The Convention
113 The taxpayer claimed an entitlement to a FITO pursuant to s 770-10. But he also relied, in the alternative, upon Art 22(2) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed on 6 August 1982, [1983] ATS 16 (entered into force on 31 October 1983) as amended (the "Treaty"). The Treaty has the force of domestic law by reason of s 5 of the International Tax Agreements Act 1953 (Cth) (the "Agreements Act"). As such, it may possibly be invoked in certain cases by a taxpayer as, what is sometimes called, a "shield" when tax is imposed inconsistently with Australia's obligations under the Treaty. The "shield" arises from the fact that the Treaty allocates taxing powers between nations and then from the enactment of that allocation into domestic law. As the Full Court of this Court observed in Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597 at 600-601 in relation to the Agreement between Australia and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, and Protocol, signed on 17 March 1976, [1976] ATS 24 (entered into force on 27 September 1976):
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 Arts 7 and 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 per cent 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.
114 Article 22 of the Treaty is headed "Relief from double taxation". It is not concerned with the allocation of taxing power. Rather, at least in the case of Art 22(2), it operates on the assumption that each sovereign nation has validly imposed tax on the same amount, thus giving rise to the need for relief. Article 22(2) provides as follows:
Subject to paragraph (4), United States tax paid under the law of the United States and in accordance with this Convention, other than United States tax imposed in accordance with paragraph (3) of Article 1 (Personal Scope) solely by reason of citizenship or by reason of an election by an individual under United States domestic law to be taxed as a resident of the United States, in respect of income derived from sources in the United States by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. The credit shall not exceed the amount of Australian tax payable on the income or any class thereof or on income from sources outside Australia. Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time.
Article 22(1) imposes on the United States a reciprocal obligation to allow in respect of a taxpayer in the United States, a credit for income tax paid to Australia. Article 22(3) deals with rebates on dividends paid by a United States corporation and is not in issue. Article 22(4) is also not in issue and need not be reproduced.
115 I make the following observations about the operation of Art 22(2).
116 First, the Article contains three elements. The first is an expression of a general principle about relief from double taxation (the "First General Principle"). The language used to express that principle is generic in nature, consistently with the primary function of a double tax treaty which is to allocate taxing powers and responsibilities between two sovereign powers. For that purpose, the language deployed invokes commonly held concepts to enable the allocation of taxing power to work in the context of what might be very different domestic laws relating to the taxation of income. The second is another expression of general principle, namely that there is to be a limitation on the credit to be allowed: it must not exceed the amount of Australian tax payable on the income "or any class thereof or on income from sources outside Australia" (the "Second General Principle"). The third is not an expression of general principle. It allocates to Australia a measure of freedom to determine domestically what sort of rules it may enact to allow, or not allow, foreign tax credits. That freedom or capacity is limited to the enactment of rules which are subject to, or consistent with, the First and Second General Principles.
117 That Art 22(2) expresses principles in only a generalised way is consistent with the language of Art 22(1). Article 22(1)(a) relevantly states:
(a) the United States shall allow to a resident or citizen of the United States as a credit against United States tax the appropriate amount of income tax paid to Australia; and
…
Such appropriate amount shall be based upon the amount of income tax paid to Australia …
118 Secondly, what is the content of the First General Principle? In my view, the answer to that question will be dispositive of this part of the appeal. The taxpayer submitted that the word "income" as it first appears is to a gain made, namely here the gain made from the sale of the assets in the United States (it was not in dispute that the United States had the right to tax that gain by reason of Art 13 of the Treaty which deals with "income or gains" from a disposition of "real property situated" in that country). On this basis, it was said, the word "income" when used a second time in the phrase "Australian tax payable in respect of the income" needed to be read as Australian tax payable in respect of that same gain made in the United States. That is because it refers to "the income". The "general principle" thus said to be expressed by Art 22(2) was that Australia must allow a credit for all of the US tax paid on a gain when calculating the Australian tax payable on that same underlying transaction. Focusing on the subject matter of the underlying transaction, it was contended, enabled the Treaty to apply in circumstances where Australia and the United States taxed the same gain very differently. Inferentially, and for that purpose, the "gain" is a singular indivisible amount of income. Thus, here, because the taxpayer paid US tax of US$3,535,554 on the sale of the Nepa Investment it was submitted that he was entitled to a credit of this amount for Australian tax payable in respect of that sale.
