The language of s 79D appears clear and unambiguous. It operates in the 1990 year when there is "an amount" of a "class of income" having a foreign source, which is derived. There may be occasions when zero can be regarded as "an amount" cf Federal Commissioner of Taxation v Ryan (1998) 98 ATC 4323 where regard is had to the context, although the result in that case can hardly be thought to have been anticipated by the earlier cases which it swept aside. But, be that as it may, it is, to say the least, difficult to imagine that the words "amount derived" were intended to encompass the case where nothing at all was derived, especially when the context is in relation to a particular class of income having a particular source. It is hard to imagine how a zero amount can be treated as having a particular source, foreign or otherwise.
In general terms it may be said that the task of statutory construction is to expose the meaning of the words which Parliament has enacted. This is reflected in the so-called "golden rule" of interpretation of Lord Wensleydale: Grey v Pearson (1857) 6 HLC 61 at 106; 10 ER 1216 at 1234. So it will generally be the case that the Court will give to legislation the ordinary grammatical meaning which it bears. As Gibbs CJ reminded us in Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1980-1) 147 CLR 297 at 304:
" … it is not unduly pedantic to begin with the assumption that words mean what they say."
However, it must likewise be said that even without provisions such as ss 15AA and 15AB of the Acts Interpretation Act 1901, it is fundamental that the statutory construction proceed to give effect to the manifest or expressed intention of Parliament. As McHugh J pointed out in Corporate Affairs Commission (NSW) v Yuill (1991) 65 ALJR 500 at 511 the literal or grammatical meaning may not be the meaning which Parliament intended to enact. Hence there will be a need to depart from the literal meaning where there is good reason so to do: Cooper Brookes at 321. As Mason and Wilson JJ there said:
" … It [ie the propriety of departing from a literal interpretation] extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions."
In CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408, Brennan CJ, Dawson, Toohey and Gummow JJ said:
" … the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd (1986) 6 NSWLR 363 at 388, if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent."
Not surprisingly, the Commissioner relies upon the decision of the High Court in Cooper Brookes in support of a construction which the literal language of s 79D does not bear. There is no doubt but that Cooper Brookes is of great significance is elucidating the role of the Court in statutory construction. However, at least some of the comments in that case must be seen by reference to the issue which arose for decision. The question was as to the operation of s 80C(3) of the Act as it then stood. On a literal reading of that subsection the taxpayer fell outside it and thus certain losses were available as a deduction to it. However, s 80C(3) was the result of amending legislation directed at taxation avoidance and the interpretation sought to be given to it by the taxpayer brought about the consequence that the amendment did not effect the purpose it was obviously intended to effect. There was a legislative "mistake" as Gibbs CJ saw it, so that "the expression of its [ie Parliament's] intention miscarried" (see at 306). In the result, the Court preferred the construction which effected the legislative purpose, rather than the construction which otherwise produced an outcome which was irrational and absurd.
Even if Cooper Brookes is not to be confined to cases involving the construction of amending legislation directed at tax avoidance, it is obvious that the decision to depart from the literal words which Parliament had enacted was made easier by the context in which the case arose. There are, too, cautions to be found in the various judgments that emphasise that courts can not depart from the literal meaning of words merely because the result may be inconvenient or even seem unjust: see per Gibbs CJ at 305, Stephen J at 310, Mason and Wilson JJ at 321 and see too per McHugh J in Saraswati v the Queen (1990-91) 172 CLR 1 at 22. This must be particularly so in the field of income tax where failure to include in a return an amount of income, or the claiming of a deduction, not otherwise allowable in the context of self-assessment, may bring about, subject now to safe haven provisions, substantial penalties.
The legislative history provides no clear answer to the present dilemma, nor do either resort to extrinsic materials nor the legislative context in which s 79D is to be found. There is nothing intrinsically absurd about quarantining a deduction against foreign income when foreign income is derived, but not quarantining a deduction where no foreign income is derived. As is clear, deductions may be incurred at a time prior to income being derived, just as deductions may be incurred and allowable after the income to which those deductions are directed may have ceased. The latter problem was reasonably clear after the decision of the High Court in AGC (Advances) Ltd v Federal Commissioner of Taxation (1974-5) 132 CLR 175, but see Placer Pacific Management Pty Ltd v Federal Commissioner of Taxation (1995) 95 ATC 4459, the former considerably earlier. On the Commissioner's interpretation a deduction would be lost in the latter case and may never be allowed in the former if it should turn out that no foreign income is ever derived.
In my view, as relevant to the 1990 year of income, s 79D should be construed in accordance with its ordinary and natural meaning. On this basis there could be no tax benefit in that year. While clearly the version of s 79D as applicable to assessments in the 1991 year would operate to produce a tax benefit in that year, it is difficult to see how it would be concluded that a scheme put into place prior to the 1991 year would be concluded to have a dominant purpose of producing a tax benefit in accordance with legislation not enacted at the time the scheme was put into place. I shall return to that problem later.
