Sunlite Australia Pty Ltd v Commissioner of Taxation

AND: COMMISSIONER OF TAXATION Respondent

order made by: COLVIN, O'SULLIVAN AND FEUTRILL JJ DATE OF ORDER: 21 march 2023

1. The appeal is dismissed.
2. The appellant do pay the respondent's costs of the appeal. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

THE COURT: 1 Sunlite Australia Pty Ltd (Sunlite) is the trustee of a trading trust. In its capacity as trustee it owns and operates a business that develops and manufactures products such as awnings, external venetians, glazing and weather shades. In the 2012 and 2013 income years, Sunlite acting in its own interests and not as trustee was registered as an R&D entity for the purposes of Division 355 of the Income Tax Assessment Act 1997 (Cth) (ITAA97). It claimed notional deductions for those years on the basis that it had incurred expenditure on R&D activities (as defined in Division 355). The amounts claimed were in excess of $1.1 million. 2 In 2016, the Commissioner conducted an audit and issued amended assessments. Sunlite objected to those assessments. The Commissioner disallowed the objection. Sunlite applied to the Administrative Appeals Tribunal for review. The decision under review was upheld, save that it was varied as to the shortfall penalty included in the amended assessments. Sunlite now brings an appeal under s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) which provides that a party to a proceedings before the Tribunal may appeal 'on a question of law' from any decision of the Tribunal in that proceeding. 3 Sunlite contends that the Tribunal erred in its construction of a key provision in Division 355, namely s 355-205 (Ground 1). It says that, in consequence, the Tribunal failed to determine what it contends to be the main issue, namely whether the R&D activities were conducted 'for' Sunlite in its own right (Ground 2). It says that this Court should now determine that issue even though the Tribunal made no findings on the point. The Commissioner disputes both Ground 1 and Ground 2 and also maintains that the proceedings are incompetent because they seek to raise matters that were not the subject of the objection and were not the basis upon which Sunlite advanced its case before the Tribunal. The Commissioner does not press the objection to competency if the Court is of the view that Sunlite's construction of s 355-205 should not be accepted.

Outcome 4 For the following reasons, Sunlite's construction is not the proper interpretation of s 355-205. Therefore, Ground 1 fails. Consequently, it is not necessary for this Court to consider Ground 2. In any event, it was not demonstrated that it would be appropriate for this Court to make the findings contemplated by the submissions in support of Ground 2 in circumstances where the Tribunal had not made any findings on the point. Therefore, we do not address Ground 2. Given the position of the Commissioner, it is also not necessary to consider the objection to competency.

