HIGH COURT OF AUSTRALIA

                                            Broken Hill South Limited

                                                           Vs.

                                             Commissioner of Taxation

                        (Latham C.J., Rich, Starke, Dixon, Evatt and McTiernan JJ.)

                                                    1 March 1937

Latham C.J.

These are appeals from the decisions of the Full Court of the Supreme Court of New South Wales in
two cases stated at the request of the parties under sec. 48, sub-sec. 11, of the Income Tax
(Management) Act 1912-1928. The appellant company is incorporated under the laws of Victoria
and has its head office in the State of Victoria. It is registered under the New South Wales
Companies Act as a foreign company carrying on business in New South Wales.

The British Australian Lead Manufacturers Pty. Ltd. (which I propose to call the Lead Company) is
also a company incorporated in Victoria and having its head office there. It is registered as a foreign
company in New South Wales carrying on business there.

The Lead Company in 1923 and 1924 borrowed £116,000 upon the security of a series of
debentures of £100 redeemable at £105 each and carrying interest at 7½ per cent per annum.
Payments of principal and interest are, according to the terms of the debentures, to be made at the
office of the Lead Company in Melbourne at its business office for the time being. There is only one
register of debentures, which is kept in Melbourne. All the debentures were sealed and issued to
lenders in Victoria. The debentures contained a covenant with the holder to pay principal and
interest and they also charged with such payments all the property of the company, present and
future, other than its uncalled and unpaid capital for the time being. The conditions of the
debentures provide that the charge, except with respect to certain real and personal property
mentioned in the first schedule to a certain trust deed, is to be a floating security. It is declared by
the conditions that the holders of all the debentures will be entitled pari passu to the benefit of the
trust deed dated 27th March 1932 made between the Lead Company and the Melbourne Trust Ltd.
as trustee for the debenture holders. It contains a covenant by the company with the trustee that the
company will duly pay principal and interest to the debenture holders. It further provides that the
company charges and mortgages in favour of the trustee certain freehold and leasehold lands in New
South Wales and it also charges the general assets of the company by way of floating charge. The
security constituted by the deed is to become enforceable in the event of default in payment of
interest or principal and upon certain other events, none of which has happened. By a mortgage
under the Real Property Act 1900 the Lead Company mortgaged the freehold land in New South
Wales, to which reference has been made, to the trustee, and covenanted that it would pay to the
trustee mortgagee the principal sum (being the sum secured by the debentures) with interest at 7½
per cent per annum.

The appellant is the Public Officer of Broken Hill South Ltd., which is the holder of some of the
debentures mentioned. The question which arises for determination is whether the interest received
by Broken Hill South Ltd. is income subject to taxation within the meaning of the Income Tax
(Management) Act 1912 (in the case of the year ending 30th June 1925) or within the meaning of
the Income Tax (Management) Act 1928 (in the case of income for the year ending 30th June 1929).
A further question arises in each case, namely, whether, if upon the true construction of the relevant
statutes the interest is liable to taxation, the provisions of the Act imposing such liability are within
the constitutional powers of the Parliament of New South Wales.

The Commissioner of Taxation has not in fact sought to tax the whole amount of the interest, but
there is no authority in the Act for any apportionment of the interest so as to make only portion of it
taxable in New South Wales, and the case must be considered on the basis that, if the Acts are
applicable and are valid, the whole amount of interest is to be deemed to be income of the taxpayer.

In the Income Tax (Management) Act 1912, sec. 4, it is provided that income means income derived
from any source in the State or earned in the State and shall be deemed to exclude income revenue
and profits exempted from the operations of the Act by sec. 10. Sec. 10 provides that nothing in the
Act shall apply to (inter alia) income derived from sources outside the State. Sec. 4, however, also
provides that interest upon money secured by the mortgage of any property in the State shall be
deemed to be derived from a source in the State. The Income Tax (Management) Act 1928, which
applies to the income for the year 1929, contains the following provision:

"Income" means income derived or deemed to be derived directly or indirectly from any source in
the State or in respect of which tax is otherwise expressly made payable under this Act and includes
interest upon money secured by the mortgage of any property in the State.

Thus the 1912 Act provides that interest upon money secured by the mortgage of any property
within the State shall be deemed to be derived from a source in the State so that such interest is to
be regarded as income for the purposes of the Act. The 1928 Act directly provides that income
includes interest upon such money.

The Full Court of the Supreme Court of New South Wales held:--(1) That the sections quoted
referred only to interest upon money secured by a mortgage which was a mortgage only of property
within the State, that is, that these provisions did not apply to a case where a mortgage created a
security over property outside New South Wales as well as over property inside New South Wales.
The money secured by the debenture trust deed is secured upon property of the Lead Company
outside New South Wales as well as upon freehold and leasehold land in New South Wales and
therefore it was held that the special definitions of income did not apply to bring the interest in
question within the area of taxation. (2) It was also held, however, by the Full Court that the
covenant in the mortgage of the freehold lands in New South Wales was located in New South
Wales and was the source of the interest in question. On this ground it was held that the income was
income derived from a source in this State and that therefore it was subject to tax under the Act. (3)
The Full Court further held that the legislation in question was within the territorial competence of
the Parliament of New South Wales for the reason that the act of the mortgagor in giving a security
over property in New South Wales constituted a sufficient territorial connection between the
transaction and the State of New South Wales to make it possible for the legislation to be regarded
as being for the peace, welfare and good government of the State within the meaning of the
Constitution Act 1902.
(1)

I find myself unable to agree with the first proposition laid down by the Full Court. The words to be
considered are "interest upon money secured by the mortgage of any property within the State." The
fact that money is secured by a mortgage of property which is not in the State does not make it
impossible for it to answer to the description of money secured by a mortgage of property in the
State. I can see no reason for interpreting these words as meaning either that the only security for
the money must be property within the State or that among the securities for the money there must
be a mortgage which is a mortgage only of property within the State. It is true that in construing
statutes of a subordinate legislature it is presumed that the legislature intends to legislate only as to
matters within its territorial limits. But this principle does not appear to me to throw any light upon
the meaning of the words now in question. A mortgage of property within the State is a thing or
circumstance which has a direct relation to the territory of the State, whether or not other property is
included in the mortgage, and whether or not other securities are given in respect of the money
secured by the mortgage of property within the State. In my opinion the words should be construed
in accordance with their natural meaning so as to apply to any case of money which is secured by
the mortgage of any property in the State, whether or not it is also otherwise secured, and whether
or not a mortgage securing it includes property outside as well as within the State. My brother Dixon
has examined this aspect of the case in detail, and I agree with his reasoning and his conclusion.

(2)

The judgment of the Full Court is based upon the view that the source of the interest received by the
appellant is to be found in the covenant contained in the mortgage of freeholds in New South Wales
so that the interest in question is income derived from a source in the State and so falls within the
definition of income in sec. 4 of the 1912 Act and sec. 4 of the 1928 Act. This mortgage was
registered in the Registrar-General's office of the State of New South Wales. The mortgage has
under the law of New South Wales the attributes of a specialty and accordingly the covenant in the
mortgage is to be regarded as localized in New South Wales (Commissioner of Stamps v. Hope[1];
Toronto General Trusts Corporation v. The King[2]; Webb v. Campbell[3]).

