Blank v Commissioner of Taxation

Application for Leave to Re-Open 6 As noted in [4] above, the applicant seeks leave to re-open his case to raise the application of s 23AG of the 1936 Act. 7 More precisely, the applicant seeks leave to contend as follows (framed in terms of an amendment to the applicant's amended appeal statement dated 28 March 2013): 53A. In the alternative to paragraph 53, if the applicant derived ordinary income from services when the payments of principal were received by him or dealt with by [GI] at his direction, then, as explained in paragraphs 53B-53D below, pursuant to s 23AG(1) of the [1936 Act], 66.88% of each payment of principal was exempt income. 53B. The conditions for the exemption in s 23AG(1) apply because: (a) The applicant is a natural person, and at the time of derivation of the income from services was a resident of Australia. (b) Each payment of principal was income consisting of "earnings, salary, wages, commission, bonuses or allowances" and was thus "foreign earnings" within the meaning of s 23AG(7) of the [1936 Act]. (c) Each payment of principal was derived from a combination of the applicant's service as an employee for a continuous period of not less than 91 days in each of South Africa, Switzerland, Hong Kong and Australia. (d) In consequence of (a)-(c), that portion of each payment of principal derived from the applicant's service in South Africa, Switzerland and Hong Kong is exempt from tax pursuant to s 23AG(1). 53C. The applicant contends that the portion of each payment of principal derived otherwise than from the applicant's service in Australia should be calculated on the basis that of the applicant's entire period of service of 5,511 days, the applicant was engaged in foreign service for 3,686 days. Applied proportionately to each payment, this would mean that (to two decimal places) 66.88% of each payment of principal was exempt income. 53D. The exclusion in s 23AG(2) from the exemption in s 23AG(1) does not apply because each payment of principal was "derived in" Switzerland and was subject to income tax in Switzerland. 8 If leave to re-open is granted and the applicant is successful in his contentions, the effect will be that approximately two-thirds of each payment of principal received by the applicant in the 2007-2010 income years was exempt income.

Relevant Principles 9 In De L v Director-General, New South Wales Department of Community Services [No 2] (1997) 190 CLR 207 at 215, Toohey, Gaudron, McHugh, Gummow and Kirby JJ said: The power of this Court to reopen its judgments or orders is not in doubt. The Court may do so if it is convinced that, in its earlier consideration of the point, it has proceeded "on a misapprehension as to the facts or the law", where "there is some matter calling for review" or where "the interests of justice so require". It has been said repeatedly that a heavy burden is cast upon the applicant for reopening to show that such an exceptional course is required "without fault on his part", ie without the attribution of neglect or default to the party seeking reopening. By such expressions of the power to reopen final orders, courts seek to recognise competing objectives of the law. On the one hand, there is the principle of finality of litigation which reinforces the respect that should be shown to orders, final on their face, addressed to the world at large and upon which conduct may be ordered reliant upon their binding authority. On the other hand, courts recognise that accidents and oversights can sometimes occur which, unrepaired, will occasion an injustice. In the case of a final court of appeal, such as this Court, that injustice may be irremediable, unless the Court itself, acting promptly, is persuaded to reopen its orders so as to afford relief in the exceptional circumstances of the case. (Emphasis added.) 10 In granting the application to re-open, the High Court identified a number of factors relevant to the exercise of the discretion: An important consideration was that the orders, although publically announced, had not been perfected by formal entry into the Court's records: at 216.6. That the oversight of the relevant statutory provision was by accident, in a case involving several points of difficulty: at 216.9. The application to vacate the orders was made promptly: at 217.3. No relevant disadvantage could be shown by the party opposing leave save for costs: at 217.3. The point raised was of importance for the meaning and application of a federal law and potentially one of general importance: at 217.4. 11 Though De L v Director-General concerned the High Court, the same principles also apply in this Court. The relevant principles were summarised by Kenny J in Inspector-General in Bankruptcy v Bradshaw [2006] FCA 22 at [24]: The authorities indicate that, broadly speaking, there are four recognised classes of case in which a court may grant leave to re-open, although these classes overlap and are not exhaustive. These four classes are (1) fresh evidence … (2) inadvertent error … (3) mistaken apprehension of the facts … and (4) mistaken apprehension of the law … In every case the overriding principle to be applied is whether the interests of justice are better served by allowing or rejecting the application for leave to re-open. (Authorities omitted, emphasis added.) 12 It is generally appropriate in the interests of justice to allow a party to re-open his or her case if it is clear that the court has proceeded on a misapprehension as to the facts or the law where (a) the misapprehension was the result of accident or oversight not the fault of the party seeking to re-open, and (b) the re-opening does not involve the re-agitation of arguments already put and dealt with: Wenkart v Pantzer (No 3) [2013] FCAFC 162 at [17]-[22]. 13 Examples where this Court permitted re-opening after reasons for judgment but before orders were made or entered are The Silver Fox Company Pty Ltd v Lenard's Pty Ltd (No 2) [2004] FCA 1310 at [22] (Mansfield J) and ICI Chemicals & Polymers Pty Ltd v Lubrizol Corp Inc [1999] FCA 662 at [16] (Emmett J).

