GE Capital Finance Pty Ltd v Commissioner of Taxation [2007] FCA 558 | Case summary

Consideration 12 It is convenient to set out some of the relevant provisions of the various Acts as they apply to the years in question. By Div IIA of Pt III of the Assessment Act interest withholding tax is imposed upon interest provided by residents in Australia to non-residents of Australia. The operative provision is s 128B(5), which provides: A person who derives income to which [s 128B] applies that consists of interest is, subject to subsections (6) and (7), liable to pay income tax upon that income at the rate declared by the Parliament in respect of income to which this subsection applies. 13 Section 128(2), so far as is relevant, provides: Subject to subsection (3), [s 128B] also applies to income that: (a) is derived … by a non-resident; and (b) consists of interest that: (i) is paid to the non-resident by a person to whom this section applies … Section 128B(1A) relevantly provides that for the purposes of s 128B, "person" means a person who is a resident. "Paid" has the meaning provided for in s 128A(2). 14 In addition s 128A(3) provides: For the purposes of this Division, a beneficiary who is presently entitled…to interest…included in the income of a trust estate shall be deemed to have derived income consisting of that…interest…at the time when he became so entitled. However, it must be remembered that s 128B(3)(h)(ii) provides that s 128B does not apply to income that consists of: …interest derived by a non-resident in carrying on business in Australia at or through a permanent establishment of the non-resident in Australia… 15 Then, in respect of withholding tax, s 128D, so far as is relevant, provides: Income…upon which withholding tax is payable…is not assessable income. 16 Without the intervention of s 128B(3)(h)(ii), the interest income of the Highland trust estate, to which GECIH was, in the relevant income years, presently entitled, could not be included in the assessable income of the trust estate and could not be taxed pursuant to s 98(3) of the Assessment Act. Further, putting aside the operation of the Agreements Act, s 128(3)(h)(ii) would not apply here as GECIH did not relevantly carry on business in Australia at or through a permanent establishment as that term is defined in s 6 of the Assessment Act. So much is not in dispute. 17 However, as indicated above, two provisions of the Agreements Act are relied upon by the respondent, namely s 3(11) and s 4, which are said to effectively substitute a different definition of permanent establishment in s 128B(3)(h)(ii) of the Assessment Act. 18 Section 3(11) of the Agreements Act relevantly provides: Where: (a) beneficiary of a trust estate…who is a resident of a country with which, or with the government of which, Australia, or the Government of Australia, has made an agreement before the commencement of this subsection is presently entitled, either directly or through one or more interposed trust estates, to a share of the income of the trust estate derived from the carrying on by the trustee in Australia of a business through a permanent establishment in Australia; and (b) under the agreement, the income is to be dealt with in accordance with the article (in this subsection referred to as the "business profits article") of the agreement relating to the taxing of income of an enterprise of a Contracting State through a permanent establishment in the other Contracting State; for the purpose of determining whether the beneficiary's share of the income may be taxed in Australia in accordance with the business profits article: (c) the beneficiary shall be deemed to carry on in Australia, through a permanent establishment in Australia, the business carried on in Australia by the trustee; and (d) the beneficiary's share of the income shall be deemed to be attributable to that permanent establishment. 19 Section 4 of the Agreements Act provides: (1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act. (2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than section 160AO or Part IVA of that Act) or in an Act imposing Australian tax. 20 It is important then to consider the operation of s 3(11) and s 4 of the Agreements Act, as their operation lies at the heart of these proceedings. 21 At the outset of his submissions, senior counsel for the respondent relied upon the stated purpose for the introduction of s 3(11), and reference was made to a number of extrinsic materials to support the respondent's contention as to the operation of s 3(11). 22 In the Explanatory Memorandum to the Income Tax (International Agreements) Amendment Act 1984 (Cth), it was stated: The Bill will amend Australia's domestic taxation law to clarify the operation of Australia's comprehensive taxation agreements in relation to certain distributions to a trust beneficiary (or unit holder in the case of a unit trust) who is a resident of an agreement partner country. The distributions dealt with by the amendment are those that consist of business profits derived in Australia by a trustee of a trust or a unit trust. It has been argued in some quarters, but not accepted by the Commissioner of Taxation, that Australia would be unable to tax such distributions, since the trust does not represent a permanent establishment of the beneficiary in Australia. Under the proposed amendment, a resident of a taxation agreement partner country who is entitled to a share of Australian source business profits derived by a trustee of a trust estate or unit trust from the carrying on of a business in Australia, is expressly to be taken as carrying on the business of the trustee. The effect of this will be that, in accordance with the "business profits" article of Australia's comprehensive taxation agreements, business income derived in Australia by a trust and distributed to a resident of an agreement partner country will be subject to tax in Australia. That result is in keeping with domestic tax policy and with what was clearly intended when Australia's comprehensive taxation agreements were negotiated. The proposed amendment also includes a safeguarding measure to ensure the intended effect cannot be circumvented by the interposing of one or more trust estates between the business trust and the ultimate beneficiary. This measure will apply to income entitlements arising after 19 August 1984. 