In my opinion, however, it does not follow that the interest paid on the debentures is income derived
from a source in New South Wales. It is important to realize the precise nature of the transaction.
The appellant as a debenture holder receives interest by virtue of the covenant in the debenture and
not by virtue of the covenant in the mortgage of freeholds in New South Wales. The debenture
constitutes the contract between the Lead Company and the appellant, and the appellant has a right
to sue upon the covenant contained in the debenture. The mortgage contains a covenant between the
Lead Company and the Melbourne Trust Ltd.--no money was paid under that covenant either to the
Melbourne Trust Ltd. as covenantee or to the debenture holder, who was not a covenantee. If the
facts had been different, if, for example, land in New South Wales had been realized and payment
had been made through the Melbourne Trust Ltd. to the debenture holder, the case might have been
different. Upon the facts as they are, however, it appears to me to be inaccurate to say that the
interest paid to the debenture holder finds its source in the covenant contained in the mortgage of
the New South Wales freehold.

(3)

Upon the interpretation of the Act which appears to me to be correct a tax is imposed upon interest
upon money which is in fact secured by the mortgage of property in New South Wales, whether or
not the interest is derived from a New South Wales source. The question is whether the fact that the
money is so secured in itself constitutes a sufficient territorial connection with New South Wales to
entitle the Parliament of New South Wales to legislate so as to impose a tax upon persons who
receive the interest and to impose that tax in respect of the whole amount of that interest. In order to
show exactly what the question is which must be decided, it may be useful to consider a possible
case. If a company carrying on business in several countries issued debentures, the payment of
interest and principal under which was secured by a charge on the assets of the company in all those
countries, the interest would under the Acts be regarded as income of the person who received it if
the company in fact happened to have any property in New South Wales. Thus a person in Europe
who purchased a debenture in an English company would find himself liable to pay income tax to
the State of New South Wales on the whole of that interest, even though in fact none of it was
derived from New South Wales--where in any given year the company might have no income or
might actually suffer a loss. Is it within the competence of the legislature of New South Wales to
legislate in this manner?

It happens in this case that the appellant carries on business in New South Wales. There is no doubt
that the legislature of New South Wales can impose such conditions as it thinks proper by way of
taxation or otherwise upon persons who carry on business in New South Wales and therefore bring
themselves within the legislative authority of the State (Colonial Gas Association Ltd. v. Federal
Commissioner of Taxation[4]; Australasian Scale Co. Ltd. v. Commissioner of Taxes (Q.)[5]).

The question which has to be decided, however, is not a question whether the Parliament of New
South Wales may tax persons carrying on business within New South Wales but whether the
Parliament can tax persons whose only connection with New South Wales is that they receive
interest upon money which is secured either wholly or in part by a mortgage of property in New
South Wales, even though none of the money they receive may be derived from any source in New
South Wales.

A resident of New South Wales can be taxed in New South Wales in respect of his income wherever
derived, his property wherever situated, or of any other circumstance. The property in New South
Wales of any person can be taxed in such manner as the Parliament of New South Wales determines.
The law imposing any of the taxes mentioned would clearly be a law for the peace, welfare and
good government of New South Wales. But it does not follow that any relation to or connection
with New South Wales can be utilized as a basis for any taxation. For example, New South Wales
might impose a head tax upon persons in New South Wales, but it could not be said that it was
within the power of the Parliament of New South Wales to impose an annual head tax on any person
who had at some time or another visited the State. The difficult question of the degree of connection
which would bring the subject matter within the territorial competence of the State legislature has
been considered in a number of cases in this court. In Commissioner of Stamp Duties (N.S.W.) v.
Millar[6] it was held that it was beyond the territorial competence of the Parliament of New South
Wales to impose a death duty in respect of shares which belonged to a person who died resident and
domiciled outside New South Wales where his only connection with New South Wales, in respect of
the taxation in question, was that the company the shares of which he held, though incorporated out
of New South Wales and having no share register in the State, carried on mining business in the
State. The shares did not owe their existence to any law of New South Wales and the shareholder
did not, by virtue of his position as shareholder, have any interest in any property in New South
Wales. The tax in question was not imposed upon the company which carried on business in New
South Wales. It was in terms imposed upon persons who died domiciled and resident out of New
South Wales. It was held that the connection with New South Wales was too remote to entitle the
enactment to the description of a law "for the peace welfare and good government of New South
Wales." Mention was made of the fact that the tax was not imposed in respect of any benefit or
advantage which the shareholder derived from property in New South Wales.

In Trustees Executors and Agency Co. Ltd. v. Federal Commissioner of Taxation[7] it was held that
Federal estate duty was chargeable upon movables situated abroad which passed by gift inter vivos
within one year of the death of a person domiciled in Australia at the time of his death. The fact of
domicil in Australia was regarded as undoubtedly sufficient to provide a territorial basis for Federal
legislation in respect not only of movables owned by the deceased at the time of his death, but also
of other movables which he had owned within a year of his death.

In Colonial Gas Association Ltd. v. Federal Commissioner of Taxation[8] the court upheld a Federal
income tax imposed upon interest paid or credited to persons who were absentees (that is, not
residents of Australia) on money raised by debentures of a company and used in Australia. The tax
was imposed upon the company, and the Act included a provision purporting to entitle the company
to deduct the amount paid in tax from the interest payable to the absentee debenture holders. The tax
was payable in respect of the whole amount of interest irrespective of whether or not the interest
paid was derived from Australia, but it was held that the Act, upon its true construction, imposed the
tax only upon companies which derived assessable income from sources in Australia. The case is
similar to the present case in that the interest chargeable with tax was not necessarily interest
derived from Australia, and that the whole amount of such interest was taxable. The tax applied in
the case of interest paid to persons who themselves might have no connection with Australia beyond
that specified in the Act. That connection consisted in the facts that the company derived income
from sources in Australia, and that the money upon which interest was paid was used in Australia.
In the present case the connection with New South Wales which is the basis of the legislation is to
be found in the fact that the money upon which interest is paid is secured upon property in New
South Wales. (See also Australasian Scale Co. Ltd. v. Commissioner of Taxes (Q.)[9].)

Croft v. Dunphy[10] establishes the proposition that the real principle to be applied in determining
the territorial competence of a Dominion legislature is whether the particular law in question is
really a law for the peace, welfare and good government of the territory in question and not merely
whether the law operates by reference to some extra-territorial elements. The cases to which I have
referred are examples of the application of that principle. They show that it is impossible to avoid
the consideration of questions of degree in the application of such a principle. As I have already said
I do not think that the fact that a person has once been in New South Wales can be regarded as a
sound basis for legislation with respect to him. The circumstance in respect of which the law
operates must be something which really appertains to New South Wales. In the present case the
enactments in question are taxing Acts. They operate, according to what I regard as the proper
construction of the Acts, upon all the interest, whatever its amount, which a person domiciled or
resident anywhere in the world receives, if the money upon which the interest is paid is secured by
any mortgage of any property in New South Wales.

