Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd

MINUTES OF ORDER THE COURT ORDERS THAT:

1. The appeal be dismissed.
2. The appellant pay the respondent's costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

REASONS FOR JUDGMENT THE COURT: The appellant Commissioner of Taxation ("the Commissioner") appeals against a judgment of a judge of this Court (Einfeld J), setting aside an objection decision in respect of an amended assessment issued by the Commissioner against the respondent, Lamesa Holding BV ("Lamesa") for the years of income ended 30 June 1994 and 30 June 1996. The question at issue in the appeal concerns whether Lamesa is liable to pay income tax in Australia in respect of profits made by it from the sale of shares in an Australian publicly listed company, Australian Resources Limited ("ARL"). The facts are not in dispute. As found by the learned primary judge they are as follows: "In December 1991 Mr Leonard Green, a principal of Leonard Green and Associates LP ('LGA'), a limited partnership established in the United States, became aware of a potential investment opportunity in Australia. Arimco Resources and Mining Company NL ('Arimco'), a company listed on the Australian Stock Exchange which had a subsidiary called Arimco Mining Pty Limited ('Arimco Mining') engaged in gold mining activities, was the subject of a hostile takeover bid, at a price which Mr Green was advised was less than the real value of the Arimco shares. With this knowledge Mr Green approached his fellow principals in LGA who then agreed to mount a takeover offer for Arimco. As an initial step, a limited partnership of institutional, investment and financial entities resident in the US and managed by LGA, Green Equity Investors LP (GEILP) acquired 18.1% of the capital of Arimco. Conduct of the venture was delegated to Christopher Walker and Greg Annick, who were then respectively a principal and an employee of LGLA in its Californian office." The following events then took place: "1. On 31 January 1992 GEILP acquired the issued share capital of the company now named Australian Resources Limited (ARL), but then called GEI Mining Holdings Pty Limited. 2. On the same day ARL acquired the capital of the company now named Australian Resources Mining Pty Limited (ARM), but then called GEI Mining Pty Limited. 3. On 6 February 1992 GEILP acquired the issued share capital of the applicant Lamesa, a private limited company incorporated in the Netherlands. GEILP thereafter transferred the capital of ARL to Lamesa. 4. On 23 February 1992, ARM made a takeover bid for Arimco. The bid was successful. By the end of July 1992 ARM owned the whole of the capital of Arimco. The ownership structure was thereafter as follows: Green Equity Investments LP (GEILP) (A limited partnership ... in the USA) owns 100% of Lamesa Holding BV (Lamesa) (incorporated in the Netherlands) which owns 98.2% (with directors and senior executives of Australian Resources Ltd owning the balance) of Australian Resources Limited (ARL) (incorporated in the ACT) which owns 100% of Australian Resources Mining Pty Ltd (ARM) (incorporated in the ACT) which owns 100% of Australian Resources and Mining Company NL (Arimco) (incorporated in Queensland) which owns 100% of Arimco Mining Pty Ltd (Arimco Mining) (incorporated in NSW) which owns gold mining leases 5. In November 1993 ARL offered a public allotment of 70 million new shares and was listed on the Australian Stock Exchange. Following the issue Lamesa's interest in the capital of ARL was reduced to 67.35%. 6. In January 1994 Macquarie Bank proposed to Lamesa a sale of 50 million of its ARL shares. Messrs Walker and Annick authorised Macquarie to negotiate a sale, which it did on 31 January 1994. 7. In January 1996 Mr Annick on behalf of Lamesa authorised Macquarie Bank to negotiate the sale of the remaining shares held by Lamesa in ARL, which it did on 11 January 1996." Each of the sales in 1994 and 1996 brought about a profit to Lamesa which, it is conceded, formed part of its assessable income under s 25(1)(b) of the Income Tax Assessment Act 1936 (as amended) (Cth) ("the Tax Act") as being income in ordinary concepts derived from a source in Australia. The profits ultimately assessed to Lamesa by the Commissioner in an amended assessment were $74,693,888 in the 1994 income tax year and $128,022,859 in the 1996 income tax year. An earlier assessment had been made based upon the view that the profits were within the capital gains tax provisions of the Tax Act and so made assessable income through s 160ZO(1) of the Tax Act, but on objection the Commissioner had formed the view that the gains were of an income and not of a capital nature. Lamesa, relies upon the provisions of the Netherlands-Australia Double Taxation Agreement ("the Agreement") as incorporated into Australian municipal law by force of s 4 of the International Tax Agreements Act 1953 (Cth) ("the Agreements Act") and Schedules 10 and 10A of that Act. It is common ground that the Agreements Act has effect notwithstanding anything inconsistent with its provisions in the Tax Act, save as to the provisions of Part IVA of the Tax Act (the anti-avoidance provisions) which are not relied upon by the Commissioner here. The issue between the parties is a very narrow one. It concerns the proper interpretation of Art 13(2) of the Agreement and the interrelationship of that Article with Art 7. To understand the