The principles of statutory construction 5 The general principles of statutory construction were not in issue. They are well established. As stated by Kiefel CJ, Nettle and Gordon JJ in SZTAL v Minister for Immigration and Border Protection [2017] HCA 34; (2017) 262 CLR 362 at [14]: The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected. (footnotes omitted) 6 Further, 'tax statutes do not form a class of their own to which special rules apply; they are to be construed by application of the settled principles' that apply generally: Alcan (NT) Alumina Pty Ltd v Commissioner of Territory Revenue [2009] HCA 41; (2009) 239 CLR 27 at [57] (Hayne, Heydon, Crennan and Kiefel JJ). However, 'the fact that a statute is a taxing Act, or contains penal provisions, is part of the context and is therefore relevant to the task of construing the Act in accordance with those settled principles': Alcan at [57] and Commissioner of State Revenue v ACN 005 057 349 Pty Ltd [2017] HCA 6; (2017) 261 CLR 509 at [24] (Bell and Gordon JJ, Kiefel and Keane JJ agreeing). As to the manner in which the prescriptiveness of the taxation regime may bear upon the approach to construction, see the observations of Allsop CJ in Channel Pastoral Holdings Pty Ltd v Commissioner of Taxation [2015] FCAFC 57; (2015) 232 FCR 162 at [4]-[6]. 7 In the present case, provisions dealing with the way in which to interpret references to what are described in ITAA97 as entities were at the heart of the competing contentions. Given the nature of the contentions, it is important to bear in mind the distinction between those legislative provisions that are truly definitional on the one hand and those which inform the approach to interpretation of other provisions or have substantive operative effect on the other hand. 8 Where a definition simply articulates the terminology to be given effect when the defined term is used in the operative text then, unless there is clear contrary intent, the proper course is to read the words of the definition into the substantive enactment and then construe the operative provision: Kelly v The Queen [2004] HCA 12; (2004) 218 CLR 216 at [103] (McHugh J). This reflects the character of a definition which simply provides an aid to the construction of the substantive provisions and the words used in the definition take their meaning informed by the context and purpose to be discerned from the operative provisions: Moreton Bay Regional Council v Mekpine Pty Ltd [2016] HCA 7; (2016) 256 CLR 437 at [61] (French, Kiefel, Bell and Nettle JJ). 9 Further, the ordinary meaning of a defined term is displaced by a statutory definition. This means that in the case of the statutory definition of a composite expression, the ordinary meaning of a word used as part of the defined term is not to be used to construe the definition: Owners of the Ship, 'Shin Kobe Maru' v Empire Shipping Co Inc (1994) 181 CLR 404 at [26], but see Commissioner of Taxation v Auctus Resources Pty Ltd [2021] FCAFC 39; (2021) 284 FCR 294 at [68] (Thawley J, McKerracher and Davies JJ agreeing) as to circumstances in which it may be appropriate to have regard to the ordinary meaning of the defined term. 10 Care must be taken to confine such an approach to provisions that are truly definitional and have no operative elements: see, for example Australian Competition and Consumer Commission v Yazaki Corporation [2018] FCAFC 73; (2018) 262 FCR 243 at [113]-[114] (Allsop CJ, Middleton and Robertson JJ). For example, some provisions do not seek to define a term but rather provide instances by way of explanation to aid in the application of the term: Minister for Immigration and Border Protection v WZAPN [2015] HCA 22; (2015) 254 CLR 610 at [48] (French CJ, Kiefel, Bell and Keane JJ). 11 Further, these principles are subject always to the possibility that the application of the statutory definition to a particular provision may be excluded expressly or by implication from the context. 12 ITAA97 is drafted with many notes and examples. They all form part of the Act: s 950-100. Even though they are not operative, they can be taken into account in construing its provisions and have been prepared on the basis that the examples are accurate expressions of the way the law applies. As explained by Steward J in Burton v Commissioner of Taxation [2019] FCAFC 141; (2019) 271 FCR 548 at [104], [147], the notes may be used to help understand the operative effect of a provision. Likewise, the examples may be used in construing the operative provisions: Brooks v Commissioner of Taxation [2000] FCA 721; (2000) 100 FCR 117 at [64] (Hill, Nicholson and Sundberg JJ).

The statutory context 13 It is convenient to begin with the relevant definition. In these reasons, references are to ITAA97 at the time of the events.