Application of Relevant Principles 14 But for one relevant matter or consideration, referred to at [23] below, I would have no hesitation in granting the applicant leave to re-open his case to make the contentions in [7] above. 15 First, notwithstanding the Commissioner's submissions to the contrary, having reviewed the way in which both parties conducted this case from the time that the Commissioner issued his Position Paper, dated 14 March 2011, following an audit of the applicant's tax affairs, through to and including the applicant's notices of objection, the Commissioner's reasons for his objection decisions, both parties' appeal and amended appeal statements, and written and oral submissions on the hearing, I am satisfied that the applicant's failure, through his counsel, to raise the application of s 23AG had nothing to do with neglect or default on his part, but was due to accidental oversight. Without attributing responsibility to either party, the fact that the Commissioner sought to defend the assessments (in whole or in part) on the back of a multi-headed "creature" that grew additional heads with the effluxion of time the closer the hearing drew nigh, undoubtedly contributed to the oversight; because it was only under one of the original heads of the "creature" that the s 23AG issue could be raised; and only then if it was the basis of upholding the objection decisions. 16 Secondly, while the issue is not a completely new issue - the Commissioner in his Position Paper, dated 14 March 2011, took the position that s 23AG applied to exempt a portion (8.81%) of the Amount from tax - the applicant is not seeking to re-argue any matter decided by the Court. 17 Thirdly, the only issues which the applicant perceives could arise concerning s 23AG are legal questions of construction, although the Commissioner disputes this. 18 Fourthly, given the significant amount of tax at issue, and the Commissioner's prior position concerning s 23AG (in which he accepted that 8.81% of each payment would be exempt), it would not be in the interests of justice for the applicant to be brought to tax on amounts merely due to oversight and not involving fault on his part. 19 Fifthly, the present application is made in a case where orders have not yet been pronounced, a point which the cases recognise as a significant factor in favour of the grant of the application: see De L v Director-General at 216 and ICI Chemicals at [16]. 20 Sixthly, the applicant has brought the application promptly, a factor which the cases recognise as relevant: see De L v Director-General at 217 and ICI Chemicals at [16]. 21 Seventhly, no relevant prejudice will be occasioned to the Commissioner if the Court permits further argument other than costs, which can be assuaged by appropriate costs orders: see De L v Director-General at 217; although the Commissioner disputes this. The Commissioner, unlike other litigants, has no personal interest in the outcome of the litigation. He serves the public interest by seeking to properly administer the tax law (cf., s 8 of the 1936 Act). He suffers no prejudice from the mere fact that the grant of leave may result in the taxpayer being able to claim a benefit to which he is entitled (cf., Brown v Federal Commissioner of Taxation (1999) 99 ATC 4516 at [51] per Hill J (no prejudice to Commissioner from extension of time to object unless the effluxion of time adversely affects the Commissioner's ability to defend the assessment) (affirmed on appeal in Federal Commissioner of Taxation v Brown (1999) 99 ATC 4852); Trustees of Post Office Staff Superannuation Scheme v Commissioner of Taxation (1999) 94 FCR 268 at [28] per Hill J (quantum of deduction irrelevant to extension of time application)). In contrast to ordinary inter partes litigation, the interests of justice are best served by allowing, in an appropriate case, a taxpayer to re-open his case to correct an inadvertent omission which, if refused, would result in the incorrect application of the tax law to the facts of the case. Indeed, similar considerations apply where it is the Commissioner rather than the taxpayer who wishes to amend his case due to inadvertent error. See, for example, Federal Commissioner of Taxation v American Express Wholesale Currency Services Pty Ltd (2010) 187 FCR 398 at [128], [186]-[197]. 