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

If that evidence is inadequate, the taxpayer bears the onus of showing the assessment to be excessive. THE JUDGMENT APPEALED FROM The learned primary judge expressed the issue for resolution correctly as being whether or not the mining leases held in the group were assets of ARL. His Honour accepted that there was evidence that for certain purposes it was appropriate to look at the assets of a holding company and its subsidiaries as a group. However, in his Honour's view, the assets of the subsidiary could not be treated as assets of its parent with the consequence that the profit was not deemed by force of Art 13 to be a profit from the alienation of real property. His Honour also considered and rejected alternative submissions that the profit arose from indirect interests in land or from the alienation of comparable interests to shares in a company. In the course of his judgment his Honour discussed evidence that was adduced from a Dutch expert as to the meaning and effect of the Agreement in the Netherlands. His Honour, however, rejected evidence of interpretation of other treaties by the Dutch Court (the Hoge Raad) as inapplicable. In the course of argument on the appeal, counsel for the Commissioner impressed upon us the desirability that we should pronounce upon the admissibility and effect of the evidence which was given. However, both parties concede that the evidence did not assist the resolution of the question before the Court, whether admissible or otherwise. In these circumstances it is inappropriate to express a concluded view on the question. We would, however, express our agreement with the distinction drawn by Lindgren J in Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6) (1996) 64 FCR 79 between the content of foreign law which is receivable in evidence and the application of that law to facts once its content has been ascertained which is not. However, where the construction of an international treaty arises, evidence as to the interpretation of that or subsequent treaties in one of the participating countries forms part of a matrix of material to which reference could properly be made in an appropriate case. As presently advised we would not wish it to be thought that a limited view of the material to which reference could be made in interpreting a double tax treaty should be taken. Had there been some decision of an appropriate Dutch court interpreting a treaty with identical or similar language, then, in our view, evidence of such a decision might well have been admissible. THE CASE FOR THE APPELLANT The Commissioner commenced his submissions by reminding the Court of the principles applicable to the interpretation of international treaties as most recently and authoritatively expounded in Applicant A v Minister for Immigration and Ethnic Affairs (1997) 71 ALJR 381. Those principles of interpretation require, it is said, that a more liberal method of interpretation be adopted than if the Court was required to construe exclusively domestic legislation (at 397 per McHugh J). The Commissioner's submissions then proceed to argue for one of four overlapping propositions. First, it is said, that the case falls within Art 13(2)(a). ARL it is said has a right to exploit the assets of its subsidiaries through its ability to wind up the subsidiaries, control the Boards of the subsidiaries or indirectly the assets of the subsidiaries. That right to exploit is, it is said, a direct interest in or over land so that when the shares in ARL were sold a profit arose from the alienation of that direct interest. The second way in which the Commissioner puts his submissions is to say that in a "lineal sense" ARL had a direct right or interest in the assets of the subsidiary. This lineal right was described in the submission as being a link in a practical and commercial sense. It is difficult to see that the second submission differs greatly from the first. Its meaning is far from clear. The third way in which the Commissioner puts his case is to rely upon the provisions of Art 13(2)(iii) and to treat there as having been a sale of a "comparable interest". So, it is said, that the assets of a subsidiary are a comparable interest to the case where what is exploited is the shares in a company, the assets of which consist wholly or principally of direct interests. Finally, the Commissioner submits that an "in substance approach" should be taken permitting the piercing of the corporate veil and so as to treat the assets of the subsidiary companies as being the assets of their parent. Provided overall within the group the assets of the group consist principally of direct interests in or over land etc, the provisions of Art 13(2)(iii) will, it is submitted, have operation. THE INTERPRETATION OF THE AGREEMENT AS AN INTERNATIONAL TREATY The Agreement is an agreement between the governments of two contracting states, negotiated at a high level within the fiscal bureaucracy. It is probable that the course of negotiations of a double tax treaty follow quite different courses to the international negotiation of other treaties as, for example, the international convention on refugees discussed by the High Court in Applicant A, to which reference is made above. Double tax treaties do not remain as but agreements between governments. They are, at least within the Anglo-Australian context, made part of municipal law and, in the case of Australia, override municipal law. So, it can be argued that a less liberal