Definition of entity 14 ITAA97 uses the term 'entity' in a manner that departs in significant respects from the ordinary meaning of the term. Subsection (1) of s 960-100 defines 'entity' in the following way: Entity means any of the following: (a) an individual; (b) a body corporate; (c) a body politic; (d) a partnership; (e) any other unincorporated association or body of persons; (f) a trust; (g) a *superannuation fund; (h) an *approved deposit fund. 15 There is a note to the definition which is as follows: Note: The term entity is used in a number of different but related senses. It covers all kinds of legal person. It also covers groups of legal persons, and other things, that in practice are treated as having a separate identity in the same way as a legal person does. 16 So, entity is used in ITAA97 as a collective term which means any of the terms listed. Those terms are not all legal persons. Some, such as partnership and trust, describe a particular type of legal relationship that may be recognised by the law. Neither a partnership nor a trust is a separate person nor has separate legal personality. 17 Subsection (2) then deals with how the definition of entity applies to the trustee of a trust. Relevantly for present purposes, it says that the trustee of a trust 'is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees at any given time'. It expands the definition of entity to include trustee and describes what is meant by that term. It also makes clear that the term trustee refers to all of the trustees of a trust and treats them as a single entity. 18 The remaining provisions in s 960-100 are perhaps more exegetical than definitional. They explain the way to interpret provisions that use the term 'entity' or any of the terms listed in the definition of 'entity' when those terms are deployed in substantive provisions of ITAA97. They address the way to apply the provisions to a case where one legal person constitutes more than one entity, a possibility that arises from the way entity is defined. 19 Subsection (3) provides: A legal person can have a number of different capacities in which the person does things. In each of those capacities, the person is taken to be a different entity. 20 It can be seen that references to an 'entity' are not to be equated with the notion of legal entity such that there is unity between the nature and extent of a legal person and an entity. Rather, a legal person acting in different capacities is taken to be a distinct entity when acting in each of those capacities. This is explained in the following example which is given after the subsection: Example: In addition to his or her personal capacity, an individual may be: • sole trustee of one or more trusts; and • one of a number of trustees of a further trust. In his or her personal capacity, he or she is one entity. As trustee of each trust, he or she is a different entity. The trustees of the further trust are a different entity again, of which the individual is a member. 21 Subsection (4) then makes clear that a reference in ITAA97 to a particular entity (such as a body corporate) does not refer to other identified capacities in which that entity may act. It states: If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity. 22 It is followed by an example and a note being: Example: A provision that refers to a company does not cover a company in a capacity as trustee, unless it also refers to a trustee. Note: Under section 87- 35, certain parts of Australian governments and authorities are treated as separate entities for the purposes of ascertaining whether another entity is conducting a personal services business. 23 Therefore, there is a unitary nature to an entity for the purposes of ITAA97. Its operative provisions apply both to what are typically considered by the general law to be legal persons (such as a corporation) and to non-legal persons (such as a trust) by defining 'entities'. Having defined those entities, it provides that each entity may be the subject of separate application of its provisions even though the same entity fulfils a number of different roles. The effect is that where the Act refers to an entity (or any of the terms within the definition) then it applies to that entity in its capacity as that kind of entity and not in another capacity. 24 These matters are fundamental to the structure of ITAA97 because the legislation imposes many taxpayer obligations and confers taxpayer benefits upon entities. So, a person who also acts as a trustee has separate taxpayer responsibilities as 'an individual' entity and as the person responsible for 'a trust' entity when it comes to matters such as lodging returns and the raising of assessments. The same legal person manifests as two entities for the purposes of the legislation. When acting in a personal capacity the individual is one entity and when acting as trustee the individual is a different and distinct entity. A company acting on its own behalf and also as trustee must lodge a tax return in its capacity as a trustee, and a separate tax return in its own capacity. The tax rates that are applicable are different and the way in which taxation applies to trust income is very different to the way it applies to corporate income. The whole of ITAA97 speaks in the context of a division between entities. 25 It is the distinction between the activities of a body corporate (as one entity) and a body corporate acting as trustee (another entity) that looms large in the present case. 26 Significantly for present purposes, s 960-100(4) deals with those instances where a provision of ITAA97 refers to an entity 'of a particular kind', for example, a body corporate. It provides that in such a case the reference is to the body corporate and not to the body corporate in another capacity (such as the trustee of a trust). So, any reference to a body corporate is to that body corporate acting in its own and not in any other capacity. That is, a substantive provision which refers to a body corporate applies only to the 'entity' being the body corporate acting in its own right.

Division 355 27 Division 355 provides for the circumstances in which an R&D entity may be entitled to a tax offset for R&D activities. In the present case, there was no issue that the activities were R&D activities as defined. The Division states the circumstances in which a taxpayer is entitled to a 'notional deduction'. It is notional because it results in a tax offset rather than a deduction from assessable income. It may be used to reduce a tax liability or, in certain circumstances, to obtain a refund.