22 Eighthly, the applicant, on review of the transcript, acknowledged that the Commissioner's counsel drew the Court's attention to s 23AG in closing oral submissions on the final day of the hearing. In response to a question from me, the Commissioner's counsel said (T 210, lines 43-46): The first is that although it seems to have been a ground of objection that part of the amount would have been not assessable by reason of [s 23AG] that argument is not put against us here on the basis that it was, in fact, income referrable to an earlier period of employment. However, that the issue was adverted to orally by the Commissioner in this way is not a reason for the Court to decline the present application for leave to re-open: see De L v Director­General at 216 and ICI Chemicals at [9]. I have no doubt that, had the applicant's counsel recognised the significance of the comment and sought to raise s 23AG in reply, it would have necessitated the same application to re-open which is now brought and the same considerations would have been applicable then as now. 23 The one matter or consideration which, in my view, militates against a grant of leave to re-open is that I do not think the applicant has a strong argument that s 23AG applies to exempt a portion of the payments of principal received, or constructively received, by him in the years in dispute. The applicant conceded that the strength of this argument is an important factor in answering whether the grant of leave to re-open is in the interests of justice but, in my view, his argument is weak, and certainly does not assist his present application. It is to that matter that I now turn.

Section 23AG of the 1936 Act: Past and Present 24 Section 23AG was inserted into the 1936 Act by Act No 51 of 1986 (Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth)) to replace the unilateral exemption system previously afforded by para 23(q) of the 1936 Act to certain kinds of income (including salary and wages). Its insertion was part of the introduction of a comprehensive foreign tax credit system of providing relief to Australian residents from double taxation of income. 25 Section 23AG relevantly contains two parts: an operative exemption from tax created by s 23AG(1), and an exception to the exemption in s 23AG(2) (originally s 23AG(3)). 26 As at 1 July 2006, and for each of the years in dispute, s 23AG relevantly provided: (1) Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax. … (2) An amount of foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the following: (a) a law of the foreign country giving effect to a double tax agreement; (b) a double tax agreement; (c) provisions of a law of the foreign country under which income covered by any of the following categories is generally exempt from income tax: (i) income derived in the capacity of an employee; (ii) income from personal services; (iii) similar income; (d) the law of the foreign country does not provide for the imposition of income tax on one or more of the categories of income mentioned in paragraph (c); (e) a law of the foreign country corresponding to the International Organisations (Privileges and Immunities) Act 1963 or to the regulations under that Act; (f) an international agreement to which Australia is a party and that deals with: (i) diplomatic or consular privileges and immunities; or (ii) privileges and immunities in relation to persons connected with international organisations; (g) a law of the foreign country giving effect to an agreement covered by paragraph (f). (7) In this section: … foreign earnings means income consisting of earnings, salary, wages, commission, bonuses or allowances … foreign service means service in a foreign country as the holder of an office or in the capacity of an employee. income tax, in relation to a foreign country: (a) in all cases - does not include a municipal income tax; and (b) in the case of a federal foreign country - does not include a State income tax. 27 When it was originally inserted in the 1936 Act, s 23AG(1) allowed an individual a complete exemption from Australian tax for foreign earnings where the person had been engaged in foreign service for a continuous period of not less than 365 days. Section 23AG(2) originally allowed a proportionate exemption in cases where a person had been engaged in foreign service for a continuous period of less than 365 days but not less than 91 days. In such cases, exemption applied to a proportion of the foreign earnings equal to the proportion which the number of days of foreign service bore to 365, that is - No of days of foreign service x foreign earnings 365 28 Section 23AG was amended by Act No 100 of 1991 (Taxation Laws Amendment Act No 2) 1991 (Cth)) to reduce the qualifying period for full exemption in s 23AG(1) from 365 to 91 days, and to remove the partial exemption in s 23AG(2) as it was no longer needed. 29 Substituting the definitions of "foreign service" and "foreign earnings" in s 23AG(7) for these terms in s 23AG(1) where they first appear, s 23AG(1) read (prior to its amendment in 2009): Where a resident, being a natural person, has been engaged in [service in a foreign country as the holder of an office or in the capacity of an employee] for a continuous period of not less than 91 days, any [earnings, salary, wages, commission, bonuses or allowances] derived by the person from that foreign service is exempt from tax.