The courts should not hold an Act to be invalid unless it is clearly beyond the power of the
legislative body. There is no doubt that the Parliament of New South Wales could have taxed such
interest as was derived from New South Wales and that it could have taxed it to any extent which
Parliament thought proper. Again, Parliament could have provided that no security should ever be
given over property in New South Wales at all, or that, if such security were given, it should be
valid only subject to certain conditions. The provision in question is not of this character, but it does
connect taxability of interest with the fact that the interest is secured upon New South Wales
property. Thus there is a connection in fact with New South Wales. The existence of the security as
a security depends entirely upon the law of New South Wales. The benefit resulting from the
existence of the security depends upon the law of New South Wales. Parliament is not compelled to
measure any taxation by the degree of benefit received in particular cases by the taxpayer. If it
chooses, Parliament may make taxation burdensome or prohibitory in character so as to discourage
or prevent a particular class of transactions. The facts that the tax does not depend upon the value of
the New South Wales property or upon the New South Wales property in fact making a contribution
to the sums actually paid in interest only show that Parliament has not adopted a particular measure
of the extent of taxation in relation to a subject matter to which the power of Parliament extends.
These matters affect the policy and not the validity of the provision in question, and it is not for a
court to consider such questions of policy. Thus I am of opinion that, though perhaps this is an
extreme case, this provision does relate to a matter which has a real connection with New South
Wales and that it is not invalid.

In my opinion the appeals should be dismissed.

Rich J.

In the consideration of this difficult case the legislative machinery under the operation of which the
debenture interest has been assessed to income tax in New South Wales has been the subject of close
examination. At a number of points the application given by the commissioner to that machinery has
been challenged on grounds of more or less cogency. I am not prepared, however, to give to the
provisions of the Income Tax (Management) Act 1928 an interpretation which, apart from any
question of exterritoriality, would lead to the exclusion of debenture interest from the assessable
income of the taxpayer. In the Act No. 11 of 1912, superseded by the Act of 1928, there was an
overriding provision which has been dropped. By sec. 10 (g) of the earlier Act it was provided that
"nothing in this Act shall apply to income earned from sources outside the State." I see no reason
why this provision should not be taken to mean exactly what it says and apply it accordingly. Thus,
before that Act can operate upon any item of income it must appear that it is not income earned
from sources outside the State. The provision is expressed to overreach all the special provisions of
the Act and therefore cannot be modified by that which "deems" income secured over property in
New South Wales to have a local source. Apart from any such artificial definition or presumption, I
should have no doubt that the debenture interest in the present case had not a source in New South
Wales. It is interest payable out of New South Wales under an instrument held out of New South
Wales securing money borrowed out of New South Wales by a company incorporated out of New
South Wales from a lender residing out of New South Wales. But under the Act of 1928 I think that,
if there were no question of exterritoriality controlling either the interpretation or the validity of the
enactment, its provisions, construed according to their natural meaning, would suffice to make the
debenture interest taxable. It may be right to limit the crucial part in the definition of "income" so as
to avoid giving it an exterritorial effect, and, if so, the limitation proposed by the taxpayer has a
good deal to commend it. That limitation is best expressed by saying that this part of the definition
should be read as if it contained the word "wholly," so as to provide for the inclusion of interest
wholly secured by the mortgage of any property in the State. But in any case I have arrived at the
opinion that, unless it is so limited, in this or some similar manner, the provision must fail on the
ground of exterritoriality. For unless it is so limited the provision amounts to an attempt to tax in
New South Wales the whole amount payable for interest on any loan made anywhere in the world
whenever any property situated in that State is included among the securities for payment of the
interest. Thus a floating charge given by a ship-owning company over an undertaking extending
throughout many parts of the world and including many ships navigating the trade routes of the
Empire would be brought under the definition if the undertaking happened to include a shelter shed
for a tallyman on a Sydney wharf, and the whole interest on a huge debenture debt, although in no
other respect connected with New South Wales, would be liable to New South Wales tax. It is said
that the New South Wales legislature is empowered to impose a liability upon anyone who avails
himself of the law of New South Wales to obtain any security or increase of security for the
payment of any sum of money in reference to which the liability is measured. I do not deny that
once any connection with New South Wales appears the legislature of that State may make that
connection the occasion or subject of the imposition of a liability. But the connection with New
South Wales must be a real one and the liability sought to be imposed must be pertinent to that
connection. The obligation at present in question is to pay a tax on income. The receipt of income
by the taxpayer is the ground and the measure of the imposition. It may be sometimes, perhaps
often, true that the existence within the boundaries of the State of property over which income is
secured is a cause of the receipt of the income. But the legislature has chosen to make the possibility
of its being so and not the fact that in a given case it is in truth so the basis of the exercise of its
jurisdiction. Considered as a mere possibility I think the connection is too remote. There is no
necessary relation between receipt of income and the existence in New South Wales of some item of
property comprised in a security to which directly or indirectly the taxpayer might resort if the
interest were unpaid. Very many instances may be supposed in which the existence of property in
the place imposing the tax is entirely irrelevant to the receipt of the income. It is not hard to imagine
pastoral land in Queensland during a drought, or in other conditions depriving it of productivity,
which is the source of nothing but a liability to rates, taxes and other outgoings. Suppose a taxpayer
residing in Melbourne lodges in his bank in Melbourne the title to such a property as one among
many securities to support his overdraft for the purposes of a commercial business. Could the
legislature of Queensland tax the bank upon the interest? In New South Wales itself there is much
property both movable and immovable from which the proprietors fail to obtain an income. Because
any such property is included in a security in a transaction which takes place outside New South
Wales and relates in no other way to New South Wales, can the interest be taxed although it is paid
altogether out of funds or sources with which New South Wales has no concern? In my opinion the
case falls within the decision of Commissioner of Stamp Duties (N.S.W.) v. Millar[11]. Conceding
that there is some connection with New South Wales, the tax is laid upon income which is not
necessarily derived from or is affected by that connection. In my opinion, there is no sufficient
relation between New South Wales and the thing to be taxed to justify the provision. The present
case may be regarded as a typical example of the exterritorial operation sought to be given to the
legislation.

The appeals should be allowed.

Starke J.

Appeal by special leave from the judgment of the Supreme Court of New South Wales upon cases
stated for its opinion. The questions were whether certain interest, or any part of it, received by the
appellant under certain debentures issued by the British Australian Lead Manufacturers Pty. Ltd.
(called the B.A.L.M. Co.) in the income years which ended on 30th June 1925 and 30th June 1929
was assessable to income tax under the Income Tax (Management) Act 1912 and the Income Tax
(Management) Act 1928 of New South Wales respectively, and if so whether the provisions of those
Acts purporting to render such interest subject to taxation were within the constitutional powers of
the State of New South Wales. The Supreme Court resolved each of these questions in the
affirmative.

