The Treasurer desires advice as to the validity of the provisions contained in the Queensland Income Tax Act Amendment Bill which was recently before the Queensland Parliament.

The matter upon which advice is desired is, I understand, the effect of sub¬section (12) of the proposed new section 7 inserted in the Principal Act by clause 4 of the Bill.

As the Bill has now been passed by both Houses of the Parliament of Queensland, and may already have become law, I propose, in referring to the Queensland law, to refer to the Act, as amended or proposed to be amended by the Bill in question, and any references by number to sections will be to sections of the Act as amended.

The Act, by section 7, imposes income tax on the annual amount of the incomes of all persons, at the rates specified in the section.

In the case of income derived from the produce of property the rate is, as a general rule:

On the first £1 the Tate shall be 12 4/1000d and the rate shall progressively increase by 4/1000d for each and every additional £ until the taxable income reaches £3,000, when the rate shall be 24d in the £ ;

On such taxable income of £3,001 the rate shall be 24 6/1000d and the rate shall progressively increase by 6/1000d for each and every additional £ until the taxable income reaches £4,000, when the rate shall be 30d in the £ ;

On all such taxable income in excess of £4,000 the rate shall be 30d in the £ on the first £4,000 and 36d in the £ on each and every £ in excess of £4,000.

Certain variations of this rate are made by subsequent provisions in the section.

Section 12 of the Act provides that certain incomes, revenues and funds shall be exempt from income tax. These include:

7. Income derived as dividends from any company which has paid in Queensland income tax on the profits of the company from which such dividends are paid;
8. Income arising or accruing from debentures, stock, bonds, certificates, or Treasury bills issued by the Government of Queensland or of the Commonwealth of Australia.

Sub-section (12) of section 7 of the Act provides as follows:

(12) The amount of the taxpayer's income which is exempt from tax under paragraphs (vii) and (viii) of section twelve of this Act shall, notwithstanding anything in this Act or any other Act contained, be taken to be part of the taxpayer's gross income, and shall be returned in the taxpayer's return; and the rate of tax shall be calculated as if the amount so exempted were part of his taxable income, but notwithstanding the provisions of paragraph (i) of subsection one of section thirteen of this Act he shall be entitled for the purposes of any deductions allowable under this Act to treat the amount so exempted as if it were part of his taxable income.

Thus, although income arising or accruing from debentures, stock, bonds, certificates or Treasury Bills issued by the Commonwealth is declared by section 12 of the Act to be exempt from income tax, the amount of that income is required to be included in the taxpayer's return, and the rate of tax is calculated as if the amount were part of his taxable income.

The question is whether this provision is intra vires the Parliament of the State of Queensland.

I have already advised that in my opinion the income from debentures and stock of the Commonwealth Bank is not liable to State income tax. A fortiori, income from debentures etc. issued by the Commonwealth is not liable to State income tax.

The Parliament of the State of Queensland has not in terms attempted to impose income tax on income derived from debentures issued by the Commonwealth, but has purported to impose income tax on the non-exempt portion of the taxpayer's income, at a higher rate than the rate which would have been imposed if the taxpayer received no income from Commonwealth debentures.

The question then is, whether what that Parliament has done is in substance the imposition of income tax on income derived from those debentures. In the case of R. v. Barger 6 C.L.R. 41, the High Court laid it down that in determining whether a particular law is or is not within the power of the Commonwealth Parliament to enact, regard must be had to its substance rather than to its literal form. This principle is in my opinion similarly applicable in determining the question of the validity of a State Act.

Queensland has done is in substance the imposition of income tax on income derived from Commonwealth debentures. Under the Queensland Act a taxpayer in receipt of a taxable income of, say £500 from property, would pay income tax at a certain rate per pound, but if he had, in addition to that taxable income, an income from Commonwealth debentures, he would pay, on the taxable income, income tax at such a rate per pound as would have been payable if the income from Commonwealth debentures were not exempt from tax.

The matter could, if thought fit, be tested by proceedings in the High Court on behalf of the Commonwealth.

There remains one other matter to be mentioned. The Commonwealth Inscribed
Stock Act 1911-1918 provides by section 52B that:

The interest derived from Stock or Treasury Bonds shall not be liable to income tax under any law of the Commonwealth or a State unless the interest is declared to be so liable by the prospectus relating to the loan on which the interest is payable.

I understand that no prospectus relating to a Commonwealth loan has declared that the interest derived from the loan is liable to income tax under any law of a State. Quite apart, therefore, from the constitutional objection to the taxation of such interest by a State, there is in existence a statutory objection to such taxation.

[Vol. 16, p. 403]