Consideration 30 Notwithstanding the Commissioner's arguments to the contrary, I am of the view that the Amount qualifies as "foreign earnings", if only on the basis that it represents deferred compensation of the applicant as a reward for his services as an employee (see R [102]) and therefore constitutes "earnings", being one of the classes of income qualifying as "foreign earnings". 31 However, the Amount is not exempt from tax under s 23AG(1) because the Amount is not derived by the applicant from foreign service; the applicant, by his own submissions, seems to accept as much; indeed, it seems to be common ground that the Amount is derived by the applicant from both foreign service and service (in Australia) that is not foreign service, and that is not sufficient to qualify the Amount for exemption from tax under s 23AG(1). 32 The applicant's answer to that is that the Amount can be apportioned as between foreign service and service that is not foreign service and the only issue is the basis upon which that apportionment should be carried out. In the applicant's words: Apportionment based on the period of foreign service is the natural method of apportionment in a case such as the present where there is an undissected lump sum derived from a combination of an employee's service both in and out of Australia. 33 The applicant further observed that apportionment based on the number of days in foreign service compared to the number of days not in foreign service was previously accepted by the Commissioner in Lopez v Commissioner of Taxation (2005) 143 FCR 574 at [75]. The Full Court did not express any view on the Commissioner's acceptance of an apportionment principle where the earnings in question were for foreign service and for service that is not foreign service. The conclusion it reached that no error of law had infected the reasoning of the primary judge made it unnecessary for the Court to do so. At [90] the Court said: The conclusion we have reached makes it unnecessary to consider the arguments addressed to apportionment of the Consultancy and Management Fee in the event that it were held to have been received by the appellant in the capacity of an employee of [the Japanese corporation]. 34 In my view, there are a number of difficulties with the applicant's answer. 35 First, as noted above, the operative exemption from tax is created by s 23AG(1); it requires the foreign earnings to be derived from foreign service; this means, in my view, exclusively from foreign service and not from service which is in part foreign service and in part service which is not foreign service. 36 Secondly, the only way in which some portion of the Amount can qualify for exemption is if that portion can be said to be derived exclusively from foreign service. It is not possible to identify any portion of the Amount as being derived exclusively from foreign service because the Amount was not calculated by reference to days of service. The Amount was "calculated on the basis of the results of GI (IPP). Solely for the purpose of calculating the amount of IPP, AG has issued to GI GS pursuant to Section [sic] 657CO which shall serve as PPU for the purpose of calculating the Employee's IPP as provided in A.2. below": Clause A.1.1. of the instrument pursuant to which the IPPA 2005 was constituted - see R [36]. The Amount is a "single, undissected amount" to use the words of the High Court in McLaurin v Federal Commissioner of Taxation (1960-1961) 104 CLR 381 at 391, and its apportionment is not appropriate: "In such a case the amount must be considered as a whole: Du Cros v Ryall (1935) 19 TC 444 at 453". 37 Thirdly, s 23AG(1) does not contain the words "to the extent to which" the foreign earnings are derived from foreign service, such as to accommodate a dissection or apportionment of the kind contemplated by s 51(1) of the 1936 Act, according to some reasonable method: see Ronpibon Tin No Liability v Federal Commissioner of Taxation (1949) 78 CLR 47 at 55. 38 In Federal Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447, Gibbs CJ obviously thought the absence of these words was significant, in relation to the operation of s 44(1)(a) of the 1936 Act, when his Honour observed at 458-459: There were two possible grounds for holding that the distributions in Federal Commissioner of Taxation v. Blakely [(1951) 82 CLR 388] and Federal Commissioner of Taxation v. Uther [(1965) 112 CLR 630] were not assessable income. The first, which appears to have been accepted by Fullagar J. in the earlier case, is that the receipt in the hands of the shareholder was capital in nature, representing as it did, the value of the shareholder's interest in the company. … The second possible ground was that the distribution was not made out of profits … [W]hat appears to be implicit in the judgment of Taylor J. in Federal Commissioner of Taxation v. Uther is the suggestion that to come within s. 44(l)(a) the distribution must have been made wholly out of profits; it is not enough that there is a distribution of a mass of assets which contains profits. This view may be supported by the fact that the section does not refer to "dividends to the extent to which they were paid to him by the company out of profits", since, in the light of the construction given to s. 51 of the Act, the inclusion of the phrase "to the extent to which" would no doubt have allowed a dissection or apportionment to be made of the distribution: cf. Ronpibon Tin N.L. and Tongkah Compound N.L. v. Federal Commissioner of Taxation [(1949) 78 CLR 47 at 55]. 