The facts are fully set forth in the cases stated. But it is desirable that I should state as shortly as
possible those I consider essential to the determination of the questions stated. The B.A.L.M. Co.,
which is a Victorian company, though registered as a foreign company in New South Wales and
carrying on business there and elsewhere, borrowed and received in London and Melbourne a
considerable sum of money upon the security of a debenture issue. Each debenture was for £100,
redeemable at £105 and carrying interest. Each debenture contained the usual covenant to pay the
registered holder the amount of the debenture, the bonus or premium of £5, and the interest secured
thereby. The debentures charged with such payments all the property of the company, present and
future, other than its uncalled capital, provided that all the debentures should rank pari passu as a
first charge on the property charged, and that such charge, save as regards real and personal property
set forth in a trust deed, should be a floating security; the debentures also provided that the holders
thereof should be entitled to the benefits of the trust deed. The trust deed was in the usual form, and
was made between the B.A.L.M. Co. and a trustee, which was a company incorporated in England.
It contained a covenant on the part of the company with the trustee to pay the debenture holders all
principal moneys and interest secured by the debentures. It also specifically charged in favour of the
trustee certain real property in New South Wales (which was also the subject of a mortgage,
hereafter mentioned), certain shares in a South Australian company, and in addition (but by way of
floating charge only) all the undertaking and property of the company, both present and future, other
than the specifically charged property and uncalled capital. The debentures were also supported by a
mortgage, given by the B.A.L.M. Co. to the trustee, of certain lands in New South Wales. This
instrument stated the consideration as the sum of £125,000 lent to the company by the trustee, but
declared that the sum was the same as that secured by the debentures, and by it the company
mortgaged to the trustee, for the purpose of securing the payment of the said principal sum and
interest thereon, all its estate and interest in the said lands situated in the State of New South Wales,
and covenanted to pay to the trustee the said principal sum and interest thereon. This mortgage was
registered under the Real Property Act 1900 of New South Wales, and had effect as a security but did
not operate as a transfer of the land charged (See Act, secs. 41 and 57). The appellant was a
company incorporated in Victoria, but it was also registered as a foreign company in New South
Wales, carrying on business there and elsewhere. It was the registered holder of several of the
debentures issued by the B.A.L.M. Co., and kept them in Melbourne. It was paid interest in
Melbourne by the B.A.L.M. Co. on the moneys secured by the debentures held by it during the
income years already mentioned. It may be assumed that the interest was provided by the B.A.L.M.
Co. out of funds available to it for the general purposes of its business, for there is nothing in the
case suggesting that it issued from the lands in New South Wales charged or mortgaged for the
benefit of the debenture holders. Now the Income Tax (Management) Act 1912 provides that income
tax shall be paid in respect of the taxable income received by any person during the period of twelve
months ending on 30th June preceding the year in which such tax is payable (sec. 9). Income means
income derived from any source in New South Wales or earned in that State, including interest upon
money secured by the mortgage of any property in the State, which shall be deemed to be derived
from a source in the State (sec. 4). Mortgage includes any charge, lien or encumbrance to secure the
repayment of money upon which interest is payable (sec. 4). Nothing in the Act shall apply to
income derived from sources outside the State (sec. 10). The Income Tax (Management) Act 1928 is
to the same effect, though the language is not precisely the same: income tax is payable in respect of
the taxable income derived by any person during every income year (sec. 8). Income means income
derived or deemed to be derived directly or indirectly from any source in the State, or in respect of
which tax is otherwise expressly made payable under the Act, and includes interest upon money
secured by the mortgage of any property in the State (sec. 4). Income year means the year beginning
on the first day of July and ending on the 30th day of June during which the income in question was
derived.

It is argued that the income or interest received by the appellant under the debentures held by it was
derived directly or indirectly from a source within the State of New South Wales, because the
instrument of mortgage over lands in New South Wales contains a covenant that the B.A.L.M. Co.
would pay to the trustee the principal moneys and interest secured by that mortgage. But we must
consider the substance of the transaction (Lovell's Case[12]). New South Wales was not the home of
the transaction. The money was lent, the debentures were issued, the trust deed was executed, and
the interest was paid, outside New South Wales. Moreover, the seats of management of both the
B.A.L.M. Co. and the appellant were outside New South Wales though both were registered there as
foreign companies and did some business there. The mortgage security was but a collateral security
to the main security constituted by the debentures and the trust deed. The source of the income is, as
was said in Nathan's Case[13], a question of fact, to be determined on practical grounds. The
transaction was not really and substantially connected with New South Wales. The mortgage over
New South Wales land was but an incident in it, and was not in fact the source of the interest paid to
the appellant. But the Income Tax (Management) Acts of New South Wales provide that income
derived from any source in New South Wales includes interest upon money secured by the mortgage
of any property in the State, which shall be deemed to be derived from a source in the State. It is
clear on the facts that the appellant did receive interest upon money that was secured by mortgage of
property in New South Wales. A mortgage under the Acts includes any charge, lien or encumbrance
to secure the repayment of money. Not only the instrument of mortgage, but also the debentures and
the trust deed constituted such a charge. But it was contended that some limitation must be placed
on the words of the Act, and that it was to be presumed that the legislature selected as a subject of
taxation only persons, things or circumstances within its territory. One limitation suggested was that
the money must be secured by mortgage over property in New South Wales only and not elsewhere.
Another and perhaps a more likely limitation suggested was that the Acts referred to interest
received in New South Wales and secured by a mortgage of property in New South Wales. But the
debenture holders obtain the protection of the State of New South Wales in respect of the mortgage
over the lands and property in that State. A mortgage upon real property in the State, whether a
conveyance of the legal estate in the land or having effect as a security only, is dependent for its
existence, maintenance and enforcement upon the laws of the State, and is therefore legitimately the
subject of taxation there (Cf. Savings and Loan Society v. Multnomah County[14]). The Acts
explicitly provide that interest upon money secured upon mortgage of any property in the State shall
be assessable to income tax, and I see no reason for refusing to give these words their natural and
ordinary signification.

But it is then contended that such a provision transcends the constitutional power of the State of
New South Wales to make laws for the peace, welfare and good government of the State in all cases
whatsoever. "Under that general power" said this court in Commissioners of Stamps (Q.) v.
Wienholt[15], "taxation is necessarily limited to the territory" (Commercial Cable Co. v. Attorney-
General of Newfoundland[16]; Commissioner of Stamps Duties (N.S.W.) v. Millar[17]). "It may be
accepted as a general principle," said the Judicial Committee in Croft v. Dunphy[18], "that States can
legislate effectively only for their own territories." But consistently with the territorial limitation
imposed by the grant of power, it is competent for the State of New South Wales to impose taxes
upon persons, natural or artificial, resident or carrying on business within its territory or upon
property within its territory, or upon income made within its territory (Colonial Gas Association
Ltd. v. Federal Commissioner of Taxation[19]; cf. Cooley on Taxation, 3rd ed., pp. 84-95). The right
to tax mortgages of property located in New South Wales was not disputed, as I understood the
argument, so long as the tax operated in rem. But it was contended that there was no power to
impose a tax in personam upon persons, natural or artificial, who were not domiciled or resident or
carrying on business within the territory. The argument may have been suggested by such cases as
Dewey v. City of Des Moines[20], but they rest, I think, upon the "due process" clause in the
Constitution of the United States, which finds no counterpart in the Constitution of Australia. If the
State can tax property located within its territory, then the constitutional authority of the State is not
transcended because it taxes the owners, legal or equitable, of that property, whether domiciled or
resident within the State or not. The situs of the property attracts the constitutional authority of the
State to tax it, and thus enables it to cast the burden upon the owners of the property. The State of
New South Wales might have taxed the value of the mortgage security itself, but instead it has taxed
the persons deriving or entitled to interest upon money secured upon a mortgage of property within
its territory. That tax is, in my judgment, within the competence of the legislative body of New
South Wales, and does not transcend its powers. It may be that some difficulty will arise in
recovering the tax in cases where the owners are outside the State. That is a difficulty which has
often been encountered in connection with taxation, but in the present case it does not exist, for the
appellant is registered as a foreign company in New South Wales and carries on business there.