119 I respectfully disagree with that statement of the First General Principle. The contention that the word "income" refers to an underlying gain is perhaps too imprecise. Moreover, there is no reason to read the word "income" as referring to one indivisible gain which is the subject matter against which competing sovereign states seek to impose tax. Nor is the reference to "income" a reference to "assessable income", as contended for by the Commissioner. Rather, "income" should be read as a concept which is independent of, but not divorced from, the domestic income tax regimes of each sovereign power (respectively income tax imposed by the Internal Revenue Code (US) and income tax imposed under the federal law of Australia: Art 2(1)). In that respect, the very subject matter and purpose of the Treaty concerns taxes on "income". Whilst that term is not defined, we can observe generic species of income addressed throughout the Treaty. It deals with business profits (Art 7); "income" from real property (Art 6); "profits" from shipping and air transport (Art 8); dividends (Art 10); interest (Art 11); royalties (Art 12); "income or gains" from the disposal of real property (Art 13); income from independent personal services (Art 14); income from dependent personal services (Art 15); income derived by entertainers (Art 17); pensions, annuities, alimony and child support (Art 18); wages, salaries and similar remuneration paid to an employee of a state (Art 19); and payments made to a student (Art 20). Each of these is an item of income for the purposes of the Treaty. We know this because this is what the Treaty says they are. Article 21(1) provides:
Items of income of a resident of one of the Contracting States, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.
(Emphasis added.)
The word "income", where it appears in Art 22(2), should thus be read as a reference to those items of income covered by the Treaty, including those addressed in Art 21. Context does not otherwise permit giving the word "income" its meaning under domestic Australian law: cf Art 3(2).
120 Thirdly, the language of Art 22(2), is not confined to a simple comparison of the tax paid in different countries on the same underlying transaction. In each case, the word "income" must bear a nexus, expressed by the words "in respect of", with US "tax paid" and "Australian tax payable". That directs attention to how each taxing regime taxes that income. The mistake which the taxpayer makes here is to commence its consideration of Art 22(2) with the identification of all of the US tax paid on the underlying gain. But because the purpose of Art 22(2) is the allowance by Australia of a credit against tax payable, in my view, the starting point must be the identification of what income Australia taxes. Because of the operation of the CGT 50% discount for individuals, Australia does not tax all of the gain made here; it taxes 50% of it (leaving aside the effect of any offsetting capital losses). That is the income, for Art 22(2) purposes, in respect of which Australian tax is payable. The question which then must be answered is what was the US "tax paid … in respect of" that income. In my view, only half of the US tax paid can be said to be in respect of the income taxed in Australia. In other words, the applicable general principle expressed in the first element of Art 22(2) is that US tax paid on income the subject of Australian tax shall be allowable as a credit against the Australian tax paid on that income.
121 Fourthly, expressing the principle in this way is a precise expression of the relief which should be given where a taxpayer has been subject to double tax. It ensures that Mr Burton does not pay double tax on the same amount of income he has earned. In contrast, if the taxpayer's interpretation were to prevail, the taxpayer would get more protection or relief than he truly needs. Here, it would permit Mr Burton to claim as a credit against Australian tax payable, US tax paid on income (50% of the net proceeds) never brought to tax in Australia. I do not think that this was the intended outcome. In my view, "double taxation" takes place in the context of Art 22(2) when the same amount is taxed by different countries twice. However, it is not double taxation if one jurisdiction seeks to tax more aspects of a singular transaction than the other; it is only double taxation when they both seek to tax the same thing - that is, the same business profits, the same "income" from property, the same "profits" from shipping and air transport, the same dividend, the same interest, the same royalty, the same "income or gains" from the disposal of real property, the same income from independent personal services, and so on. As Viscount Dilhorne observed of the equivalent article in the then Double Taxation Relief (Taxes on Income) (New Zealand) Order, 1947 (S.R. & O. 1947, No. 1776), in Duckering (Inspector of Taxes) v Gollan [1965] 2 All ER 115 at 116:
The object of [the article] is clearly to secure that credit shall be given for New Zealand income tax paid in a particular year against United Kingdom tax payable in the same year in respect of the same income.