issue it is useful to set out the relevant provisions of the Agreement. The Agreement was made in March 1976. The text of the Agreement is in both the English and Dutch languages, but both texts are "equally authentic". It is not suggested that there is any relevant difference between the language of the two texts material to the resolution of the present issue. The Agreement is an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Although, therefore, the Agreement has this dual object, the Agreement substantially concerns allocation of taxing power. Thus, as will be seen, the agreement allocates to the State, where business is carried on or through a permanent establishment, the right to tax business profits of that State (Art 7). It allocates to the country of residence the power to tax aircraft and ship profits (Art 8). Sometimes, as with Art 7 and Art 8, the power allocated to the jurisdiction named is exclusive. Sometimes, as is the case with interest, both jurisdictions may tax but with a nominated limit of 10% in one (Art 11). The allocation is of the right to tax. There is nothing in the Agreement which compels a jurisdiction to exercise that right. Australia, for example, does not tax "exempt income", although such income could fall within the business profits Article. Save as to its operation to allocate taxing power, the Agreement is little concerned directly with fiscal evasion. However, Art 25 provides for an exchange of information between the competent authorities of each State, which exchange is vital to countering fiscal evasion. Unlike more recent treaties, the Agreement is concerned only with taxes on income It has no direct concern with capital gains: cf the double tax agreement between the United Kingdom and Australia which refers specifically both to taxes on income and capital gains. Commencing with Art 6, the Agreement allocates the jurisdiction to tax in respect of particular kinds of income. Art 6 is concerned with income from real property. Not surprisingly, the power to tax income from real property is allocated to the State in which the real property (including mines, quarries or natural resources) is situated. By force of Art 6(2) of the Agreement, income from a lease of land and "income from any other direct interest in or over land" is to be regarded as income from real property. Art 7 is concerned with business profits. It is at the core of the Agreement in so far as the Agreement is designed to assist the flow of commerce between the contracting states. It is relevantly in the following terms: "1. The profits of an enterprise of one of the States shall be taxable only in that State unless the enterprise carries on business in the other State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them as is attributable to that permanent establishment. ... 5. For the purpose of this Article, except as provided in the Articles referred to in this paragraph, the profits of an enterprise do not include items of income dealt with in Articles 6, 8 , 10, 11, 12, 13, 14, 16 and 17." It is agreed as between the parties that subject to the operation, if any, of Art 7(5), the profits on the sale of shares fall to be taxed only in the Netherlands and not in Australia, there being no permanent establishment in Australia through which the enterprise carries on business. The question that arises therefore, is whether the profits fall within Art 13 so as to be excluded from Art 7. Art 13 provides as follows: "1. Income from the alienation of real property may be taxed in the State in which that property is situated. 2. For the purposes of this Article - (a) the term 'real property' shall include - (i) a lease of land or any direct interest in or over land; (ii) rights to exploit, or to explore for, natural resources; and (iii) shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the State or of rights to exploit, or to explore for, natural resources in one of the States. (b) real property shall be deemed to be situated- (i) where it consists of direct interests in or over land - in the State in which the land is situated; (ii) where it consists of rights to exploit, or to explore for, natural resources - in the State in which the natural resources are situated or the expiration may take place; and (iii) where it consists of shares or comparable interests in a company, the assets of which consist wholly or principally of direct interests in or over land in one of the States, or of rights to exploit, or to explore for, natural resources in one of the States - in the State in which the assets or the principal assets of the company are situated. 3. Gains from the alienation of shares or 'jouissance' rights in a company the capital of which is wholly or partly divided into shares and which is a resident of the Netherlands for the purposes of Netherlands tax, derived by an individual who is a resident of Australia, may be taxed in the Netherlands." There was no evidence before the Court as to the value of the assets of ARL and its subsidiaries at relevant times. All that is known appears from the consolidated accounts of the group as at 30 June 1993, based on historical cost, which can be summarised as follows: "Asset Amount Percent Cash and Receivables 30,453,310 25.00 Inventories 5,190,263 4.26 Plant and Equipment 42,664,887 35.03 Land and Buildings 5,001,964 4.11 Exploration and Development Expenditure 38,490,372 31.60 capitalised 121,800,796 100.00"