Both appeals should be dismissed.

Dixon J.

The question for decision is whether interest upon debentures held by the taxpayer company forms
part of its income assessable to income tax under the law of New South Wales. The debentures were
issued by a company carrying on a manufacturing business in that State and elsewhere. Some of its
assets are situated outside New South Wales. It is incorporated in Victoria and registered in New
South Wales as a foreign company. Its head office is in Victoria. The debentures are secured by a
floating charge of the usual kind over all the assets of the company. But under the debenture trust
deed there is a specific charge over land of the company situate in New South Wales and an
obligation is imposed upon the company to give to the trustee under the deed a first legal mortgage
over such land. In fact this was done. The land was under the Real Property Act and a memorandum
of mortgage in favour of the trustee was registered securing the entire debenture debt. It contains a
covenant with the trustee to pay to the trustee the principal sum on the due date and another
covenant to pay interest. But the latter covenant does not say to whom the payment of interest is to
be made. The debenture trust deed contains a covenant with the trustee to pay to the debenture
holders principal and interest and each debenture contains a covenant with the person whose name is
inserted as debenture holder to pay to him or the registered debenture holder for the time being the
principal sum on the due date and half-yearly interest in the meantime. The debentures provide that
payments shall be made at the registered office of the company or at its bankers for the time being.
In fact interest has been paid to the taxpayer company in Melbourne and to other debenture holders
elsewhere out of New South Wales. The trustee is a company incorporated in England and carrying
on business, among other places, in Victoria, where it has a registered office. The money was
borrowed in London and Melbourne, where it was paid over. The debentures were sealed and issued
in Melbourne. The register of debentures is kept in Melbourne and the debentures themselves have
not been held in New South Wales.

No information has been laid before the court as to the nature or comparative extent of the
operations or property of the borrowing company outside New South Wales.
Two different years of income have been chosen by the parties for the purpose of raising the
question whether the taxpayer company must include interest upon the debentures in the income
upon which it is taxed in New South Wales. One year is governed by the provisions of the Income
Tax (Management) Act 1912-1925 N.S.W. and the other by those of the Income Tax (Management)
Act 1928-1929 N.S.W., which is modelled on the Commonwealth Income Tax Assessment Act 1922-
1928. Important features affecting the question are common to both statutes, but each presents
considerations absent from the other, and it is more satisfactory to deal with each year separately.

Under the Income Tax (Management) Act 1912-1925 income tax was payable in each year upon the
taxable income derived during a preceding period of twelve months (sec. 9). Taxable income was
defined as the amount of income remaining after subtracting from the taxpayer's income the
allowable deductions (sec. 4). Income was elaborately defined (sec. 4). The definition began with
the proposition that income meant income derived from any source in the State or earned in the
State. But it included the statement that interest upon money secured by the mortgage of any
property in the State shall be deemed to be derived from a source in the State. The word "mortgage"
was defined to include any charge, lien or encumbrance to secure the repayment of money upon
which interest is payable. The Act contained a provision that the person beneficially entitled to any
income, called the principal taxpayer, should pay the tax upon it; but a proviso imposed a secondary
liability upon other persons described as representative taxpayers who were empowered to
indemnify themselves. The list included mortgagors. Their liability was stated in the following
clause:--"If the principal taxpayer is resident out of the State and is entitled to income being interest
payable upon money secured by a mortgage of any land in the State or being interest derived from
any other source in the State the tax on such income shall be also payable by the mortgagor of such
land or the person paying such interest, as the case may be" (See secs. 11 (1) (d) and 14). In the
body of the Act a general negative provision occurred providing that nothing in the Act should
apply to income from sources outside the State (sec. 10 (g)).

If the special provisions relating to interest upon mortgages were absent, I should be of opinion that
the facts placed before the court would not bring the debenture interest received by the taxpayer
under the tax imposed by the statute. For, with so many circumstances connecting the transaction
with places out of New South Wales, I should not think that enough to give the interest a source in
New South Wales could be found in the facts that some of the assets subject to the floating charge
were in that State, that part of the borrower's business was conducted there and that the debenture
deed was supported by a fixed mortgage over land there and that the mortgage contained an
independent covenant to pay interest. But, unless full effect is denied to the literal terms of the
provisions relating to interest secured by the mortgage of property in New South Wales, the
conditions of liability which they describe are fulfilled and the interest is assessable. The debenture
deed satisfies the definition of mortgage. It certainly contains a charge or encumbrance to secure the
repayment of the money upon which interest is payable. Whether it would have done so if it had
included no specific charge may be open to dispute. But I think that a floating security falls within
the description "charge," and there is no reason to restrict the meaning of that word in the definition
(See Barcelo v. Electrolytic Zinc Co. of Australasia Ltd.[21].) It is to be noticed that the word
"mortgage" is defined not as a verb or verbal noun but as a substantive signifying a particular form
of proprietary right or possibly an instrument creating it. In the definition of income the word
mortgage is used as a verbal noun. It speaks of "money secured by the mortgage of any property in
the State." But I think the word must receive a meaning extended by reference to the definition. The
debenture deed is, therefore, enough to satisfy the requirement expressed by the word "mortgage" in
the paragraph which attributes a source in the State to interest upon money secured by the mortgage
of any property in the State. But, in any case, I think that the mortgage under the Real Property Act
would suffice to do so. For although, unlike the trust deed, its provisions are not incorporated in the
debenture and the debenture holders are not parties to it, yet I think it "secures" the debenture
moneys within the meaning of the provision. The trustee holds it for the debenture holders as a
security for the repayment to them of the principal sum and interest.

The substantial question is whether full effect ought to be given to the literal words of the statement
that interest upon money secured by the mortgage of any property in the State shall be deemed to be
derived from a source in the State.