(Emphasis added.)
122 Fifthly, the parties were in agreement that in construing Art 22(2) regard should be had to the Vienna Convention on the Law of Treaties, opened for signature on 23 May 1969, [1974] ATS 2 (entered into force on 27 January 1980) (the "Vienna Convention") and in particular Art 31 of that Convention. In McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134, the Full Court of this Court summarised the applicable principles arising from that Convention at 143 [38] as follows:
The application of the Convention has been discussed by McHugh J in Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225 and in Thiel v Commissioner of Taxation (1990) 171 CLR 338, the latter case being concerned with the interpretation of the double taxation agreement between Australia and Switzerland. The leading authority in this Court on interpretation of double taxation agreements is Lamesa. It is unnecessary here, to set out again what is there said. The following principles can be said to be applicable:
• Regard should be had to the "four corners of the actual text". The text must be given primacy in the interpretation process. The ordinary meaning of the words used are presumed to be "the authentic representation of the parties' intentions": Applicant A at 252-253.
• The courts must, however, in addition to having regard to the text, have regard as well to the context, object and purpose of the treaty provisions. The approach to interpretation involves a holistic approach.
• International agreements should be interpreted "liberally".
• Treaties often fail to demonstrate the precision of domestic legislation and should thus not be applied with "taut logical precision".
In my view, the interpretation I have reached is consistent with the foregoing principles of construction. It considers the meaning of the words of Art 22(2) in the context of the entire Treaty.
123 Sixthly, for the reasons that follow, there is no disconformity between Div 770 and the general principles established by Art 22(2). Division 770 is authorised by that Article.
124 Seventhly, it was a fundamental plank of the taxpayer's case, both in reliance upon Art 22(2) and s 770-10, that the Commissioner was wrong to contend that double taxation only arises where foreign tax and Australian tax are imposed on "exactly the same amount". It was said that double taxation arises where foreign tax and Australian tax are imposed on the same "subject matter"; namely, here, the same underlying gain. With great respect, I do not agree with this submission. The taxpayer's inspiration for this expression of the test is found in some words contained in the introduction to the OECD's Model Tax Convention on Income and Capital (and which language first appeared in 1995). The words were as follows:
International juridical double taxation can be generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods.
Consideration of the OECD Model Convention and the commentary to it is well established, and I will assume that this includes the introduction to the Model itself: Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338. However, putting aside the fact that these words were written some 12 years after the Treaty here was signed, it appeared to be accepted that the Treaty was based not only on the OECD Model. It was also based on the United States Model Income Tax Convention for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income. In that respect, it was not established that the two Models were materially and relevantly the same. In any event, and for my part, I was not assisted by the generalised words relied upon. They do not specifically address the issue before the Court. In my view, care should be taken before relying upon highly generalised statements in a bi-lateral document, the wording of which is likely to have been the product of competing sovereign interests and then the reaching of a compromise. Such statements are usually of very limited use: Stevens v Kabushiki Kaisha Sony Computer Entertainment (2005) 224 CLR 193 at 231 [126] per McHugh J. The safer course is to construe the words of the Treaty itself in their context and in accordance with the Vienna Convention.
125 Eighthly, I do not think that my approach lacks that "degree of pragmatism" which Lord Reed recently relied upon for the construction of the equivalent article in the United Kingdom-United States double tax treaty: Anson v Commissioners for Her Majesty's Revenue and Customs [2015] UKSC 44; 4 All ER 288 at [114]. I do not think it pragmatic to award a taxpayer a credit for foreign tax paid on income not included in assessable income in Australia.