23 In the Second Reading Speech, similar sentiments were expressed: This measure is in response to a technical argument to the effect that Australia would be unable to tax distributions of business profits derived in Australia by a trust where those distributions are made to a beneficiary, or a unit holder in the case of a unit trust, being an enterprise resident in an agreement partner country. It is claimed that, since the trust does not represent a permanent establishment of the beneficiary in Australia, the business profits article in our taxation agreements would operate to shield the beneficiary from a liability to tax in this country. The Commissioner of Taxation has advised the proponents of that argument that he does not accept their view and would contest any such cases coming to his attention. However, if a court were to uphold the argument, Australia's taxation agreements would have a completely unintended effect that could lead to substantial revenue losses. Against this background the Government decided that, to guard against potential revenue losses, legislative action consistent with Australia's domestic tax policy and with what was clearly intended when our taxation agreements were negotiated was needed to put beyond doubt Australia's right to tax distributions of the business profits in question. To that end, the provisions of this Bill will amend the present Australian domestic law so that a beneficiary or unit holder resident in a taxation agreement partner country who is entitled to a share of trust income derived from business operations carried on in Australia, will be deemed to be carrying on the business of the trustee through a permanent establishment situated in Australia. This will ensure that, in accordance with the rules contained in the business profits article of our various taxation agreements, the non-resident will be subject to Australian income tax on that share of business income. This clarifying measure will apply to distributions of business profits to which a beneficiary overseas became entitled after 19 August 1984, the day on which the Treasurer (Mr Keating) announced - after all of our agreement partners had been informed - the Government's intention to legislate in the manner outlined. 24 The respondent also referred to the Treasurer's Press Release dated 19 August 1984: The Government has decided that the income tax law should be amended to make it clear that Australia has the right to tax distributions by Australian business trusts to beneficiaries (or unit holders in the case of unit trusts) resident in countries with which Australia has concluded double taxation agreements. The Government has become aware of a technical argument on the basis of which it is claimed that Australia would be unable to tax distributions of business profits derived in Australia by a trust, where they are made to a beneficiary who is resident in a treaty country, since the trust does not represent a permanent establishment of the beneficiary in Australia. The Commissioner of Taxation has advised the proponents of that argument that he does not accept the argument and would contest any such cases coming to his attention… The income tax law is to be amended so that a beneficiary or unit holder who is resident in a treaty country, and who (whether via one or more other trusts or not) is entitled to a share of trust income derived from business operations carried on in Australia, shall be deemed to be carrying on the business of the trustee through a permanent establishment situated in Australia, where the trustee's business would constitute a permanent establishment having regard to the provisions of the relevant double taxation agreement. The amendment will apply to income entitlements arising after to-day. In deciding on this course of action, the Government considered the alternative of seeking to appropriately amend each of Australia's numerous double taxation agreements. However, the process of individual amendment would absorb considerable time and resources. Moreover, in the interim, revenue losses could be substantial. In these circumstances, and as the amendment will do no more than ensure the clearly intended application of the agreements, the Government has concluded that the proposed action is the appropriate course. 