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

The question has arisen as to the assessability for income tax under the Income Tax Assessment Act 1915 of debenture holders of municipal corporations or other local governing bodies or of public authorities.

The only reference in the Act to interest on debentures is that in section 14 (b) which provides for the assessability of interest credited or paid to a debenture holder of a company which derives income from a source in Australia or of a company which is a shareholder in a company which derives income from a source in Australia.

The definition of 'company' under the Act includes all bodies or associations corporate or unincorporate, but there is little doubt that the municipal corporations and public authorities do not come within the application of the definition.

Under section 11 the revenue of a municipal corporation or other local governing body or of a public authority is exempt, and, as provision is made for the special assessment of companies, it may apparently be inferentially assumed that the general intention of the Act is not to regard bodies of this nature as companies.

The question then arises as to the assessability of the debenture holders of these bodies. The definition of 'income' in the Act includes interest upon money secured by mortgage of any property in Australia. It is not usual for the municipalities or public authorities to secure by mortgage money raised by way of loan, and they content themselves with the issue of the debenture bond. These bonds require payment of interest thereon in London or other designated places on fixed rates of interest.

It would therefore seem that if the loans are not secured by mortgage of any property in Australia the interest on the debentures does not fall within the definition of 'income' and is therefore not assessable under the Act and further that as the contracts are made in London as a rule and the payments are made there, the interest even if it were regarded as income is not derived in Australia.

As the question is one that will affect many persons outside Australia who derive income from debentures issued by municipalities and public authorities, I should be glad to be favoured with your advice in the matter.

I agree with the Commissioner that a municipal corporation is not a company within the meaning of the Act.

As regards the question whether the interest on the debentures is income for the purposes of the Act, I would point out that section 14 is not exhaustive as to what constitutes income. It provides that certain matters shall be included as income, but does not exclude from income what is not included therein.

Anything that is income in the ordinary meaning of the term is income under the Act, unless it is expressly exempted.

I do not think that it would be seriously contended that interest on debentures is not income.

To make income liable to the provisions of the Act however, it must be income derived directly or indirectly from a source in Australia.

As regards the taxability of interest on debentures, I would refer you to my opinion⁽¹⁾ given in connection with your memorandum of 12 February 1916. The definition of income to include interest on mortgage of land is immaterial in deciding what is the source of the interest, as the interest arises from the mortgage or debenture and not from the land.

[Vol. 15, p. 193]

(1)Opinion No. 801.