In the view which I take it is not strictly relevant to deal with the other matters raised by the Applicants both as to s 79D or Part IVA on this branch of the case. However, as it is likely that whatever the outcome the present case will be appealed, it is desirable that I indicate my views on the balance of the argument.
Before turning to Part IVA, a further submission related to s 79D should be noted. The above comments have assumed that the interest incurred was related to income from a foreign source (as defined). Not so, say the Applicants. If the scheme had not been entered into or carried out it can be assumed that ACP would have subscribed for the shares in the UK companies and in the result, at some stage, have derived dividend income. However, it is submitted that that dividend income would have had an Australian source for ordinary Australian income tax purposes and, to the extent that it differs, would not be from a foreign source in the defined sense.
At the heart of this submission is the view that ACP was a holding company, the activities of which would be holding shares, rather than subscribing for them. Its central management and control and decision making process was in Australia and, as a holding company, the source of its dividend income for ordinary purposes should be seen to be where that central management and control, that is where its decision making process was, namely Australia. Reference is made to the decision of the High Court in Esquire Nominees Limited v The Commissioner of Taxation (1973-4) 129 CLR 177 and Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338. The latter case is relied upon for a slightly different reason by the Commissioner.
In the former of these cases, the issue for decision was whether the dividend income of a resident of Norfolk Island, who was the trustee of a trust holding shares in another company resident in Norfolk Island, was to be assessed as if derived from a source in Norfolk Island with the consequence that s 95 of the Act had no operation to include it in the computation of net income of that trust estate. The case accepts both that source of income is a matter of fact as well as the requirement that what must be looked at is what a "practical man would regard as a real source of income": Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 at 189.
Barwick CJ, in holding the source of the dividend in question to be Norfolk Island, placed emphasis on where the fund of profits were out of which the dividends were to be paid (see at 212). So too did Menzies J at 221. Stephen J regarded a number of factors as relevant including the location of the fund of profits out of which the dividend was paid (see at 226). Each of these views would tend against the Applicants' submission, for the fund of profits out of which the dividend from the UK companies would be paid would be overseas, not in Australia. However, the Applicants seize upon the following passage from the judgment of Barwick CJ at 212:
"Further a company may make profits without trading in goods or commodities or for that matter in securities. It may make profits simply by investment and may do so though its investment portfolio consists only of shares in one other company or even of all the shares in one other company. In such a case its net income from its investment will be its profits. Further, in my opinion, the place where the company makes its investment income will be the place where it has its central management and control. It will, of course, be different in the case of a company conducting manufacturing or trading activities. In the case of such companies the place where these activities are carried on can be seen in fact to be the geographical source of the profits these activities yield."
With respect, this passage ignores both the facts in that case, where the Commissioner was seeking to argue source as dependent upon situs of shares or ultimate funds emanating from Australia in a subsidiary of the holding company, as well as the comments of the Chief Justice which precede this passage and of the other members of the majority of the Court to which reference has earlier been made. The distributed profit in that case, that is to say the dividend from the Norfolk Island holding company, was in Norfolk Island as was also the central management and control. Here the fund out of which dividends would in time be paid was in the United Kingdom, even if the central management and control of ACP was in Australia.
In any event, the case had nothing to do with the statutory question which the combined effect of s 79D and the definition of "foreign source" in s 160AFD poses. It is necessary, therefore, to turn to Thiel.
Thiel was concerned with the interpretation of the words "profits of an enterprise of one of the Contracting States" in Art. 7 of the Double Tax Agreement between Australia and Switzerland. It was not concerned with the statutory question here raised. For the Commissioner it is said that ACP had a "business, commercial or investment activity carried on … in a foreign country". The Applicants deny for this purpose that ACP carried on an investment activity or for that matter did so (or should be taken to do so) as part of carrying on an activity overseas.
Mason CJ, Brennan and Gaudron JJ in Thiel gave to the words "carried on" in the Treaty a meaning not involving repetition, in contradistinction to other places in the Act where the words are used in juxtaposition to "carrying on" and "carrying out". In these other places repetition is indicated. It was, as their Honours observed, necessary to look at the context of the Treaty to reach a conclusion.
The context in s 79D is whether an Australian resident derives income from an investment activity which it carried on in a foreign country. It would seem highly unlikely that the legislature intended to quarantine deductions against foreign income where there was no repetition of the activity but not do so where the activity was done once and once only. In my view s 79D should be construed, consistent with the general law of source in any case, to bring about the result that a dividend from an overseas company in which the taxpayer has invested is to be treated as having a foreign source for the purposes of the section.
It is not difficult on an ordinary reading of the words to conclude that the dividend which, for present purposes, ACP is to be taken to have derived if it had not taken up redeemable shares in MLG would have been income which it would have derived from an investment activity which it carried on in the United Kingdom, namely the subscription of shares there. The dividend would in the relevant sense be income "from" the activity of subscription and in the result would be taken to have a foreign source.
I turn now to consider Part IVA. I do so on the basis that contrary to my view s 79D would, as the Commissioner submits, have applied to ACP even where ACP derived no income from a foreign source in the year of income.