For the taxpayer company, it is contended that neither as a matter of interpretation nor as a matter of
validity can this statement operate according to its full literal meaning. The width of application of
which its general terms are capable is relied upon as raising a prima facie presumption against a
literal and unqualified construction. Could it have been intended to tax the whole of the interest
payable upon a loan secured over the undertaking of an enterprise carried on in many countries,
simply because it included some asset in New South Wales, though negligible in value and of no
commercial significance? Does the legislation mean to tax interest upon a loan made in Queensland
by one resident of that State to another upon mortgage of real property there situated, because a
guarantee is taken from a third party who supports it by the deposit of the title deeds to property he
owns in New South Wales? If a mortgagee of land in Victoria goes into possession and applies the
rents and profits to keeping down the interest on the loan, is he taxable in New South Wales because
the loan is collaterally secured by a bill of sale over chattels in that State, although no resort is made
to them? If a receiver and manager is appointed under a debenture deed covering a business carried
on partly in New South Wales and partly elsewhere, are the sums he pays to the debenture holders
out of the profits of the business for interest taxable in New South Wales, although in that State the
business is carried on at a loss?

The restriction which the argument for the taxpayer company seeks to impose upon the generality of
the provision would answer these questions in the negative. It is contended that properly understood
the provision does not apply unless the money is secured by mortgage of property in New South
Wales only. The considerations upon which this contention is founded are both negative and
positive. It is said, on the one hand, that there is no specific reference to a security out of New South
Wales; that there is no provision for apportioning the interest where the security includes property
elsewhere, although a characteristic feature of the statute is its recourse to apportionment for the
purpose of dealing with income arising from property, business or transactions out of as well as in
the State; that it is not to be presumed that the legislation intends to exhaust all its territorial
authority over subjects of taxation, still less to exceed it.

On the other hand, positive indications of a restrictive meaning are said to exist, (i) in the opening
words of the definition of income which confine it generally to a source in New South Wales; (ii) in
the emphatic provision that nothing in the Act shall apply to income derived from sources outside
the State; (iii) in the distinction between the expression "mortgage of any property in the State,"
which is used, and the expression, which is not used, "mortgage comprising any property in the
State"; and (iv) in the readiness with which the word "wholly" may be read before the word
"secured" in order to give effect to the proposed restriction.

The question is one of interpretation, and, unless an artificial construction is adopted in order to
avoid an excess of constitutional authority, we must give that meaning to the provision which we
think it actually expresses. In forming an opinion as to what meaning it does express, we must be
guided by the rules of construction and, accordingly, consider the subject matter and examine the
rest of the statute in which it occurs. But we must not forget that the chief of those rules forbids
departure from the ordinary grammatical sense of the words used except for the purpose of avoiding
some obscurity or some inconsistency with other parts of the statute.

The proposed limitation upon the generality of the words involves the introduction of a qualification
which the terms of the provision do not express or even insinuate. It would not avoid the taxation of
interest in all cases where the source from which the income arises lies outside New South Wales,
although it might lessen the frequency of such cases. For in many loan transactions, as, for instance,
between banker and customer, the security provided and its situation has little or no bearing upon
the locality of the source of the income derived by the lender. It ascribes to the legislature an
intention of the most unlikely kind, namely, to tax if the security covers nothing but property in
New South Wales, but to abstain from taxing if any other property whatever is included. Further, the
phrase "secured by the mortgage of any property" seems to me to tend against the proposed
construction because it refers to the act of mortgaging. In the provision making a mortgagor a
representative taxpayer the expression is "secured by a mortgage of any land." But this phrase again
suggests that the existence of any mortgage and the inclusion of any land is enough. In my opinion
the provision is not limited to cases where the money bearing the interest is secured over nothing
but property in New South Wales. A quite different qualification is, I think, suggested by the
argument based upon the introductory words in the definition of income which adopt source in New
South Wales as the criterion, and upon the negative provision in sec. 10 (g) which enacts that
nothing in the statute shall apply to income derived from sources outside the State. For that
argument appears to me to be founded upon the view that the requirement that the source of income
shall not be outside the State is an overriding one controlling the application of the special provision
that interest upon money secured by the mortgage of property in the State should be deemed from
such a source. The form of sec. 10 (g) clearly is that of a paramount exclusion and it ought to be so
understood and applied. But in its application the question at once arises whether the locality of the
source is to be determined entirely as a matter of fact and independently of statutory provision. Does
it not rather depend on what the legislature has chosen to regard as a source of income? The
paragraph relating to interest in the definition of income has the effect of determining that the
source of income is in New South Wales. In applying sec. 10 (g), it appears to me that such a source
must be assumed. On that assumption, its operation is not that of an inconsistent but paramount
provision controlling the operation of the paragraph relating to interest. In point of meaning I think
that the paragraph intends to ascribe a source in New South Wales to interest upon all money the
repayment of which is secured by any charge, lien, or encumbrance over property any portion of
which is situated in that State. It should receive this construction and be given an operation
accordingly, unless such an operation would be beyond the territorial authority of the Parliament of
New South Wales.

But, before considering the question of extra-territoriality, it is convenient to deal with the Income
Tax (Management) Act 1928-1929, which governs the second of the two years of income. That Act
contains an analogous provision concerning interest secured by the mortgage of property in the
State, but it also contains particular provisions relating to interest paid to a debenture holder in a
company. There is no paramount exclusion of income from sources outside the State. The definition
of income differs from that in the earlier statute. It is as follows:--"Income means income derived
or deemed to be derived directly or indirectly from any source in the State or in respect of which tax
is otherwise expressly made payable under this Act and includes interest upon money secured by the
mortgage of any property in the State" (sec. 4). The definition of "mortgage" is the same except that
the words "upon which interest is payable" are omitted, but this seems immaterial.
Being based on the Federal legislation, the Act contains provisions like those dealt with in Colonial
Gas Association Ltd. v. Federal Commissioner of Taxation[22] (secs. 17 and 18). Further, sec. 11 (l)
directly enacts that the assessable income of any person shall (without in any way limiting the
meaning of the words) include interest credited or paid to or otherwise derived by any depositor or
debenture holder of a company.

What territorial connection with New South Wales the company, the debenture, or the debenture
holder must have, if any, is not stated. But in sec. 80, which deals with the retention of money due
to non-residents in order to pay the tax for which they are liable, "a debenture holder or depositor in
a company deriving income from a source in the State" is mentioned. It may be that the territorial
basis intended by sec. 11 (l) is that the company derives income from a source in the State. Such a
view would be consistent with the history of the provision in the Commonwealth legislation (See
Colonial Gas Association Ltd. v. Federal Commissioner of Taxation[23]). If this is the meaning of
sec. 11 (l), the debenture interest in the present case would fall within it. But a question would then
arise as to its validity. For the fact that the company derives income from New South Wales affords
little, if any, territorial connection between that State and the interest received by the debenture
holders from the company. The existence of this special and express provision for the inclusion of
interest upon debentures of companies in the assessable income of a person might perhaps appear
exhaustive, so that it would be a wrong to treat the definition of income as covering such interest.
But sec. 11 is framed to guard against any such construction. It does so by means of the words
"without in any way limiting the meaning of the words," scil., "assessable income." Those words go
back to the definition of "income." I think the same meaning as in the case of the analogous
provision in the former Act should be given to the words in that definition, viz., "and includes
interest upon money secured by the mortgage of any property in the State." Unless a qualified
interpretation be required in order to preserve the provisions from invalidity on the ground of extra-
territoriality, I think that the definition of income covers the interest upon the debentures in the
present case, so that it falls within the assessable income from which the taxable income is obtained.
Perhaps it also falls within sec. 11 (g) if that provision is valid and is subject to no artificial
limitation of meaning. Sec. 92 contains the now familiar provision requiring severance and
restrictive interpretation when an enactment goes beyond power; a discussion of the effect of such
provisions will be found in the note to Williams v. Standard Oil Co. of Louisiana[24] (See too
Railroad Retirement Board v. Alton Railroad Co.[25]). I do not see how sec. 17 of the Interpretation
Act 1897 can effect a restriction which would relieve the interest from tax.