The key provision in issue, s 355-205 28 The key provision in issue in the appeal is s 355-205(1) which states: When notional deductions for R&D expenditure arise (1) An *R&D entity can deduct for an income year (the present year) expenditure it incurs during that year to the extent that the expenditure: (a) is incurred on one or more *R&D activities: (i) for which the R&D entity is registered under section 27A of the Industry Research and Development Act 1986 for an income year; and (ii) that are activities to which section 355- 210 (conditions for R&D activities) applies; and (b) if the expenditure is incurred to the R&D entity's *associate - is paid to that associate during the present year. (notes omitted)

The definition of R&D entity 29 As to the defined term 'R&D entity', s 355-35(1) provides: (1) Each of the following is an R&D entity: (a) a body corporate incorporated under an *Australian law; (b) a body corporate incorporated under a *foreign law that is an Australian resident. Note: Each of the above paragraphs extends to a body corporate acting in its capacity as trustee of a public trading trust (see subsection 102T(9) of the Income Tax Assessment Act 1936). (2) A body corporate incorporated under a *foreign law that: (a) is a resident of a foreign country for the purposes of an agreement in force between that country and Australia that: (i) is a double tax agreement (as defined in Part X of the Income Tax Assessment Act 1936); and (ii) includes a definition of permanent establishment; and (b) carries on business in Australia through a permanent establishment (within the meaning of that definition) of the body corporate in Australia; is an R&D entity to the extent that it carries on business through that permanent establishment. (3) However, an *exempt entity cannot be an R&D entity. 30 It may be observed that the definition of R&D entity does not refer to other entities such as a trust or partnership as one of the entities that is an R&D entity (noting the exceptional case of a public trading trust). Sunlite approached the construction of the term R&D entity on the basis that it described a sub-set of the defined term 'entity' for the purposes of Division 355 and that the references to 'body corporate' in the definition were references to that term that were to be understood in the context of s 960-100. Further, it was accepted by Sunlite that a trust is not an R&D entity and that the reference to 'a body corporate' was a reference to that body corporate acting in its own right. Plainly, it was correct to make those concessions.

Section 355-210(1) 31 Section 355-210(1) states that an R&D activity 'covered by one or more of the following paragraphs is an activity to which this section applies'. It then has various provisions that deal with geographical connections with Australia. For example, para (a) states: the R&D activity is conducted for the *R&D entity solely within Australia; 32 Each of the various provisions refer to the R&D activity being conducted 'for the R&D entity'.