126 Finally, the taxpayer contended that if the Commissioner's approach were to be adopted there would be an anomalous outcome concerning the treatment of capital losses and revenue deductions. Because step 1 of s 102-5 requires the capital gain to be reduced by reference to other capital losses incurred during the income year, step 2 then requires the capital gain to be further reduced by any previously unapplied net capital losses from earlier income years, and steps 3 and 4 then require the application of available discount percentages, the FITO is limited to the resulting net capital gain. In contrast, it was said, the position was different for revenue gains. It was said that in such a case any deductions from ordinary income do not "burn" the amount of FITO that can be applied. It was then said that this differing treatment was anomalous, and was unlikely to be what Parliament intended. However, the reason for the difference, if there be a difference, arises from the treatment of capital gains and losses giving rise to a net capital gain which is only then included in assessable income. It does not arise, it seems to me, from adoption of the Commissioner's construction of Art 22(2) or s 770-10 as against that favoured by the taxpayer. As for the availability of the CGT 50% discount, no anomaly arises from the inability to apply a FITO against amounts which are never included in assessable income. In these circumstances, the observation of Black CJ and Sundberg J in Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 83 FCR 511 would appear to be apt. At 519 their Honours said:
Especially when different views can be held about whether the consequence is anomalous on the one hand or acceptable or understandable on the other, the Court should be particularly careful that arguments based on anomaly or incongruity are not allowed to obscure the real intention, and choice, of the Parliament.
See also ConnectEast Management Ltd v Federal Commissioner of Taxation (2009) 175 FCR 110 at 119 [41].
127 For these reasons, I do not think that Art 22(2) supports the taxpayer's case. The learned primary judge reached the same conclusion below. His Honour said at [126]-[127]:
In my view, the same process of reasoning should apply. Under Australian law, the only income forming part of the assessable income is 50% of the capital gain on which tax is paid in the US. Where Art 22(2) refers to Australian tax payable in respect of income, the income is only 50% of the capital gain.
Secondly, the word 'all' does not appear before the words 'United States tax paid' in the first line of Art 22(2). The Article does not suggest that a credit is allowed against Australian tax payable for the whole amount of the US tax paid. The general principle is that one is allowed a credit. It simply says a credit against US tax paid. It does not prescribe how much is to be allowed as a credit. The credit is subject to the provisions and limitations of Australian law. Division 770 serves to determine the credit allowable and importantly nothing in the Art 22 is inconsistent with the construction of s 770-10 advanced by the Commissioner.
I respectfully agree with and adopt these reasons of his Honour.
128 I should finally record that neither party addressed the Court as to what would happen if the Court were to decide that no offset was available under Div 770 but nonetheless was of the view that the taxpayer's construction of the Treaty was correct. The parties were invited to make submissions in writing about this after the hearing.
129 The taxpayer submitted that s 16 of the Agreements Act provided the "mechanism" whereby the Commissioner could grant a credit for the US tax paid in conformity with Art 22(2). His argument, however, well illustrates the danger of a literal reading of the text of legislation without regard to statutory history. The relevance of that history can sometimes play a decisive role: cf Woodside Energy Ltd v Commissioner of Taxation (No 2) [2007] FCA 1961; (2007) 69 ATR 465. In some cases it does not: cf Jeffrey James Prebble Pty Ltd v Commissioner of Taxation (2003) 131 FCR 130. In this case it does.
130 Section 16 of the Agreements Act provides:
Rebates of excess tax on income included in assessable income
(1) This section applies in relation to each relevant part of a taxpayer's income of the year of income that consists of income in respect of which a provision of an agreement limits the amount of Australian tax payable.
(2) The taxpayer is entitled, in respect of each relevant part of the taxpayer's income of the year of income to which this section applies, to a rebate of the amount (if any) by which the amount ascertained in accordance with the last preceding section as the amount of Australian tax payable in respect of that part exceeds the limit applicable under the provisions of the agreement in relation to that part.
(3) The rebate to which a taxpayer is entitled under this section in respect of a relevant part of the taxpayer's income shall be allowed in the taxpayer's assessment in respect of income of the year of income in the assessable income of which that part is included.
(4) A rebate, or the sum of the rebates, a taxpayer is entitled to under subsection (2), in respect of income of a year of income, must not exceed the amount of Australian tax payable in respect of the taxpayer's taxable income of that year after all other rebates of, and deductions from, that tax have been taken into account.
131 The taxpayer submitted:
Article 22(2) of the Australia-US Convention limits the amount of Australian tax payable, in terms of s 16(1). It does so by requiring, in the present circumstances, that a credit for the full amount of the US tax on the three gains in issue "shall be allowed" against Australian tax.
