The Commissioner of Taxation of the Commonwealth of Australia v. Commonwealth Aluminium Corporation Ltd Commonwealth Aluminium Corporation Ltd v. Commissioner of Taxation of the Commonwealth of Australia v Commonwealth Aluminium Corporation [1979] FCA 33

VICTORIA DISTRICT REGISTRY VG No. 28, 30, 31 & 32 of 1978

BEUWEEN = THE COISSIONER OF TAMATIS Or Ti nb COM ONVA PH OF AUSTEA ETA Appellant (Plainvszff) AND 2 COMMON TD. LTH ATUN INI CORPO] NON LAT hob Respondent (Berendant Appellant (Defendant) AND > THE COMI SSICH, CR_OF ThxaTiONn

AUSTRALIA Respeor dent {(Plaantiié) CORAM : Brennan, Deane and Fasher JJ, the lst day of May 1979 REASONS FOR JUDGMENT BREUNAN J: I have had the advantage of reading the judgment

prepared by my brother Deane. I concur in that judament,

I certify that this 1s a true copy of the Reasons for Judgm-nt herein of his Honour Mr. qustice Brennan.

IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) VG No. 28, 30, 31 & 32 ~ ) of 1978 GENERAL DIVISION )

(Plaintiff) AND COMMONWDALTY ALLNT UI CORPORATION LI UTI» ' Respondert (Defendant) AND Co* TONE ALTH ALWILNIOM CORP rlOn LlliTep Appellant (Defendant ) AND. THE corso or

CORAM Brennan, Deane and Fisher JJ. Tuesday 1 Mav, 1979. REASONS FOR JUDGMENT DEAKE J: These appeals involve the liabilaty to incone

tax of the taxpayer, Commonwealth Aluninium Corporation Limited, an respect of the taxpayer's 1967, 1969, 1970 and 1971 tax

The Commissioner assessed tho taxpayer, 3n respect of each of the tax years, on the basis that the provisions of s.136 of the Income Tax Asscssmeni Act 1936 (''the Act") wore applicable to it. The taxpayer objected to the assessment an each case and, upon the objection being disallowed, the Commissioner, at the request of the taxpayer, referred his decision to disallow the objection to a Board of Review. By majority, the Board of Review reduced each asscssmeni to nil. The Commissioner appealed to the Suprene Court of Victoria against the decision of the Board in respect of each of the tax years. The Supreme Court (Jenkinson J ) dismissed the appeal in respect of the 1969, 1970 and 197] assessments but upheld the appeal in respect of the 1967 assessment and ordered that that matter be reritted to the Board of Revicw for further hearing. The taxpayer, by leave, appeals to this Court from his Honour's decision in respect of the 1967 tax year. The Commissioner, by leave, appeals against his Honour's decision

Section 136 constitutes Division 13 of Part III of the Act. That Division 1s headed "Australian Lusiness

shares in which 7s held by or on benal non-restdents; or i of

(e) ts carrted on by a company which nolds or on behalf of whieh otker persons rnold a ma,ar7ty of the slaves tin a non-resrdent vompany,

and tt appears to the Commisetoner that the busicese

amount of taxable wrxeome whieh mignt be orpested so arise from thit buctness, tre pere- tig ow cl bustness tin Australia srall, now! :

It 1s common ground between the partics thut neither the cireumstances described in $.136(b) nor the circumstances deser1rbed in s.136(c) existed, 1n respect of the Lampayer, in any of the four tex years. The issue between the taxpayer aad the Commissioner is whether the circumstances described in s.136(a) existed in respect of any of those years The prinery question involved in that issue 1s whether, during all or any of the tax years, the taxpayer carried on in Austral'a a business controlled principally by non-residents If the ansser to that question, in respect of any tax year, 1s in the affirmative questions will arise concerning whether the assessment which the Commissioner issued in respect of that tax year was jusiifiec under the operative provisions of s.136 If the answer to that question, 1n respect of any tax year, 1s in the ncgative, thc assessment which the Commissioncr issucd cannot be justificd If the ansver to that question 1s in the affirmative in respect of part of a particular tax year and in the negative in respec. of another part of that tax year, a question wil] arise as to

whether, and 1f so how, the section can properly be applicd to

the exception of some insignificant nominal shareholdings, all of the issued shares 1) its capital were, at relevant times, beneficially hold by Coraleo Limited (formerly Ceanmaico