The important question remains whether the attempt to include in the income liable to tax interest
on money secured by the mortgage of any property in New South Wales exceeds the territorial
limitations upon the legislative power. The power to make laws for the peace, order and good
government of a State does not enable the State Parliament to impose by reference to some act,
matter or thing occurring outside the State a liability upon a person unconnected with the State
whether by domicil, residence or otherwise. But it is within the competence of the State legislature
to make any fact, circumstance, occurrence or thing in or connected with the territory the occasion
of the imposition upon any person concerned therein of a liability to taxation or of any other
liability. It is also within the competence of the legislature to base the imposition of liability on no
more than the relation of the person to the territory. The relation may consist in presence within the
territory, residence, domicil, carrying on business there, or even remoter connections. If a
connection exists, it is for the legislature to decide how far it should go in the exercise of its powers.
As in other matters of jurisdiction or authority courts must be exact in distinguishing between
ascertaining that the circumstances over which the power extends exist and examining the mode in
which the power has been exercised. No doubt there must be some relevance to the circumstances in
the exercise of the power. But it is of no importance upon the question of validity that the liability
imposed is, or may be, altogether disproportionate to the territorial connection or that it includes
many cases that cannot have been foreseen.

In the present case no relation between the territory and the person, as distinguished from the
transaction to which he is a party, is made the occasion of the tax. The thing in respect of which the
taxpayer is made liable is the interest on money borrowed or otherwise owing. The imposition of the
liability is based upon the fact that a security exists under the law of New South Wales over property
in New South Wales for the repayment of the money. In my opinion this connection is sufficient.
The interest grows out of the debt. If the creditor chooses to avail himself of rights in property
conferred by the law of New South Wales in respect of land or chattels under the authority of the
legislature, the law of New South Wales can impose upon him any liability which is relevant to the
purpose of his doing so; and the purpose of his doing so is to secure repayment of the moneys. The
argument to the contrary, while conceding that the mortgage could be made the subject of a tax,
denied jurisdiction over the interest, which, it was said, had no necessary connection with the
existence of the security. As a matter of business or of economics, it may be true that the source of
interest payments is or may be independent of the security. But the legislative power is not tied
down to such conceptions of the source of income as the criteria of liability to taxation. Perhaps it is
a question of relevance. However that may be, the legislature has directed the exercise of its
authority to the use made of property in the State and of securities provided by the law of the State,
and as the purpose for which these things are used is to secure, or further secure, repayment of sums
of money, it has taxed the interest at which the money is forborne.

In my opinion it is competent for the State Parliament to do so. Adopting this view, I do not think
that any restrictive construction should be placed upon the natural meaning of the provisions
relating to mortgage interest.

In my opinion the appeals should be dismissed.

Evatt J.

These are two appeals by special leave from the Full Court of the Supreme Court of New South
Wales. Each appeal raises the same question--whether it is within the competence of the Parliament
of the State to tax the interest received upon money where the security taken by the mortgagee
includes any property in New South Wales.

The first appeal relates to the Income Tax (Management) Act 1912; the second to the Act of 1928.
The former Act taxed "income" by reference to its having been derived from any source in the State,
but sec. 4 expressly included within the term "income" interest upon money secured by the
mortgage of any property in the State, deeming such interest to have been derived from a source in
the State. Under the Act of 1928, the definition of "income" also expressly included interest upon
money secured by the mortgage of any property in the State. In each Act, moreover, a mortgage was
defined to include any charge, lien or encumbrance to secure the repayment of money.

A preliminary question is whether, in these two cases, the debenture interest received by the
appellant company was interest upon money secured by a "mortgage" within the meaning of the two
Acts. The answer must be Yes, for much the same reasons as were stated in Barcelo v. Electrolytic
Zinc Co. of Australasia Ltd.[26], following, on this point, the judgment of Cussen A.C.J. in the
court below[27].
Another preliminary question is whether the definition sections of the two Acts can be "read down"
and limited to cases where the mortgage comprises property within New South Wales but no other
property. The Full Court felt itself able to interpret the Acts in the way mentioned. But I think that
the wording of each Act is too unyielding to allow of such an interpretation. Each Act aims at
bringing within the denotation of "income" all the interest payable under a security so long as the
property secured includes property within the State.

The Full Court also felt able to sustain the assessments by reason of the covenant contained in the
specific mortgage to a trustee for debenture holders of certain freehold and leasehold lands in New
South Wales, it being held that such covenant was itself the "source" of the debenture interest, which
should therefore be regarded as having been derived from a "source" in the State. But the interest
paid to the taxpayer was not paid under the covenant in the specific mortgage, and it is difficult to
see how the covenant can be regarded as the source of such interest.

The main question on the appeals is whether, interpreting the definition sections in their ordinary
grammatical sense, the legislation is legislation for the peace, welfare and good government of New
South Wales.

Of recent years the extent to which the constitutional competence of Dominion legislatures to pass
taxation legislation is affected by reason of territorial considerations has been considered by this
court in a catena of cases, viz.:-- Commissioner of Stamp Duties (N.S.W.) v. Millar[28]; Trustees
Executors & Agency Co. Ltd. v. Federal Commissioner of Taxation[29]; Colonial Gas Association
Ltd. v. Federal Commissioner of Taxation[30]; and Australasian Scale Co. Ltd. v. Commissioner of
Taxation (Q.)[31]). In some of these judgments, the great significance of the judgment of the Privy
Council in Croft v. Dunphy[32] is emphasized, for, although sec. 3 of the Statute of Westminster is
not yet in force in relation to the Commonwealth of Australia, Croft v. Dunphy[33] proceeded upon
the basis of the law as existing prior to that statute.