Under s 16(2), the appellant is entitled, in respect of his income for the 2011 and 2012 years of income, to a rebate of the amount by which the amount ascertained under the former s 15 of the Agreements Act exceeds the limit applicable under Article 22(2). Section 15 was repealed in 1986, but this does not deny s 16 effect, and the relevant part of s 16(2) should be construed as referring to the amount of tax otherwise payable but for the limit in the agreement: Satyam Computer Services Ltd v Commissioner of Taxation (2018) 362 ALR 589; [2018] FCAFC 172 at [27]. In the event that the Court agrees with the Commissioner's construction of s 770-10(1), this is the Australian tax in respect of the three gains before the Article 22(2) credit. The limit applicable under Article 22(2) is the Australian tax payable after a credit has been allowed for the full amount of US tax. The rebate under s 16(2) is the difference, that is, the full amount of the US tax.
I respectfully disagree.
132 Section 16, in its current form, was introduced into the Agreements Act by the Income Tax (International Agreements) Act 1968 (Cth). This Act gave domestic force to a new double tax treaty that had been entered into between the governments of the Commonwealth of Australia and that of the United Kingdom in 1967. That amending Act also repealed and substituted s 14 of the Agreements Act (reproduced below). As will become clear, s 14 was the "mechanism" whereby Australia's obligations concerning double taxation were at that time to be enforced by the giving of a credit for foreign tax paid. In contrast, s 16 was not that mechanism. Section 14 was then repealed by the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth) when general rules for the allowance of a credit for foreign tax paid were introduced into the 1936 Act (Div 18 of Pt III). Section 14 provided:
Provisions relating to credits for foreign tax.
(1) This section has effect for the purpose of the determination of the credit or credits allowable, under an agreement, for foreign tax paid or payable by a person in respect of any income.
(2) Where the income of the person of the year of income includes only one amount of income in respect of which a credit is allowable under the agreement, a credit is allowable in respect of that amount of income.
(3) Where the income of the person of the year of income includes two or more amounts of income in respect of which credits are allowable under the agreement -
(a) if those amounts of income comprise one class of income only - one credit is allowable in respect of the total of those amounts; or
(b) if those amounts of income comprise two or more classes of income - a separate credit is allowable in respect of the total f those amounts included in each class of income.
(4) The amount of the credit allowable in respect of any income shall not exceed the amount of Australian tax payable in respect of that income.
133 The Explanatory Memorandum which accompanied the Income Tax (International Agreements) Bill 1968 (Cth), relevantly said of s 14:
Provisions relating to credits for foreign tax
The main purpose of the new section 14, as of the section 14 being repealed, is to provide that where credit for foreign tax in respect of any income is allowable under the provisions of an agreement, the amount of that credit is not to exceed the amount of Australian tax payable in respect of the income.
Because of the exemption under section 23(q) of the Assessment Act, credits were, in practice, previously allowable only in the case of dividends and the existing section 14 requires the calculation of a separate credit in respect of each dividend derived from each country with which Australia has a double taxation agreement.
Following the new United Kingdom agreement credits will now be available also in respect of United Kingdom interest and royalties. With this extension of the area in which credits are allowable it is proposed to keep to a minimum the number of credit calculations required.
The proposed section 14 will apply on the basis of a separate credit for all income of a particular class that is derived from any one country with which Australia has a double taxation agreement. The limitation on the amount of credit will, therefore, be applied separately to each class of income derived from each such country.
…
134 In contrast, s 16 is not concerned with the provision of a "credit" but with the conferral of a "rebate" in defined circumstances. As the Explanatory Memorandum makes clear, s 16 is concerned with the payment of dividends, royalties and interest to non-residents in circumstances in which a double tax treaty has limited Australia's taxing rights. For example, in 1968 the then Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, signed on 7 December 1967, [1968] ATS 9 (terminated on 17 December 2003) limited Australia's right to tax royalties paid to a resident of the United Kingdom to 10% of the amount paid. The Explanatory Memorandum thus stated about s 16:
This clause proposes the repeal of section 17 of the Principal Act and its replacement by a modified section - section 16.
The existing section 17 provides for the allowance of a rebate to give effect to provisions in Australia's double taxation agreements limiting the amount of Australian tax payable by assessment processes in respect of dividends flowing to countries with which Australia has double taxation agreements. Where the amount of Australian tax on the dividend, as ascertained in accordance with the present section 16, exceeds the amount to which the Australian tax is limited, a rebate is to be allowed in the shareholder's assessment.