39 In Slater Holdings, the relevant question was whether the distribution was made "out of profits"; in the present case, it is whether the foreign earnings are derived "from foreign service". Very different conclusions might be reached if the relevant words were "could reasonably be taken to be attributable to profits derived by the company" or "foreign earnings derived by a person that are reasonably attributable to that foreign service": cf., Federal Commissioner of Taxation v Sun Alliance Investments Pty Ltd (In liq) (2005) 225 CLR 488 at [79]-[83]. 40 Fourthly, the fact that the Parliament provided for a partial exemption in s 23AG(2) when s 23AG was first inserted into the 1936 Act where the continuous period of foreign service was less than 365 but not less than 91 days, calculated by reference to the proportion of the number of days service as a fraction of 365 multiplied by the foreign earnings, may suggest that if an apportionment of the kind now pressed by the applicant was intended, it would have been provided for in the statute. Tellingly, it was not. 41 Unfair as it may seem, I am of the view that apportionment of the Amount into two portions, one being exclusively for foreign service and the other being exclusively for service in Australia, so as to enable the former to trigger the exemption from tax afforded by s 23AG(1), is neither appropriate nor possible. It follows, in my view, that the applicant's contentions in [7] above cannot succeed and, on that ground alone, leave to re-open must be refused.

Time of Derivation: 2007 income year 42 The further submissions filed by the parties in relation to the applicant's application to re-open and the s 23AG issue have identified a further issue arising out of what I said at R [105], namely: In my view, the income represented by the money constituting the Amount was derived by the applicant on a receipts basis as and when it was paid to him, or applied on his behalf, by GI. 43 It is common ground that no part of the Amount was paid to the applicant until 1 February 2008 (see the table at R [47]), but the Commissioner claims that there was a constructive derivation of the first two instalments of the Amount in the 2007 income year on the basis that they were withheld from payment when they fell due in the 2007 income year to cover (in part) the applicant's Swiss tax liability. In the words of the Commissioner's counsel, the fact that the amounts withheld were "not then paid to the Swiss tax authorities until the 2008 year does not affect the conclusion that [they were] derived by the applicant in the year in which [they were] withheld from him". 44 The applicant does not dispute that he was entitled to the payments in the 2007 income year. Nor does he dispute that the payments due in the 2007 income year were withheld from payment by GI. But the applicant submitted the fact that a debtor withholds an amount otherwise due does not mean there has been a receipt of the amount by the creditor or an application or dealing with the amount on behalf of the taxpayer: s 6-5(4) Income Tax Assessment Act 1997 (Cth). There must be an agreement, direction or other conduct by the creditor. The agreement to vary the payment terms was not entered into until 24 January 2008: Court Book vol 4 tab 56 at 1592. In those circumstances, there was a constructive receipt (and derivation) in January 2008 of the payments the applicant was entitled to receive in the 2007 income year but which were in fact withheld for payment to the Swiss Federal Tax Administration ("FTA"), and not before. 45 I agree with applicant's position on this issue. There was no derivation of income, constituted by the first two instalments of the Amount that fell due in the 2007 income year, in that year by reason that they were withheld from payment to the applicant. The applicant derived those amounts when, with his agreement, they were paid to the FTA by GI on his behalf.

Orders 46 I have made orders to give effect to these reasons. 47 I will not make orders to give effect to my reasons for judgment published on 21 February 2014 until I have had a further opportunity to hear the parties at the time of publishing these reasons. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edmonds.