Industries Pty. Limited). Comalco Limited ("Coraler") ves

Section 6 of the Act provides that, 1n the abscnee of contrary intention, the word "resident" or the phrase "resident of Australia" when used in the Act menns, in the case of a company, a company which 18 ancorporated in Australia or which, not being incorporated in Australia, carries on business 1n Australia and has cither its central management and coutrol an Australia or its voting power controlled by sharehcldeors who are residents of Australia. The section defines "non- resident'' as meaning "a person who 1s not a resident of Australia". Plainly, the phrase "resident of Austraii:n' an the definition of "non-resident" has its defined sense. In the absence of a contrary intention, a company which 1s incor- porated in Australia is a "resident" and not a "non-resident" for the purposes of the Act No contrary iuntention as tu be drawn from the provisions or contcat of s.13G(a). For tae purposes of those provisions, the taypayer was, during the tax year, a resident company in which, ignoring insignificant

nominal shareholdings, all of the issucd shares were benficially

During the tax years, the tuxpayer owned and carricd on 1n Australia a business of mining and sc]ling bauxite. It

is to that business ~- and that business alone - that the

Commissioner points to justify bis contention that, during the tax years, the taxpayer carricd on in Australia a business

that was, for the purposes of $.136, 'controlled principally

by non-residents". The evidence Stublishes that the taxnayer controlled that business at least in the primary sense of not being subject to direct outside interference Tne Commissiiner did not dispute that this was so Indeed, that primary contro} by the taxpayer of its business constituted the first link of

a chain of control which, so the Commissioner argued, lay ultimately in the hands of non-residents. In essence, the Commissioner's argurent was that one dues not, for the purnese of ansvering the question posed by s 136(a), stop at the taxpayer's control of the business which it carried on but that, 1n view of the fact that the taxpayer 18 8 compxzny. 11

1s necessary to trace back shareholding in the taxpayer thrceugh Comalco and beyond to ensure thal the stage 3s never reacned where, by permutation and combination, 1t 1s possible to discern theoretical indirect control of a majority of the assucd shares in Comalco as lying in the hands of non-residents. Ignoring shares held by members of the public as a result of

a public issue in Australia (10% of the issued shares), the shares in Comalco Limited were held in equal numbers by an American Corporation, Kaiser Aluminium and Chemical Corporation, and, subject to some minor variations during the 1970 tax

year, Conzinc Riotinto of Australia Limited (C.R.A.) which

was incorporated in Australia. The Commissioner's identificat- ion of non-resident control involved, inter alia, a tracing back from the taxpayer, through the resident Conalco, through

the resident C R.A. and through at least one other interposed

resident company, until one finally reaches, on the C.n.A. side, a company incorporated in the United hingdon and noc in

It can be seen thai, at the heart of the primary question 1n dispute between the Cormissicner and the toxvaycr, there lies a preliminary point of interpretation which falls within narrow confines. That point 18 whether tne refereacn to "controlled principally" in s.136(2) requires, 1n a cause where a business 1s owned, carried on and, at least in the primary sense, controlled by a company, investigaiion berond the corporate veil to determine the identity of those who control the company or of those through whor the company exercises its control of its business If, as the taxpeyer argues, S.13G(a) does not, 1n such a case, require investignt - 1on beyond the conpany's control of 11s business, that will be the end of the present appeals. If, on the other hand, s.136(a) requires, as the Commissioner argues, that one goes beyond the control which the comyany cxercises over its business, the dispute moves to another level. At that level, the Commissioner would cmitend, as has been indicated, that the identification of the relevant control is to be made through tracing shareholdings whale the taxpayer would contend that the identification of the relevant control is to be determined by identifying those through whom the company cxer-

The Commissioner supported his approach to the construction of s.136 of the Act by reference to the decision

of the High Court of Australia in The Texas Co. (Australasia)

Limited v. Federal Commissioner of Tanation ((1940) 63 C.L R.

382). Examination of the terms of the agreed facts in that case (ibid, at p. 389, para. 10) discloses, however, that it was expressly admitted that the business carricd on by that taxpayer was at al] material times controlled by persens resident outside Australia. The point of interpretation no. under considcration did not arise for decision in that casc. The judgments of the members of the Court, when read in that context, do not, 1n my respectful view, assist in the resolat-

Section 136 of the Act remains in the form in which

it was originally enacted The section as based upon s.28(1)

of the Incone Tax Assessment set 1922 \hich, for its part,

remained unamended during the life of the 1922 Act. Section

"Wher any bustinece whieh ts earrted on in Australis ts controlled prina:paliu bu persons reeidznt outside Australia, ari te apreare to tre Cormcse- toner that the Bbustness rroaunges etiter ne tanubie ineome or less tnan the erdicary tasable tno which mtgnt be expeeted te ariec from that buccnecs, the percon ecarrytng ¢. the business in fustprets shall be assessable and chargeable with treo. Tax on such percentaye of the total reesinte (unetirer eash or credtt) of the business, as the Commres icner in his judgment thinkc prorer".