It is necessary to extend the provisions now contained in section 17 because the new United Kingdom agreement, in addition to limiting the amount of Australian tax payable on dividends derived by United Kingdom residents, also provides for limitations on the Australian tax on interest and royalties paid to United Kingdom residents. The new section 16 will operate for these purposes.
The section will not apply in relation to income that is subject to withholding tax. Where United States, Canadian and New Zealand taxpayers derive dividends in respect of which the Australian tax is limited to 15%, the dividends will in general be subject to withholding tax and section 16 will accordingly not be applicable. Except in isolated cases, therefore, section 16 will in practice apply only in relation to United Kingdom residents.
135 With the repeal of s 14 of the Agreements Act and then Div 18 of the 1936 Act, in my view, the only "mechanism" left for the enforcement of Australia's obligations in relation to double taxation is Div 770. Section 16 is not another form of this "mechanism". It simply does not deal with the subject of double taxation. Read in the context of s 14 and the explanation of it found in the Explanatory Memorandum, it cannot, with respect, do the work contended for by the taxpayer.
136 Moreover, and in any event, s 16 cannot be given any sensible operation. Subsection (2) provides that the rebate is to be calculated as the amount by which the Australian tax payable "in accordance with the last preceding section" exceeds the limit applicable in a double tax agreement. That "preceding section" (s 15) set out a series of rules for the calculation of the "Australian tax" payable. However, s 15 was also repealed in 1986. Without those rules, s 16 cannot be made to work. Of course, the Court must "strive" to give meaning to every word of a provision, such as s 16: Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355. But no amount of striving can supply legitimate meaning and operation to a provision which is dependent upon another section which Parliament has seen fit to repeal.
137 The taxpayer also relied upon a decision of the Full Court of this Court in Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172; (2018) 362 ALR 589 which concerned Art 23 of the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, signed on 25 July 1991, [1991] ATS 49 (entered into force on 30 December 1991). At [27] the Full Court said:
If, and to the extent that, s 16 of the Agreements Act has any bearing upon the proper construction of the statutory scheme, the repeal of the former s 15 should not be treated as denying s 16 any effect and it should be construed as referring to the amount of tax otherwise payable but for the limit in the agreement: Project Blue Sky at [71].
I do not think that this passage has any bearing on the proper outcome here. The Court in Satyam was dealing with a different issue, namely the correct interpretation of Art 23 of the India-Australia double tax treaty.
138 It was next submitted that the 1997 Act supplied the "machinery" to enable the credit arising under Art 22(2) to be enforced. It was said that the definition of "tax offset" in the method statement found in Step 3 of s 4-10(3) of the 1997 Act would include the "credit" conferred by Art 22(2). Section 4-10(3) provides:
Method statement
Step 1. Work out your taxable income for the income year.
To do this, see section 4-15.
Step 2. Work out your basic income tax liability on your taxable income using:
(a) the income tax rate or rates that apply to you for the income year; and
(b) any special provisions that apply to working out that liability.
See the Income Tax Rates Act 1986 and section 4-25.
Step 3. Work out your tax offsets for the income year. A tax offset reduces the amount of income tax you have to pay.
For the list of tax offsets, see section 13-1.
Step 4. Subtract your tax offsets from your basic income tax liability. The result is how much income tax you owe for the financial year.
139 It was submitted that the credit referred to in Art 22(2) answers the description of an amount that "reduces the amount of income tax you have to pay". It was said that the Commissioner's "own practice recognises this". I respectfully disagree. The offsets referred to in Step 3 are those provided by the 1936 and 1997 Acts, such as those found in Div 770. They are the ones listed in s 13-1 of the 1997 Act. That is why the provision directs the reader to that provision where there is found an applicable "list of tax offsets". Whilst the provision is a "Guide" (see s 950-150 of the 1997 Act for the use to be made of a Guide), there is nothing to suggest, as submitted by the taxpayer, that it is not "exhaustive". In my view, the list can be considered to confirm the meaning of Step 3 (s 950-150(2)(b)). It can be used to affirm that the offsets referred to in Step 3 are those supplied by the 1936 and 1997 Acts. The Commissioner's practice cannot alter that conclusion.
