, but in view of the peculiar relations between the Governments and the Company, it appears desirable to have the whole matter determined before insisting upon any of the shareholders paying a tax in respect of the income derived from this source. A great many of the shareholders are resident in England-they number, I understand, about 7,000.

In view of these facts I should be glad to be favoured with advice as to the course to be pursued.

The agreement in question was entered into between the Company and the States of South Australia, Western Australia and Tasmania.

At Federation the Commonwealth took over the control of the postal, telegraphic and telephonic services, and in so doing would take over such of the obligations imposed on the States under the agreement with the Company as were applicable to the powers of the Commonwealth.

The control of the Customs having passed exclusively to the Commonwealth, the obligation of refunding customs duties under the agreement would rest on the Commonwealth.

The Commonwealth, however, does not assume any obligations except those that were previously obligations on the State, but are now, owing to the division of powers under Federation, applicable to the Commonwealth instead of the States.

The rates and taxes referred to in clause 19 of the agreement are rates and taxes imposed by the State, and the obligation of recouping the Company would only rest on the Commonwealth to the extent to which these rates and taxes related to matters which had come under the control of the Commonwealth.

A Commonwealth income tax is not a tax of this class, and is not, I think, within the class of the taxes referred to in clause 19 of the agreement.

In my opinion, under the agreement of 14 April 1900, the Company is not exempt from Commonwealth income tax, nor is the Commonwealth liable to recoup the Company for any income tax which may have been paid by the Company.

[Vol. 14, p. 420]