It 1S apparent that the words "controlled principally by non- residents" in s.136(a) can be directly traced to the words "controlled principally by persons resident outside Australia" un s.28(1) of the 1922 Act. Prima facie, one would expect that "controlled prancipally" would have the same denotation

The 1922 Act was not primarily concerned with tanetion of companies' corporate taxalion was, generally speaking, only imposed in respect of undistributed income or payments made to undisclosed or absentee recipients. The provisions of the 1922 Act relating to companies were, when compared with the provisienr of the 1936 Act, quite unsophisticated. In particular, express provisions reguiring the piercing of the corporate shell] to determine questions of identity and continuity of corporate control which have become comnon in the 1936 Act were urkno- 7 un the 1922 Act. In the context of the 1922 Act and the unqualified acceptance of corporate personality which it cnbodisc. the reference 1n s 28(1]) to a business being controiled prancipally by an entity was, in a case where the business was owned, carried on and controlled by a compary, plainly, a

The inclusion of clauses (b) and (c) 1n s 136 of the Act reinforces the conclusion that the words "controlled principally" when used in clause (a) of s 136 are intendcd, in a case where a business 1S owned and controiled by a company, to refer to the direct control of its business which Lhat coumnany enjoys. Where such a company 1s a non-resident, the conditions of clause (a) will be satisficd without more. Where such a company 1S a resident, the provisions of clause (a) are in- applicable and 1t 1s necessary to go to the provisions of clauses (b) and (c) and to cmbark on the inquiries which they prescribe. The specific identification of the cxercise for determining control beyond the corporate veil which 1s contsined

un clause (b) clearly confirms that 1t was not intended by the

draftsman that one should find in Lhe provitiecns of eclauuse (2) e1ther the same or some more effective and sophisticated inquiry

directed at ascertaining veontrol beyond the corporate veil.

It 1s not necessary for the purposes of the present matter to form or express any concluded vies aus to the preerse meaning of the word "principally" an s.136(a). If the word as interprcted as meaning "in the main", "dominantly or "pre- dominantly", 1t adds little to the concept of douminunce wich 1s already inherent in the reference to control. fhe obvidds alternative 1s to read the word as ncaning "in the capacity of a principal as distinct from an agent". The cortext of tho 1922 Act provides some support for giving the vord this reaneng in that one finds in other scctions of that Act advertence to the notion of a business being carricd on in Australia on behalf of an overseas principal (see, e.g., s.60). Wheteve. meaning 1S given to the word however, it is, in my view, clear that the business of mining and selling bauxite wnich vas, during the tax years, carried on in australia by the taxpayer yas, for tne purposes of s.136(a) of the Act, controlled principally by the taxpayer which was not a non-resident. It follows that the provisions of s.136 were not applicable te the

It was submitted on behulf of the Commissioner that to hold that a business which was owned, carried on and, at least in the primary sense, controlled by a compan; was controlled principally by that company for the purposcs of

S 13G(a) would deprive the clause of a]1l real utility, 'fn my

view, this 1s simply not so. Section 136(a) 1s plainly gpplic- able 1n a case where a business 15 carried on in Australia bv

a taxpayer in the capacity of agent for a non-resident prineivel It will also apply ain the case where the business 1s both carried on in Australia and controlled by a non-resident er br a partnership 1n which a non-resident 1s a controlling nurtner. It will apply to a case where a busiress 18 carried on in Australia by a resident subsidiary of a non-resident company but in circumstances where the non-resident comany so inter- feres in the conduct of the business that tho resident eccon™pan, could not properly be said io exercise control of its own business at al]. It may well be that the provisions of <lause (a) are susceptible of ready avoidance. That 1s, however, scarcely surprising in a context where the provisions of clauses (b) and (c) which were introduced in the 1936 Aet to cover the need for inquiring beyond the resident status of a company which controls principally a business carried on in Australia are susceptible of equally ready avoidance. Any undue limitation of the scope of the section may, at lcast in part, be the result of the link between the section and the definitions of "resident", "resident of Australia" and "non- resident" contained in s.6 of the Act in that the lepaisJatirve desire to cast wide the net of taxation which has Jed i» the extended definitions of "resident" and "resident of Australia"

has resulted in a correspondingly restricted definition of

"non-resident" and a perhaps unintended narrowing of tne

1970 and 1671 tax years shoul dismissed, The tampaycr's

eppeal in respect of the 1957 tax year should be cliloved. 'The order of che Supreme Court of Victoria ellosing the crpes1 fron . o

the Tcxation Board of Review in respect of the 19G7 tex veas

should be set oside and in lieu thereaf it shouJ]d be ordered that the appeal apeinsty the decision aud order of the Ta.atlou Board of Review be dismissed. The order in the tazpsyer's favour ag to costs in the Sunrome Court shouid not be cisturved, the vosponden t's cous

VICTORIA DISIRICT PEGLSTRY ) VG No. 28, 39, 31 & ) of 1975

l May, 1979 a FUSHER J: I have had the benefit of readsng the judqrent of

Deane J. I agree with the order he propores and with biz teas

bcornty that this arethe ' O7aEed- pages are a truc copy af the e Ficasors te Judgment of Mr Justice Fisher.