approach might be given to the interpretation of a tax treaty applicable in Australia than to the United Nation convention on refugees, albeit that the relevant provisions of that treaty in Australian municipal law fell to be decided in the context of the Immigration Act 1958 (Cth) and Regulations. But it is now too late for any distinction to be drawn between the principles of interpretation applicable to double tax treaties on the one hand and those applicable to other international treaties on the other: Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 is authority for the Court adopting the same approach to the interpretation of double tax treaties as to other international treaties (see per Dawson J at 349 and per McHugh J at 356). Although the majority judgment of Mason CJ, Brennan and Gaudron JJ made no direct reference to the question of principles of interpretation, their Honours' endorsement of the appropriateness of considering the OECD model, convention and associated commentaries (at 344) carries with it, it might be thought, the same approach. The principles thus to be adopted are clearly set out in the judgment of McHugh J in Applicant A (at 396-7) where his Honour, after indicating the need for a "holistic approach" of treaties considering the context, object and purpose of the treaty, set out five propositions. His Honour said: "In my opinion, the approaches of Zekia J and Murphy J are correct and should be followed in this country. First, as Brownlie points out, [Brownlie, Principles of Public International Law (4th ed, 1990) at 628] Art 31 is headed in the singular: 'General rule of interpretation'. This use of the singular indicates that Art 31 is to be interpreted in a holistic manner. As the International Law Commission, whose draft articles on the law of treaties exactly mirrored Art 31 of the Vienna Convention, [Art 27] commented: 'The Commission, by heading the article 'General rule of interpretation' in the singular ... intended to indicate that the application of the means of interpretation in the article would be a single combined operation. All the various elements, as they were present in any given case, would be thrown into the crucible, and their interaction would give the legally relevant interpretation. ... [T]he Commission desired to emphasize that the process of interpretation is a unity and that the provisions of the article form a single, closely integrated rule.' Second, taking the text as the starting point is consistent with the basic principle of interpretation that courts should focus their attention on the 'four corners of the actual text' in discerning the meaning of that text. [Shearer, Starke's International Law (11th ed, 1994) at pp 435-436] The text of the treaty, being the starting point in any investigation as to the meaning of the text, necessarily has primacy in the interpretation process. As the International Law Commission has noted: ["Reports of the Commission to the General Assembly" [1966] 2 Yearbook of the International Law Commission 169 at 220] 'The article ... is based on the view that the text must be presumed to be the authentic expression of the intentions of the parties; and that, in consequence, the starting point of interpretation is the elucidation of the meaning of the text, not an investigation ab initio into the intentions of the parties.' [The International Law Commission also noted that the affording of primacy to textual interpretation in a generally holistic paradigm was, at least in 1966, the opinion of a majority of jurists: "Reports of the Commission to the General Assembly" [1966] 2 Yearbook of the International Law Commission 169 at 218.] The need to give the text primacy in interpretation is accentuated by the tendency of multilateral instruments to be the result of various compromises by various States of groups of States. If the subjective intentions of their representatives were the criterion, the interpretation of many international instruments might be impossible. Third, the mandatory requirement that courts look to the context, object and purpose of treaty provisions as well as the text is consistent with the general principle that international instruments should be interpreted in a more liberal manner than would be adopted if the court was required to construe exclusively domestic legislation. [Shipping Corporation of India Ltd v Gamlen Chemical Co A/Asia Pty Ltd (1980) 147 CLR 142 at 159, per Mason and Wilson JJ; Chan v Minister for Immigration and Ethnic Affairs (1989) 169 CLR 379 at 412-413, per Gaudron J; Buchanan & Co v Babco Ltd [1978] AC 141 at 152.] Fourth, international treaties often fail to exhibit the precision of domestic legislation. This is the sometimes necessary price paid for multinational political comity. [See Bennion, Statutory Interpretation (2nd ed, 1992) at p 461.] The lack of precision in treaties confirms the need to adopt interpretative principles, like those pronounced by Zekia J, which are founded on the view that treaties 'cannot be expected to be applied with taut logical precision.' [Buchanan [1978] AC 141 at 154.] Accordingly, in my opinion, Art 31 of the Vienna Convention requires the courts of this country when faced with a question of treaty interpretation to examine both the 'ordinary meaning' and the 'context ... object and purpose' of a treaty." Similar principles of construction are to be found in the judgment of Brennan CJ at 383 in agreeing with McHugh J, Dawson J at 388, Gummow J at 410 agreeing with McHugh J and at 