High Court of Australia Dixon C.J. McTiernan and Fullagar JJ. Commissioner of Taxation (Cth) v Armco (Australia) Pty Ltd [1954] HCA 49 ORDER Question in the case stated answered—No. The appellant Commissioner of Taxation to pay the costs of the case stated. Cur. adv. vult. The Court delivered the following written judgment:— Sept. 17, 1954 Dixon C.J., McTiernan and Fullagar JJ. The question to be determined upon this case stated is whether certain interest credited by the taxpayer company to a corporation which does not "reside" in Australia but in the United States of America is interest credited on money lodged at interest in Australia with the taxpayer company within the meaning of s. 125 (1) (b) of the Income Tax Assessment Act 1936-1942. Section 125 is concerned rather with the collection of tax than the incidence of tax. It deals with the case of non-residents to whom interest on money of a certain description is credited or paid and demands the tax upon the interest at the source by imposing liability upon the Australian debtor paying the interest. But its operation is limited. To begin with, it does not affect natural persons who pay or credit interest; only companies who do so. Then there is an exclusion of cases where the debtor can show that the creditor abroad can enforce the payment of the full amount of the interest without any deduction for tax. Where the company paying or crediting interest is liable to pay tax, the provision authorizes the deduction of tax from the interest credited or paid. Thus the incidence of the tax is meant to fall on the creditor abroad receiving the interest. But while this is so, the liability to the Crown of the company here is not secondary or collateral, but independent and primary. The reason is that those provisions which tax non-residents upon income from an Australian source may not always cover interest of the description to which the section relates or every person to whom it is credited or paid. The description of interest to which the provision applies forms another limitation on its operation and it is upon that limitation that the present case turns. For s. 125 (1) is confined to interest credited or paid by a company (a) on money secured by debentures of the company and used in Australia or used in acquiring assets for use or disposal in Australia or (b) on money lodged at interest in Australia with the company. In the accounting period of twelve months in respect of which the taxpayer company was assessed for the financial year ended 30th June 1943, it credited to the Armco International Corporation of Middletown, Ohio, a sum of £14,070 8s. 0d., being interest accruing in that period calculated at four and one-half per cent per annum upon one million dollars secured by a promissory note payable on demand. The commissioner has assessed the taxpayer company to tax upon this sum of £14,070 8s. 0d. on the footing that it is interest on money lodged at interest in Australia with the company. This the company denies. The question for decision is whether the money represented by the promissory note is within the statutory description "money lodged at interest in Australia with the company". In the first instance that depends upon the history of the transaction leading to the making of the promissory note. It is the same transaction as the Court had before it in Armco (Australia) Pty Ltd v Federal Commissioner of Taxation [1] , where the question was whether the company could deduct a loss incurred in connection with the payment of moneys covered in whole or in part by the promissory note because of an adverse change in the rates of exchange. The facts will be found in the report stated in greater fullness than is necessary for present purposes. It is enough to describe how the indebtedness came to be incurred. The Armco International Corporation or its nominees hold all the shares in the taxpayer company, which was incorporated under Australian law in the year 1933. In various States of the Commonwealth the latter carried on the business of a steel merchant and fabricator. For the purpose of that business it proceeded to purchase from the Armco International Corporation and import quantities of steel sheets, for which by September 1938 it owed the parent company $541,664.85. The purchases seem to have been made really for an Australian company called Commonwealth Rolling Mills Pty Ltd but the taxpayer company invested £250,000 in acquiring half the share capital of that company and it was arranged that the liability for the steel sheets to the Armco International Corporation should be assumed by the taxpayer company. To make up funds so as to enable the latter to acquire the shares in the Commonwealth Rolling Mills Pty Ltd the parent company remitted to it three advances of $150,000 each, a total of $450,000. The taxpayer company was further indebted to the parent corporation in respect of expenditure made in America on its behalf. The amount was $75,536.90. The sums owing for the steel sheets and for the moneys expended in America had been allowed to run on so that the taxpayer company should be in funds but neither these debts nor the advances to make up enough to buy the shares bore interest up to that time. However instructions came from the parent corporation giving reasons for requiring the taxpayer company to give a promissory note for $1,000,000 representing the funds thus advanced on open account. The note was to be payable on demand and to be expressed to bear interest at four and one-half per cent per annum. The interest was to be credited monthly and run from 15th September 1938. The subject of the case stated is the interest reserved by this note accruing during the accounting period of twelve months ended 31st October 1942. 1. (1948) 76 C.L.R. 584. It is needless to carry the narrative of the transaction further. It is enough to refer to the report of the previous case [1] and to say that ultimately in 1944 the promissory note was satisfied by a transfer to the parent company of the shares in Commonwealth Rolling Mills Pty Ltd and the remittance of a cash balance. The effect of the transaction was summarized in the previous case in a passage which it is convenient to repeat: "The purpose of allowing the liability for the steel sheets to stand over was simply to enable an investment to be made. One purpose in view when the goods were supplied was that of creating a fund in Australia, which, supplemented by the loans, would be applied for something outside trading altogether, viz., investment in the shares of another company, an operation exclusively of fixed capital. The giving of the promissory note is confirmatory of the intention that the amount representing the steel sheets and the loans made should together form a consolidated liability in the nature of an advance. The reality of the transaction was that the American Corporation desired that its Australian subsidiary should take up shares at a cost of £250,000 and at a subsequent date transfer the shares to it at cost. For the purpose of putting its subsidiary in funds for the purpose it advanced money both by way of loan and by supplying goods and allowing the remission of the moneys representing the price to stand over" [1] . 1. (1948) 76 C.L.R. 584. 2. (1948) 76 C.L.R., at pp. 620, 621. It will be seen that the contract to pay interest was a new and independent agreement expressed in the promissory note, that is to say it formed no part of the terms on which the original indebtedness was incurred. Moreover, except for the three remittances amounting to $450,000, there was no debt for money lent. The word "advance" is perhaps not inappropriate because it is a word of wide signification. But except for these remittances there was no payment of money by way of loan. The promissory note converted what was an open account into an ascertained indebtedness at interest. It is this fact, the conversion into a fixed debt, that the commissioner uses to meet the obvious difficulty created by the words in s. 125 (1) (b) "money lodged at interest". He says that the provision is not concerned with the history of the money earning the interest, only with its position during whatever year of income may be under assessment. He contends that if the money has come to be in a condition characteristic of a definite loan specifically left in the hands of the borrower, that is enough to satisfy the word "lodged". He applies this to the facts of the present case by treating the aggregation of the various amounts in which, on different accounts, the taxpayer company was indebted to the American Corporation and the taking of a promissory note for a round sum at interest as the equivalent of depositing an amount by way of loan. The implications of the words "money lodged at interest" cannot be met in this way. These words naturally refer to money which has been handed over, placed in the hands of the borrower, on the terms that he pays interest. Clearly this was never done in fact. Debts arose and were allowed to stand unpaid so that the taxpayer company would be in funds. For the most part money was not handed over or placed in the hands of the debtor. No money was handed over at interest. When the debtor was put in funds it was not at interest. The circumstance that after an interval of time a promissory note with interest was taken to secure a great part of the debt does not satisfy the description the statute employs. The provision does not lay down a wide or flexible principle. It carefully selects two kinds of transactions resulting in the payment of interest to persons abroad, viz. money secured by debenture and used in certain ways and money lodged. There is a careful restriction of its operation to those descriptions of transaction. It is a taxing statute and there is no warrant for extending its application to a case which does not come fairly within the natural meaning of its literal words. The question in the case stated should be answered—No.