25 Therefore, the purpose for the introduction of s 3(11) was to amend Australian domestic law, without seeking to negotiate an amendment individually of each of Australia's double taxation agreements. The aim was to put beyond doubt Australia's "right" to tax distributions of the business profits in question pursuant to the business profits article. As the respondent contended, the mischief that was sought to be cured was payments made to a non-resident beneficiary escaping the operation of domestic tax law in circumstances where the business profits article would apply. However, there is nothing in the extrinsic materials referred to by the respondent that indicated that a purpose for the introduction of s 3(11) of the Agreements Act was to effect a change to the operation of s 128B or s 128D. The focus of the amendment was not upon interest income or the withholding tax provisions, or upon the circumstance that exists here where the business is carried on by a trustee who is in fact a resident of Australia. The business profits article itself is directed to where a non-resident carries on business in Australia through a permanent establishment of that non-resident in Australia. 26 As I have said, the intended focus of the amendment was on the operation of the business profits article in Australia's double taxation agreements, relevantly in these proceedings, the USA Double Tax Treaty. 27 The USA Double Tax Treaty is one of the many double tax treaties entered into by Australia, and has been entered into for the avoidance of double taxation with respect to taxes on income. To achieve its aim of avoiding double taxation, the USA Double Tax Treaty allocates taxing "rights" between the treaty partners. As with all international treaties to which Australia is a party, it forms part of domestic law only because there is legislation which provides for the treaty to be incorporated into Australian law. The Agreements Act gives the force of law to the various international double taxation agreements scheduled to it. 28 The Agreements Act, in addition to incorporating the double taxation agreements scheduled to it into domestic law, defines certain expressions used in the scheduled agreements. It may well be because of the operation of s 4(2) of the Agreements Act, which provides that it, namely the Agreements Act, and thus the double taxation agreements scheduled to it, prevail over provisions of the Assessment Act and the provisions of an Act imposing Australian tax, a provision in the Assessment Act or in such an Act will have no operation if such a provision is inconsistent with the operation of the Agreements Act or a double taxation agreement. I will return later to the operation of s 4(2) in the circumstances of this case. 29 Certain forms of income are dealt with separately in the USA Double Tax Treaty. Interest is dealt with in Art 11, and business profits are dealt with in Art 7. In relation to each, the USA Double Tax Treaty is both prohibitive and permissive. Where it permits taxation by allocating the power to tax, the result will depend upon the provisions of the domestic legislation. 30 In relation to interest, Art 11(1) and (2) provides: (1) Interest from sources in one of the Contracting States, being interest to which a resident of the other Contracting State is beneficially entitled, may be taxed in that other State. (2) Such interest may be taxed in the Contracting State in which it has its source, and according to the law of that State, but the tax so charged shall not exceed 10 percent of the gross amount of the interest. 31 In relation to business profits, Art 7(1) provides: The business profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the business profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 32 Subject to Art 11(3), Art 7(6) gives precedence to Art 11. Article 7(6) provides: Where business profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article. 33 Article 11(3) of the USA Double Tax Treaty provides as follows: Paragraph (2) shall not apply if the person beneficially entitled to the interest, being a resident of one of the Contracting States, has a permanent establishment in the other Contracting State…and the indebtedness giving rise to the interest is effectively connected with such permanent establishment… In such a case the provisions of Article 7 (Business Profits)…shall apply. 34 Therefore, without the application of s 3(11) to the interpretation of the USA Double Tax Treaty, the position under the USA Double Tax Treaty in the circumstances of this case would be relatively straightforward. Article 11(2) would apply, and not Art 7. This is because of the precedence Art 7(6) gives to Art 11. Article 11(3) could not assist the respondent, because the USA Double Tax Treaty in defining "permanent establishment" requires in the circumstances of this case that GECIH carried on an enterprise through a permanent establishment in Australia, which did not occur. 35 It was argued by the respondent that Art 11(3) gives priority to Art 7 over Art 11 where the person beneficially entitled to the interest carries on business in Australia at or through a permanent establishment in Australia and the indebtedness in respect of which the interest is paid is effectively connected with the permanent establishment, because of the operation of s 3(11) of the Agreements Act. I do not have to decide that question. Whether or not the respondent's reliance upon the operation of s 3(11) leads to the conclusion that interest income to which the beneficiary is presently entitled is able to be taxed in Australia in accordance with Art 7 and not Art 11 of the USA Double Tax Treaty, in my view the respondent's contentions as to the scope and operation of s 3(11) in conjunction with s 4 are without foundation, even assuming Art 7 is the applicable article. 