140 It was then said, in the alternative, that Step 2(b) in s 4-10(3) supplied the necessary "machinery". This was on the basis that "Article 22(2), as incorporated and given priority by ss 5 and 4(2) of the Agreements Act, is a 'special provision'". Again, I respectfully disagree. Step 2 is directed at the identification of the rate of tax which is payable on taxable income ascertained by Step 1. It does not deal with offsets or credits. They are addressed by Step 3. The offset can only have work to do once the quantum of tax has first been ascertained by Steps 1 and 2.
141 Finally, and in the alternative, ss 4(2) and 5 of the Agreements Act were relied upon. Those provisions are relevantly as follows:
4 Incorporation of Assessment Act
…
(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the [1936 Act or 1997 Act] (other than Part IVA of the [1936 Act]) or in an Act imposing Australian tax.
…
5 Current agreements have the force of law
(1) Subject to this Act, on and after the date of entry into force of a provision of an agreement mentioned below, the provision has the force of law according to its tenor.
…
142 It is said that because of these provisions, Art 22(2) has the force of law with domestic application independent of Div 770. The taxpayer relies on an income tax ruling (TR 2000/16) for that purpose. The Commissioner generally supported this view of the application of Art 22(2) but observed that "there may well be scope for unforeseen anomalies, or practical difficulties, in computing credit by force of the article directly".
143 Again, I respectfully disagree. As already mentioned, ordinarily, whilst it has the force of domestic law, the provisions of the Treaty serve to allocate taxing powers between nations; they do not operate to assess and then impose any tax. They are not a source of power to tax: Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (No 4) [2015] FCA 1092; (2015) 102 ATR 13 at [61]; but note the exceptional circumstances in Satyam. As a result, as this Court observed in Lamesa Holdings, the business profits article in a double tax treaty does not authorise the Commissioner to impose tax on income which is treated by the 1936 and 1997 Acts as being exempt. For one thing, the language used often lacks the specificity required to impose tax (or to give a credit).
144 However, as the taxpayer points out here, the language of Art 22(2) is stronger. The critical phrase is "shall be allowed as a credit". This was said to impose a domestically enforceable obligation to give a credit for foreign tax in the circumstances mandated by that article. But upon whom is the obligation imposed and what is its content? Three observations may be made:
(a) No obligation is imposed by Art 22(2) on the Commissioner. Rather, it is imposed on "Australia". That term is relevantly defined in Art 3(1)(k) as the "Commonwealth of Australia" and, when used in a geographical sense, includes certain geographic areas, such as Norfolk Island. That term does not include the Commissioner. Various articles in the Treaty impose obligations and duties on the "competent authority" of each Contracting State. That term is defined in Art 3(1)(e)(ii) as meaning "the Commissioner of Taxation or his authorized representative". Art 22(2) does refer to the competent authority of either Contracting State;
(b) Article 22(2), as already mentioned, expressly contemplates that the means of conferring a "credit" will be the enactment of separate domestic law. The credit which is allowable "shall be in accordance with the provisions and subject to the limitations of the law of Australia" (emphasis added); and
(c) Article 22(2) does not allocate taxing power (unlike, for example, Art 7). It thus cannot be invoked as a "shield".
145 In my view, imposing the obligation on "Australia" and not on the Commissioner as a competent authority, strongly suggests that the intention here was to impose obligations at the level of two sovereign states. The obligation relevantly owed is to the Republic of the United States as a sovereign nation by the Commonwealth of Australia. That conclusion is consistent with the second observation I have made. The obligation is to be discharged by the enactment of domestic legislation. Here that is Div 770. This conclusion does not foreclose the availability of relief were Australia to be in breach of its obligation in Art 22(2). It may, for example, be open to a citizen of Australia to seek declaratory relief in this Court to determine whether Australia had complied with Art 22(2). But that citizen could not, in such proceedings, seek a credit outside the terms of Div 770. The Commissioner thus has no lawful authority, absent Div 770, to grant the FITO sought and the Treaty is no other source of power to do so. What he has said in TR 2000/16 makes no difference to that outcome.