419 per Kirby J. However, as the case demonstrates, agreement as to the principles of interpretation does not necessarily bring with it agreement as to the application of the treaty. We should add that, while we pay heed to the admonition of McHugh J to adopt a "liberal approach", cases such as Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 suggests that interpretation of municipal tax law should also not involve the application of narrow legalistic principles. None of the first three submissions need detain us long. It is not difficult to appreciate how Art 13 generally came to be in the form it is. First, in allocating taxing power over profits arising from the alienation of real property, the negotiating parties chose the place of situs as that having the greatest connection with the profit. To do so obviates any difficulty which might arise through the adoption of a concept of source of profit and the connection between the profit and the place of residence may be seen as of little significance. Second, Australia, as a land of plentiful natural resources and concerned with the exploitation of them, would clearly wish to ensure that the Article accommodated profits from the alienation of resource interests as well as ordinary profits from land sales. Hence the Article's concern that it be extended beyond the ordinary concept of real property. Third, it would seem clear enough that those concerned with negotiating the Agreement saw advantage in adopting some general words such as "alienation", rather than "disposition", to avoid difficulties which might have emerged had words such as "sale", "disposition" and the like, been used. The word "alienation" is apt to encompass sales, gifts or exchanges, without the need for undue technicality. Given the general private international law concern with the distinction between movable and immovable property, rather than between real and personal property, the latter being a distinction more relevant to the common law, one might have expected that Art 13 would be concerned with immovable property rather than real property: cf In re Hoyles [1911] 1 Ch 179 at 183 The use of the expression "real property" with its antithesis "personal property", raises immediately the query whether leasehold interests, treated as personalty for English law purposes, should be so treated for the purposes of the Agreement. To ensure that they were not, it was necessary to extend the term "real property" specifically to include leases. But the use of the word "lease" without more would be very narrow. It would raise then in English law the relevance of the test of exclusive possession. Mining leases, whether from the Crown or private leases, might not be "leases" in a technical sense. They may be said to grant a profit ŕ prendre with a right of entry. But they are clearly direct interests in or over land to be assimilated to real property. They and analogous rights are to be comprehended by the provisions of Art 13(a)(2)(i). But the kinds of direct interests to which that sub-Art is concerned, are interests in land analogous to leasehold interests. The paragraph does not, on any view of the matter, treat as interests in land rights to wind up companies and seize control of assets. Rights of exploitation, for example authorities to prospect, might arguably not fall within the category of direct interests in or over land within Art 13(2)(a). Thus, the explicit naming of such rights in Art 13(2)(a)(ii) suffices to explain the terms of that sub-Art. One comes then to Art 13(2)(a)(iii). Shares in a company are personalty. Since the place of incorporation of a company or the place of situs of a share may be the subject of choice (cf R v Williams [1942] AC 541, Brassard v Smith [1925] AC 371) the place of incorporation or the register upon which shares were registered would not form a particularly close connection with shares to ground the jurisdiction to tax share profits. Thus, generally, the double tax treaty leaves profits from the alienation of shares to be dealt with in accordance with Art 7 in the context of an enterprise. Those involved in framing the present Agreement chose to assimilate shares or comparable interests of the kind described in Art 13(2)(iii) to real property, in limited circumstances. Such assimilation could only arise by the specific provisions of the Agreement. Likewise, these specific provisions set the extent to which the assimilation of shares to realty may operate. When the Agreement uses the words "comparable interests in a company" in Art 13(2), it seeks to avoid the technicality inherent in the word "shares". The Article will operate whether the property alienated was stock or warrants, provided that it is possible to say of the interest alienated that it is comparable to a share. But it is a far cry from that to say that rights to underlying assets of a subsidiary are interests in the nature of shares. That is not what the words "comparable interests in a company" are concerned with. Art 13(2)(a)(iii) seeks to assimilate, within the category of real estate, shares, stock or other comparable rights, provided that the assets of the company consist wholly or principally of one of the two classes of assets referred to in Art 13(2)(1)(a)(i) or (ii), that is to say, direct interests in land (Art 13(2)(a)(i)) or rights to exploit or to explore for natural resources (Art 13(2)(a)(ii)). The only room for debate in our view is whether Art 13(2)(a)(iii) should be construed so that the words "the assets of which" extend