36 It is important to recall that s 3(11) was introduced to amend the Agreements Act and to impact upon the operation of the USA Double Tax Treaty. The Agreements Act and the USA Double Tax Treaty, and in particular Art 7, establish the scope within which the Australian legislature may impose tax. Article 7 provides that in certain circumstances the Contracting State may tax the business profits (which is permissive), but only so much of the business profits as is attributable to the permanent establishment (which involves a prohibition or limitation). Section 3(11) is similarly directed to the ability to impose a tax or the allocation of the power to tax. It is a provision which is to be read and used "for the purpose of determining whether the beneficiary's share of the income may be taxed in Australia" (emphasis added). 37 Therefore, neither Art 7 (which is relevantly only enabling) nor s 3(11) (which in itself is not an operative provision) provide in themselves any assistance to the respondent. 38 As previously indicated, without the intervention of the Agreements Act and the combined operation of s 4 and s 3(11) of the Agreements Act in the interpretation and operation of s 128B(3)(h)(ii) of the Assessment Act, the answer to the ultimate issue in the proceedings would be that the interest income to which a non-resident beneficiary is presently entitled is to be subject to withholding tax at a lower rate under s 128B of the Assessment Act. This arises because the term "permanent establishment" found in s 128(B)(3)(h)(ii) would be defined in accordance with s 6 of the Assessment Act, which would not include the non-resident beneficiary, who does not itself carry on business at or through a permanent establishment in Australia. 39 To overcome this conclusion, the respondent contended that because the Agreements Act incorporates the provisions of the Assessment Act as dictated by s 4(1), which will include s 6 and s 128B(3)(h)(ii), "modification" is made to the operation of those two sections because of the introduction of s 3(11). The respondent contended that the modification necessary is the effective replacement of the definition of permanent establishment found in s 6 with the deeming provision found in s 3(11). The respondent also contended that s 3(11) on the one hand and the definition of permanent establishment as applicable to s 128B(3)(h)(ii) on the other hand are relevantly inconsistent, so by virtue of s 4(2), s 3(11) prevails. 40 In view of the respondent's submissions, it is necessary to consider the effect of s 4(1). By the operation of s 4(1), the Agreements Act incorporates the Assessment Act subject to s 4(2). However, each Act retains its own identity and the imposition of the relevant tax is still imposed by and at the rates declared by the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 (Cth) and the Income Tax Rates Act 1986 (Cth) by reference to the Assessment Act. The incorporation has the consequence, as a matter of a drafting technique, of incorporating the text of the Assessment Act into the Agreements Act. As Lockhart J said in Amalgamated Television Services Pty Ltd v Australian Broadcasting Tribunal (1984) 1 FCR 409 at 413: It is not uncommon to find in an Act a provision that an earlier Act is incorporated and shall be read as one with the later Act. The effect of such a provision is to transpose the earlier into the later Act or to write every provision of the earlier Act into the later Act as if they had been actually printed into it. It is a rule of construction of statutes; but it cannot be used in effect to amend the provisions of the earlier Act which is to be read as one with the later Act. Sometimes an Act provides that it is incorporated and shall be read as one with an earlier Act. The effect is the same namely, to transpose the later into the earlier Act. See generally the Canada Southern Railway Co. v The International Bridge Co (1883) 8 AC 723 at 727, per Lord Selborne; Osborne v The Commonwealth (1911) 12 CLR 321 at 342-343, per Barton J Perpetual Trustee Co (Ltd) v Wittscheibe (1940) 40 SR (NSW) 501 at 510, per Jordan CJ; Cadbury-Fry-Pascall Pty Ltd v Federal Commissioner of Taxation (1944) 70 CLR 362 at 388, per Williams J, and the cases there cited; Tasman Timber Ltd v Minister for Industry and Commerce (1983) 46 ALR 149. 41 For the purposes of this case, it is unnecessary to go any further into the issues mentioned by Sheller JA in Director of Public Prosecutions (NSW) v Alderman (1998) 45 NSWLR 526 at 532-533 and the question of whether the incorporation may effect an amendment to the earlier Act. 42 Undoubtedly, the drafting technique of incorporation by reference may require necessary adjustments or modifications to be made in the incorporated provisions. In Cadbury-Fry-Pascall Pty Ltd v Commissioner of Taxation (1944) 70 CLR 362 at 388 Williams J said: The tax is imposed by the Tax Act, which prescribes the rates of taxation. This Act incorporates the Assessment Act and provides that the two Acts are to be read together. My own view, to which I adhere, as to the effect of such a section, is stated in Perpetual Trustee Co (Ltd) v Wittscheibe as follows: "In re Woods' Estate; Ex parte Her Majesty's Commissioners of Works & Buildings the Court of Appeal held that if a subsequent Act bring into itself by reference some of the clauses of a former Act, the legal effect of that is to write those sections into the new Act just as if they had been actually printed into it. It has also been held that where two Acts are to be read together the Court must construe every part of each of them as if it had been contained in one Act, unless there is some manifest discrepancy making it necessary to hold that the latter Act has to some extent modified something found in the earlier Act: see Hart v Hudson Bros Ltd; Phillips v Parnaby, and Williams v Tooth & Co Ltd." (Footnotes omitted). See also McGillivray v Piper (2000) 182 ALR 282. 