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

Section 22 of the Income Tax Assessment Act 1915-1916 reads:

22 (1) Every person whose principal place of business is out of Australia and who either as owner or charterer of any ship carries passengers, live stock, mails or goods shipped in Australia shall by his agent or other representative in Australia, when called upon by the Commissioner by notice published in the Gazette or by any other notice, make a return of the full amount payable to him (whether such amount be payable in or beyond Australia) in respect of the carriage of the passengers, live stock, mails and goods.

2. The agent shall be assessed thereon and liable to pay tax on Five pounds per centum of the amount so payable.
3. When such person has no recognised agent or representative in Australia other than the master of the ship and the master fails to make any return, the Commissioner may assess such master, and the master shall be liable to pay the tax assessed.
4. The Commissioner shall give notice of every such assessment to the master, and the master shall pay the tax assessed prior to the clearance of the ship.
5. The Collector of Customs for the State in which the master is called upon to pay the tax shall not grant a clearance, and may detain the ship, until he is satisfied that the tax has been paid.

A shipping company claims that the amount payable to it by the Imperial Government in respect of freight on frozen produce carried in refrigerating chambers, is not taxable to the company as income under the Income Tax Assessment Act.

The view taken by the company is that the amount does not come within the scope of the Income Tax Assessment Act, the services performed being mere operations of His Majesty's Government and therefore not subject to the collection of taxes in His Majesty's name.

The company asked the grounds on which the Department declined to admit the validity of the company's contention, and was informed that section 22 of the Act was most explicit on the point and the fact that the freight money was paid by the Government was not material.

The solicitors for the company replied that the Department was in error in asserting the taxability of the company under the section named, and takes the view that the Commonwealth Constitution has not empowered the Commonwealth legislature to impose taxes upon the operations of the Imperial Government as such provision in the laws of the Commonwealth would be a direct obstruction to the proper exercise of Imperial powers.

The solicitors further state:

The means and instrumentalities necessary for carrying on the Imperial Government are not to be impaired by the Commonwealth ... the exercise of such a power of taxation by the Commonwealth Government on the income of the officers, servants or contractors of the Imperial Government is inconsistent with the independent sovereignty of the Imperial Government.

To make our contention more clear to you we will ask you to refer to the decision of D'Emden v. Pedder 1 C.L.R.91, in which it was held that a State of the Commonwealth could not impose a duty tax upon any receipt given for salary of a Federal Government officer, because such an imposition impaired the means and instrumentalities necessary for carrying on the Federal Government. Deakin v. Webb 1 C.L.R.585 held that for similar reasons the States could not levy income tax on the salary of a Federal officer and vice versa. For the same reasons the Commonwealth cannot levy income tax upon interest income derived from State-funded or other stocks, Treasury Bills, etc.

It is the fact that in Webb v. Outtrim [1907] A.C.81 the Privy Council refused to follow the decision of our High Court in D'Emden v. Pedder and Deakin v. Webb, but when the same question arose again before our High Court in Baxter v. Commissioners of Taxation 4 C.L.R. 1087, a majority of the High Court refused to follow the Privy Council and again endorsed the principle as enunciated in D'Emden v. Pedder and Deakin v. Webb.

If it is within the power of the Commonwealth to levy tax upon any of the 'means and instrumentalities' of the Imperial Government, such power must necessarily be unrestricted even to the extremity of confiscating the whole of the freight, charter-hire, salary or wages as the case may be and we think you will hardly be advised that such powers are provided for by or are involved in the Constitution of the Commonwealth.

In any event we cannot see our way to vary advice which we have already given to our client that it is not liable for taxation upon either the freights or charter-hire received by it from the Imperial Government, more especially for the carriage of troops and stores for war purposes.

While I agree that the Imperial Government is not taxable under any Commonwealth law, the present claim of the Department is not against the Imperial Government, but against the company in respect of its income.

The only possible conclusion to be drawn from the foregoing argument and authorities, as interpreted, is that all payments by any Government to any person cannot be taxed by the Commonwealth. I do not agree with this.

I should be glad if you would furnish me with your opinion on the subject; and would ask that the matter be dealt with urgently.

I do not agree with the contention of the solicitors to the company. Without deciding whether the principle of D'Emden v. Pedder applies to the relations between the Imperial Government and the Commonwealth Government, a shipping company, which in carrying on its business carries meat for the Imperial Government is no more an instrumentality of that Imperial Government than a shopkeeper who happens to supply some of his goods to that Government is an instrumentality of the Government.

In my opinion, a shipping company is not exempt from tax under section 22 because the freights or charter-hire are paid by the Imperial Government.

[Vol.15, p.128]