Some of the cases also illustrate the fact, occasionally overlooked, that, constitutionally speaking,
the status of the States of Australia is equal to, or co-ordinate with, that of the Commonwealth itself.
Sovereignty is not attributable to one authority more than to the others; it is divided between them
in accordance with the demarcation of functions set out in the Commonwealth Constitution. Within
the limits so prescribed, the legislative authority of the States is of precisely equivalent quality and
potency to that of the Commonwealth, the authority of which is, in secs. 51 and 52 of the
Commonwealth Constitution, limited by reference to subject matter. In short, the Commonwealth
Parliament may legislate for "the peace, order and good government of the Commonwealth with
respect to" a large number of subject matters. Similarly, the State of New South Wales may legislate
for the "peace, welfare and good government" of New South Wales. In relation to such a subject
matter as that of taxation, and subject, of course, to any overriding provision of the Commonwealth
Constitution, it is quite impossible to deny to the States in relation to their geographical area
constitutional powers precisely analogous to those possessed by the Commonwealth Parliament in
relation to its geographical area. The legislation of the States cannot be deemed ultra vires merely
because of territorial reasons, unless analogous legislation of the Commonwealth Parliament would
similarly be deemed unconstitutional and void. So far as concerns direct taxation, the States of
Australia occupy a constitutional position quite different from that of the Provinces of Canada.
Accordingly, the four cases referred to above are all in point, although two of them relate directly to
the powers of the Commonwealth Parliament, and two to those of the States.

I have discussed the question in Trustees Executors & Agency Co. Ltd. v. Federal Commissioner of
Taxation[34], and I shall not repeat the conclusions reached in that judgment. But one point should
perhaps be stressed. In any investigation of the constitutional powers of these great Dominion
legislatures, it is not proper that a court should deny to such a legislature the right of solving
taxation problems unfettered by a priori legal categories which often derive from the exercise of
legislative power in the same constitutional unit. For instance, as was pointed out by Griffith C.J. in
Morgan v. Deputy Federal Commissioner of Land Tax (N.S.W.)[35], a court must accept the position
that, in dealing with all questions of constitutional validity, a legislature is entitled to regard
shareholders in a company as being the beneficial owners of property although the company is
usually treated as its sole legal owner. This method of approach is illustrated in the judgment
delivered by Gavan Duffy C.J. and myself in Millar's Case[36], although the particular opinion did
not prevail in that case. On the hearing of the present appeals, counsel for the appellant founded
himself largely upon the judgment of the majority in Millar's Case[37], arguing that a taxing
enactment of a Dominion, if it is based upon a connection or relationship with the Dominion, must
be strictly confined to legislation with respect to that connection or relationship. As a general
principle, this contention cannot be accepted.

In the present case, the State of New South Wales may be regarded as thus putting forward its claim
to tax:--"Under the terms of your mortgage investment, you receive in every year certain interest
payments. But the security for the repayment of your principal moneys is, or at any rate includes,
property in New South Wales. In a rare type of case the value of that property will be small in
proportion to the value of your total moneys secured or the aggregate value of the property securing
it. But you, the mortgagee, have deliberately chosen to accept a security over property in this State,
and, in almost every possible case, the value of that part of the security will be significant. In the
case of default, you, the mortgagee, will probably have recourse to the laws of this State. We
therefore regard your investment as being, to a substantial extent, a New South Wales investment.
We do not think it expedient to reduce the quantum of tax merely because part of the property is
situate outside the State. We think it more convenient to tax you on the whole of the interest which
you receive from the principal moneys secured (in part or in whole) by a charge on New South
Wales property."

In my opinion, it is not longer possible to deny that such legislation is for the peace, welfare and
good government of New South Wales. There is a territorial connection with that State, which, in an
ordinary case, will turn out to be of great, and even decisive, consequence. In my opinion, neither a
State nor the Commonwealth is constitutionally confined to legislating by reference to the precise
economical advantage gained by the taxpayer from his having accepted security over property
within the jurisdiction. Such advantage is often incommensurable. The legislature can pierce
through the forms of the transaction, and determine to treat the taxpayer as a person deriving income
from a New South Wales mortgage or charge.

The appeals should both be dismissed.

McTiernan J.

I agree that the appeals should be dismissed.

The conclusions which I have reached are, firstly, that, in the case of the debenture interest included
in the assessment made under the Income Tax (Management) Act 1912-1925, it falls within sec. 4 of
that Act, and, in the case of the debenture interest included in the assessment made under the
Income Tax (Management) Act 1928-1934, it falls within sec. 4 of that Act; and, secondly, that
neither of these provisions, so construed, is in excess of the territorial limits of the legislature of
New South Wales.
My reasons for these conclusions are substantially the same as those which the Chief Justice and
Dixon J. have formulated on the questions of construction and constitutional power raised by the
appeals, and to set out my reasons would merely involve the substantial reiteration of the discussion
in their judgments on these questions. In the view which I have taken on these two questions it is
unnecessary to decide whether the source of the income was in New South Wales.
Appeals dismissed with costs.
Solicitors for the appellant, A. J. McLachlan & Co.
Solicitor for the respondent, J. E. Clark, Crown Solicitor for New South Wales.
[1] (1891) A.C. 476.
[2] (1919) A.C. 679.
[3] (1900) 25 V.L.R., at pp. 509-511; 21 A.L.T., at p. 228.
[4] [1934] HCA 12; (1934) 51 C.L.R. 172.
[5] [1935] HCA 23; (1935) 53 C.L.R. 534, at pp. 553, 556, 561.
[6] [1932] HCA 63; (1932) 48 C.L.R. 618.
[7] [1933] HCA 32; (1933) 49 C.L.R. 220
[8] [1934] HCA 12; (1934) 51 C.L.R. 172.
[9] [1935] HCA 23; (1935) 53 C.L.R. 534.
[10] (1933) A.C. 156.
[11] [1932] HCA 63; (1932) 48 C.L.R. 618.
[12] (1908) A.C. 46.
[13] [1918] HCA 45; (1918) 25 C.L.R. 183, at p. 195.
[14] [1898] USSC 48; (1898) 169 U.S. 421; 42 Law. Ed. 805.
[15] (1915) 20 C.L.R., at p. 540.
[16] (1912) A.C. 820, at p. 826.
[17] [1932] HCA 63; (1932) 48 C.L.R. 618.
[18] (1933) A.C., at p. 162.
[19] (1934) 51 C.L.R., at p. 181.
[20] [1899] USSC 54; (1899) 173 U.S. 193; 43 Law. Ed. 665.
[21] [1932] HCA 52; (1932) 48 C.L.R. 391, at p. 420.
[22] [1934] HCA 12; (1934) 51 C.L.R. 172.
[23] [1934] HCA 12; (1934) 51 C.L.R. 172, at p. 185.
[24] (1929) 73 Law. Ed. (U.S.) 287, at p. 288.
[25] [1935] USSC 107; (1935) 295 U.S. 330; 79 Law. Ed. 1468.
[26] [1932] HCA 52; (1932) 48 C.L.R. 391.
[27] (1932) 48 C.L.R., at pp. 435, 436.
[28] [1932] HCA 63; (1932) 48 C.L.R. 618.
[29] [1933] HCA 32; (1933) 49 C.L.R. 220.
[30] [1934] HCA 12; (1934) 51 C.L.R. 172.
[31] [1935] HCA 23; (1935) 53 C.L.R. 534.
[32] (1933) A.C. 156.
[33] (1933) A.C. 156.
[34] (1933) 49 C.L.R., at pp. 235-241.
[35] (1912) 15 C.L.R., at pp. 666, 667.
[36] (1932) 48 C.L.R., at pp. 629, 630.
[37] [1932] HCA 63; (1932) 48 C.L.R. 618.

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