43 For reasons set out below in relation to s 4(2), and even assuming in favour of the respondent that the answer to the issue before the Court can be determined by only looking at the Assessment Act as being read as one with the Agreements Act, in my view both the text and context of and the purpose for the introduction of s 3(11) indicate that the operation of the withholding tax provisions as they are to be applied in this case, and in particular the operation of s 128B(3)(h)(ii) and the definition of permanent establishment found in s 6 do not affect the operation of s 3(11). There is no "manifest discrepancy" making any modification necessary, and all the relevant provisions operate without conflict. 44 However, be that as it may, because s 4(1) is made expressly subject to subs (2), then the real issue in this case is not so much the application of the principles expressed by Williams J in Cadbury 70 CLR at 388, but whether s 4(2) brings about the result contended for by the respondent. This result does not hinge on the reading of the two Acts as one, but upon whether there is any relevant inconsistency between the Agreements Act, and relevantly here, the Assessment Act. It is to be noted that s 4(2) does not only deal with inconsistency in relation to the incorporated Act (namely the Assessment Act), but also with any Act imposing Australian tax. The obvious purpose of s 4(2) is to ensure that the Agreements Act is to prevail, but only in respect of its field of operation and according to its provisions. 45 Section 3(11) operates to determine whether the beneficiary's share of the income may be taxed in Australia in accordance with the business profits article. Such a provision has effect notwithstanding the operation of the withholding tax provisions and s 128(B)(3)(h)(ii) as contended for by the applicant. In my view, s 3(11) facilitates the operation of the business profits article which is only enabling and does not impose any tax itself. Section 3(11) is not in its terms, nor in the context in which it appears, concerned with the operation of s 128B of the Assessment Act and was not intended to so operate. Section 3(11) is not a definition provision which purports to replace the definition of "permanent establishment" for the purposes of the application of s 128B(3)(h)(ii). The work of s 3(11) is in connection with Art 7 and enables tax to be imposed in the circumstances set out in the extrinsic materials referred to by the respondent. As I had said, s 3(11) does not impose any tax in itself, or in conjunction with Art 7, assuming it applies. Section 3(11) is not directed to the operation of the withholding tax provisions and provisions that actually impose tax, and was introduced as an enabling provision only to assist in the taxing of distributions to a trust beneficiary which has a non-resident in the context of the business profits article where the concept of a permanent establishment is significant. Each of s 3(11) and s 128B can thus operate without affecting the operation of the other and without any inconsistency. 46 Even if the purpose for the introduction of s 3(11), or the mischief to which s 3(11) was addressed, was in fact to effectively modify or affect the operation of s 128B(3)(h)(ii), my view is that the purpose has not been implemented. I am mindful of the comments of Kirby J in James Hardie & Coy Pty Ltd v Seltsam Pty Ltd (1998) 196 CLR 53 at 82 that "unless driven to the result by unyielding words, no judicial satisfaction is to be derived from concluding that the manifest target of legislation has been missed". However, again assuming in favour of the purpose contended for by the respondent, I cannot ignore the actual words of the legislation: see Mills v Meeking (1990) 169 CLR 214 at 235, and R v L (1994) 49 FCR 534 at 538. In my view, the text and context of s 3(11) in the Agreements Act does not allow the court to read that provision as being reasonably capable of applying to the operation of the withholding tax provisions, or more specifically to the operation of s 128B(3)(h)(ii): see generally the discussion in Pearce DC and Geddes RS, Statutory Interpretation in Australia (6th ed, Butterworths, 2006) pp 51-58. Even adopting a position which would allow courts a flexible approach to overcome what could be said to be a drafting failure to facilitate the legislative intention, the respondent in this case cannot overcome the text and context in which s 3(11) appears. The Court would need to embark upon the task of impermissibly re-writing the Agreements Act to facilitate the result the respondent seeks. I would need to transform a provision dealing only with the scope of the taxing power into one that effectively imposes a tax. 47 Therefore, without s 3(11) applying to s 128B(3)(h)(ii), or otherwise prevailing over the withholding tax provisions, s 128D applies to exclude the relevant interest income from assessability because such interest income is within the withholding tax provisions of s 128B. 48 Accordingly, I propose to order in each proceedings that the objection decision be set aside and the objections of the applicant be allowed. The matter will be remitted to the Commissioner to be reassessed in accordance with law. I propose to order that the respondent pay the applicant's costs of and in connection with each of the proceedings, and that such costs of each proceeding be assessed and taxed together. I certify that the preceding forty-eight (48) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.

GE Capital Finance Pty Ltd v Commissioner of Taxation

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