to assets of various companies down the line of a chain of companies, or should be restricted so that the words bear their literal meaning. At this point one may have regard in considering Art 13(2)(a)(iii), both to the policy of double taxation treaties generally and to the specific policy revealed in Art 13. There will be cases, and Thiel was one, where resort to the purpose of the double tax treaty to be found in the words "for the avoidance of double taxation with respect to taxes on income" may throw light on the interpretation to be adopted with respect to a particular Article. But it is difficult to see that that is the case here. If Art 13 applies, then profit from the alienation is authorised to be taxed in the place where the realty referred to in the Article is. If the alienation falls outside Art 13, then any profit falls to be taxed under Art 4 , in this case in the Netherlands. It happens to be the case, because of unilateral relief granted by the law of the Netherlands, that no tax will be payable in the Netherlands. That of itself can not affect the interpretation of the Agreement. If the relevant mining property had happened to be in the Netherlands so that the issue was between taxation there on the one hand and taxation in Australia on the other, the situation would have been one where tax would clearly have been payable on the alienation of the shares in Australia without the benefit of any exemption. Yet the Agreement must operate uniformly, whether the realty is in the Netherlands or in Australia. Regard to the policy behind the Agreement is, in our view, likewise of little assistance. On the one hand it may be said that the words of Art 13 should be given an interpretation so as to extend to any number of layers of companies irrespective of the corporate structure, if it can be said of the group that its assets consist of the kinds of assets referred to in Art 13(2)(a)(i) or (ii), they should fall to be taxed in the place of situs of the relevant real estate interest. But it is equally possible as a matter of policy that the legislature chose to limit the assimilation in Art 13 of shares to realty only to one tier of companies so as to avoid the kinds of melancholy complication which arise where multitudinous tiers are involved and with potentially varying percentage ownership interests. An example of the complexity which a comprehensive provision assimilating land rich companies to land may give rise to is to be found in the provisions of the Stamp Duties Act 1920 (NSW) Div 30 and comparable provisions in other States. It is not difficult to conceive that the parties to the Agreement intentionally eschewed such complexity. The degree of complexity required would, no doubt, depend upon whether the policy was to deal only with wholly owned subsidiaries on the one hand or whether it would be intended to extend to lesser percentage ownership. While it will be recalled that in the 1994 year of income Lamesa held virtually 100% of ARL, that was not the situation in 1996, by which time Lamesa held only 67.35%. But what if ARL had, instead of owning 100% of ARM, owned 75%. Would the assimilation be intended to operate as a matter of policy? What if the percentage ownership were 51%? The same questions can be asked at other levels in the chain of ownership to which the facts of the present case relate. It seems to us quite consistent with rational policy that the Agreement was intended to assimilate as realty only one tier of companies rather than numerous tiers. Separate legal personalty is a doctrine running not only through the common law but the civil law as well. No suggestion is made to the contrary. That is consistent with the plain and quite unambiguous language which the Agreement has employed. When legislation speaks of the assets of one company it invariably does not intend to include within the meaning of that expression assets belonging to another company, whether or not held in the same ownership group. In Anglo-Australian law the proposition found early illustration in Gramophone and Typewriter Ltd v Stanley [1908] 2 KB 89 where Cozens-Hardy MR said (at 95-96): "The fact that an individual by himself or his nominees holds practically all the shares in a company may give him the control of the company in the sense that it may enable him by exercising his voting powers to turn out the directors and to enforce his own views as to policy, but does not in any way diminish the rights or powers of the directors, or make the property or assets of the company his, as distinct from the corporation's. Nor does it make any difference if he acquires not practically the whole, but absolutely the whole, of the shares. The business of the company does not thereby become his business." (Emphasis added) In these circumstances the language of the Agreement should be given effect. This is not to adopt a narrow or "illiberal" view of the Agreement. It is merely to interpret the language of the Agreement in the light of the broad purposes of juridical allocation which the Agreement embodies. We would dismiss the appeal with costs. I certify that this and the preceding nineteen (19) pages are a true copy of the Reasons for Judgment herein of the Court: Associate: Dated: 20 August 1997

Counsel for the Applicant: D H Bloom QC, G T Pagone QC and A W Payne

Solicitor for the Applicant: Australian Government Solicitor

Counsel for the Respondent: I V Gzell QC, A H Slater QC and R Hamilton

Solicitor for the Respondent: Freehill Hollingdale & Page