The contentions advanced by Sunlite as to the meaning of s 355-205 33 Sunlite began its contentions by emphasising certain general law principles in relation to trusts. First, at general law a trust is not a separate legal entity. Second, liabilities incurred by a trustee acting as trustee are personal liabilities of the trustee. Third, the trustee will usually have a right of indemnity as against the trust assets in respect of trust liabilities. For present purposes, these propositions may be accepted at the level of generality with which they were expressed. 34 Next, Sunlite submitted that when it, as a body corporate acting as trustee, incurred expenditure on R&D activities, the trust could not have incurred that liability because it was not a separate legal entity. Rather, as a matter of general law, it could only be a body corporate acting on its own behalf that incurred liability for the relevant expenditure. This was said to flow from the general propositions concerning the incurring of liabilities by the trustee of a trust. 35 Therefore, so it was submitted, when s 355-205 refers to expenditure that an R&D entity incurs, it is referring to expenditure that has to be incurred by a body corporate in its own right. This was said to be because, as a matter of general law, only Sunlite could have incurred that liability. 36 Reliance was then placed upon the terms of s 960-100(2) which were said to recognise that it is the trustee of a trust that is the entity. Based on its terms the submission advanced was that in a case like the present 'the entity is the trustee of the trust'. As to that submission, we observe that it misreads s 960-100(2). For convenience of reference, we restate its terms (excluding references to superannuation funds or approved deposit funds): The trustee of a trust … is taken to be an entity consisting of the person who is the trustee, or the persons who are the trustees, at any given time. 37 As can be seen, the provision is not saying that in the case of a trust, the trustee is the entity. Rather, it is saying that in the case of a trust (which itself is an entity - see the definition quoted above), the trustee is also taken to be an entity. Contrary to the submission advanced by Sunlite, the terms of s 960-100(2) are not creating a single entity comprising the body corporate that is a trustee and the trust, but recognising and maintaining the distinction for the purposes of the legislation between a legal person, such as a body corporate, (as one entity) and that legal person as trustee of a trust (as another entity). Therefore, the proposition that s 960-100(2) operates so as to make a body corporate that is a trustee the entity where there is a trust should not be accepted. 38 The next step in the analysis advanced by Sunlite relied upon s 960-100(4). Again for convenience of reference, we restate its terms: If a provision refers to an entity of a particular kind, it refers to the entity in its capacity as that kind of entity, not to that entity in any other capacity. 39 The contention advanced was that those words meant that the reference in s 355-205 to an R&D entity (as defined in s 355-35) - which could only be a body corporate - did not apply to the body corporate acting as trustee. 40 As to that contention, it may be accepted that s 355-205 does not apply to a trust or a trustee. And it may also be accepted that s 355-205 is confined to a body corporate acting in its own right. However, despite Sunlite's submission to the contrary, that does not mean that the reference in s 355-205 to an R&D entity (that is, a body corporate) includes the activities of that body corporate as trustee of the trust, particularly the incurring of expenditure in its capacity as trustee. Rather, what the provisions in s 960-100 require is that the reference to 'body corporate' be read as an entity that is acting in its own capacity and in no other capacity. 41 Therefore, expenditure incurred by Sunlite as the entity that is a trustee of the trust is not expenditure that it incurs in its own right. Put another way, the differentiation between a body corporate acting in its own right (being one particular entity) and a body corporate acting as a trustee (being a distinct entity even though it is the same legal person) means that expenditure incurred as trustee is not expenditure of the body corporate acting in its own capacity. 42 For those reasons, the contentions advanced by Sunlite should not be accepted. The provision in s 355-205 to the effect that an R&D entity (a body corporate acting in its own right) can deduct 'expenditure it incurs' means expenditure it incurs in its own right and not as trustee. 43 Sunlite sought to support its construction by arguing that s 355-210 provided the operative qualification for a deduction by requiring that the R&D activity be conducted 'for' the R&D entity. By reference to its terms, Sunlite contended that expenditure that it incurred acting as trustee (for which it was liable in its own right under general law) could be deducted provided the expenditure was incurred 'for the R&D entity'. It sought to demonstrate that even though the expenditure in the present case had been found by the Tribunal to be incurred by Sunlite acting in its capacity as trustee, the arrangement that was in existence was that Sunlite in its own right would reimburse the trust for the expenditure and be the proprietor of the knowledge gained from the R&D activity. 44 However, the problem with focussing upon s 355-210 as conferring the qualifying basis for the notional deduction is that it would allow for a deduction by a body corporate even though it incurred no liability in its own right. In the particular circumstances of this case, Sunlite says that it took on a liability to reimburse the trust for the expenditure incurred by it in its capacity as trustee. However, the construction advanced would apply equally in a case where there was no such arrangement. Accordingly, if there was an arrangement whereby the benefit of the R&D expenditure was to be enjoyed by the R&D entity in its own right without assuming any responsibility for the expenditure incurred on the R&D activity then it might still be said that the R&D activity was conducted for the body corporate in its own right such that it could claim the notional deduction as that entity without having incurred any of the expenditure. 45 Also, in order to be entitled to claim a notional deduction an entity must be registered under s 27A of the Industry Research and Development Act 1986 (Cth) (IRD Act) in respect of the R&D activities the subject of the deduction because the notional deduction is only available to the extent that the expenditure is incurred on R&D activities 'for which the R&D entity is registered': s 355-205(a). Therefore, it must be the R&D entity that is registered. As Sunlite accepts, Sunlite acting in its capacity as a trustee is not an R&D entity. The IRD Act uses the same definition for R&D entity as is in ITAA97. Therefore, Sunlite in its trustee capacity cannot be a registered R&D entity. 46 The construction contended for by Sunlite is that expenditure incurred by Sunlite in its capacity as trustee (for which Sunlite in its own capacity is liable as a matter of general law but which it does not otherwise incur) can be the subject of a notional deduction even though the entity that is Sunlite acting as trustee is not registered. The consequence of Sunlite's construction is that there could be a deduction when expenditure was being incurred by an entity (Sunlite as trustee of a trust) that could not be registered. 47 All of which is to further expose the fundamental flaw of Sunlite's submission which ignores the terms of the legislation that require references to an entity that is a body corporate to be read as applying singularly to the body corporate acting in its own right and not to another entity (relevantly, the body corporate acting as trustee). The premise for the case advanced by Sunlite is that expenditure by Sunlite as trustee can be the subject of a notional deduction (on the basis that it is sufficient if it can be shown that Sunlite had a general law liability for the expenditure and that R&D activity was conducted for Sunlite in its own capacity) even though such an entity cannot be registered for the R&D activities. As has been explained, that premise is not established. 48 For those reasons Ground 1 fails.

The nature of the appeal 49 Where an appeal is provided for in respect of an administrative determination then the court is required to exercise original, not appellate, jurisdiction and to do so in proceedings which are in the nature of judicial review: Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (Vic) [2001] HCA 49; (2001) 207 CLR 72 at [15] (Gaudron, Gummow, Hayne and Callinan JJ). Section 44 of the Administrative Appeals Tribunal Act confers a judicial power to examine the Tribunal's decision for legal error. In such cases the appeal is not conducted by way of rehearing. Although the Court is given power to make such orders as it thinks fit and has a power to find facts, those powers should not be exercised to usurp the fact-finding function of the Tribunal and the circumstances in which it may be appropriate to find facts in the context of such an appeal are confined: Osland v Secretary to the Department of Justice [2010] HCA 24; (2010) 241 CLR 320 at [19]-[20] (French CJ, Gummow and Bell JJ). 50 In the present case, Sunlite, by Ground 2 invites the Court to consider the materials before the Tribunal and make findings that would, on its case, result in the conclusion that the R&D activity for which the relevant expenditure was incurred was conducted 'for' Sunlite in its own right for the purposes of s 355-210. As has been noted, and as Sunlite accepts, it must succeed on Ground 1 in order for the resolution of Ground 2 to serve any purpose. 51 As to the question whether the relevant expenditure was in respect of an R&D activity conducted for Sunlite in its own right, the Tribunal, having concluded that the relevant expenditure was incurred for Sunlite as trustee of the trust, found that the point was rendered academic by that conclusion and did not otherwise address the point. 52 In circumstances where the Tribunal has not undertaken any consideration of the material for the purpose of making the relevant factual findings then the appropriate course in most instances will be for the matter to be remitted to the Tribunal rather than for this Court to undertake the fact-finding task. The power of this Court to find facts should be exercised in a manner that is consistent with the conduct of an appeal by way of judicial review. Instances where an obvious additional finding could be made or there was agreement as to a finding to be made would be clear cases where the power may be exercised. The fact that the task had not been undertaken at all makes this an inappropriate case for the exercise of the power. 53 It follows that Ground 2 should also not be upheld. 54 For the Commissioner, submissions were made on the basis of a notice of contention to the effect that if Ground 1 succeeded, the decision should be affirmed on the basis of a finding favourable to the Commissioner to the effect that the R&D activity was not conducted 'for' Sunlite. For the same reasons that have been given as to why Ground 2 should not be upheld, the contention point should not be upheld.

Orders and costs 55 For reasons that have been given, the appeal should be dismissed. It was accepted that if Ground 1 failed then costs should follow the event. There should be an order for costs in favour of the Commissioner. I certify that the preceding fifty-five (55) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Colvin, O'Sullivan and Feutrill.