The Shell Petroleum Company Ltd v Commissioner of Taxation

REASONS FOR JUDGMENT 1 The respondent has brought a motion before this Court seeking an order from the Court for wider discovery by the applicant of certain categories of documents. 2 The background to the dispute is as follows. The applicant was at all material times a company forming part of the Royal Dutch Shell global group of companies (the 'Shell Group'). The applicant filed a proceeding objecting to the income tax assessment issued by the respondent on 30 May 2003 for the year of income ending 30 June 2001 (the 'Objection proceeding'). There is also a separate but related proceeding, which is not relevant to this application. The respondent included in the applicant's assessable income for that year an amount of $67,178,866 (the 'disputed amount'). The applicant filed the Objection proceeding as a result of the respondent issuing an adverse private binding ruling that concluded the applicant was liable to be assessed for tax on the disputed amount. The disputed amount arose as a consequence of certain transactions involving the applicant's acquisition and subsequent sale of shares (the 'shares') in a company called Shell Coal Holdings (Australia) Limited ('SCHAL'). According to the income tax assessment the applicant incurred a liability for taxation of $22,840,814,40. 3 There are a number of facts which are not in dispute. The applicant is a resident company of the United Kingdom, and not resident in Australia for taxation purposes. Secondly, the profit in question arose as a consequence of the disposal by the applicant of the shares, which took place approximately five months after the applicant acquired the shares. Thirdly, the shares were previously held by SCHAL, as a part of the profit making structure through which it derived income, and the applicant has conceded the shares constituted capital assets in its hands. 4 The respondent served a notice of discovery on the applicant on 20 September 2004. The applicant sought amendments to that notice of discovery at a hearing before Registrar Efthim on 17 December 2004. On 1 March 2005, Registrar Efthim ordered that Shell Petroleum provide discovery of the following documents by 31 March 2005: 'Working papers, analyses, submissions, reports, memoranda, papers, presentations and reports to The Shell Petroleum Company Ltd, company boards committees and sub-committees, minutes of meeting of The Shell Petroleum Company Ltd company boards committees and sub-committees, other records of The Shell Petroleum Company Ltd and The Shell Company Ltd decisions, records of discussions, correspondence to and from advisers to The Shell Petroleum Company Ltd companies and/or joint venture partners and/or regulatory bodies and/or bankers, agreements, contracts, share transfers, any other documents ("documents") relating to each of the following matters: (a) the recommendations and/or decisions: (i) that the Australian power assets should be divested separately from the Australian coal assets; (ii) that the ownership of the coal assets of The Shell Petroleum Company Ltd should be separated from the ownership of the motor assets of The Shell Petroleum Company Ltd; and (iii) that Shell Coal Holdings (Australia) Ltd (SCHAL) should transfer the Shares to Shell Petroleum Company Ltd (Shell Petroleum). (b) the sale of the Shares by SCHAL to Shell Petroleum to on or about 15 March 2000; (c) the sale of all the Shares by Shell Petroleum to IG Investment (Callide) Pty Ltd on or about 20 July 2000; (d) the place where the negotiations leading to the sale of the Shares occurred; (e) the place where relevant decisions concerning the sale of the Shares was entered; (f) the place where the relevant contract for the sale of the Shares was entered; and (g) the place where the relevant contract for the sale of the Shares was to be performed, including, if applicable, any and all such documents relating to or concerning any and all negotiations or dealings leading thereto. 2. Shell Petroleum's accounts and financial statements reflecting its financial position both immediately before and then after the sale of the Shares. 3. Shell Petroleum's accounts and financial statements and journals posted to those accounts that show the treatment of the: (a) acquisition of the Shares by Shell Petroleum; (b) the sale of the Shares. 4. The share sale agreement between SCHAL and Shell Petroleum. 5. Valuations for the Shares at the time of disposal to The Shell Petroleum Company Ltd by SCHAL.' 5 On 27 April 2005 the respondent filed and served the abovementioned motion seeking a review under s 35A(5) of the Federal Court of Australia Act 1976 of the decision made by Registrar Efthim. The applicant has no objection to the orders for discovery made by the Registrar and, subject to minor typographical changes, the applicant submits that the orders made are the appropriate orders for discovery in the circumstances. The respondent seeks to vary the orders made by Registrar Efthim by seeking discovery as set out in an amended notice of motion as follows: '1. Working papers, analyses, submissions, reports, memoranda, papers presentations and reports to Shell Group company boards committees and sub‑committees, minutes of meetings of Shell Group company boards committees and sub‑committees, other records of Shell Group and Shell Group company decisions, records of discussions, correspondence to and from advisers to the Shell Group companies and/or joint venture partners and/or regulatory bodies and/or bankers, agreements, contracts, share transfers, any other documents ("documents") relating to each of the following matters: (a) Project IKE and in particular the Power and Divest options formulated as an output of that project: (b) to the extent not contained in (a), the Shell Group coal to power concept and strategy; (c) to the extent not included in (a) and (b) above, the impact of a divestiture of the coal assets on the ability and/or interest of the Shell Group to continue and/ or grow its participation in the Australian power industry; (d) the recommendations and/or decisions: (i) that the Australian coal assets of the Shell Group be divested; (ii) that the Australian power assets should be divested separately from the Australian coal assets; (iii) that the ownership of the coal assets of the Shell Group should be separated from the ownership of the power assets of the Shell Group; and/or (iv) that Shell Coal Holdings (Australia) Ltd (SCHAL) should transfer the Shares to Shell Petroleum Company Ltd (Shell Petroleum); (e) the sale of the Shares by SCHAL to Shell Petroleum on or about 15 March 2000; (f) the sale of all of the Shares by Shell Petroleum to IG Investment (Callide) Pty Ltd on or about 20 July 2000; (g) the place where the negotiations leading to the sale of the Shares occurred; (h) the place where relevant decisions concerning the sale of the Shares were made; (i) the place where the relevant contract for the sale of the Shares was entered; and (j) the place where the relevant contract of sale for the Shares was to be performed, including, if applicable, any and all such documents relating to or concerning any and all negotiations or dealings leading thereto. For the purposes of the order sought the term "Shell Group" means the group of companies of which Royal Dutch Petroleum Company and The "Shell" Transport and Trading Company p.l.c., are the parent companies and a Shell Group company means a company that is part of the Shell Group. 2. Shell Petroleum's accounts and financial statements reflecting its financial position both immediately before and then after the sale of the Shares. 3. Shell Petroleum's accounts and financial statements and journals posted to those accounts that show the treatment of the: (a) the realization of the Australian Coal assets by means of the sale of the Shares in Shell Coal Holdings Ltd (U.K.); and (b) the accounting carrying value of the equity in Shell Coal Holdings (U.K.) both before and after the transfer of the Shares by SCHAL to Shell Petroleum. 4. SCHAL's accounts and financial statements and journals posted to those accounts that show the treatment of the transfer of the Shares by it to Shell Petroleum. 5. Guidelines and procedures for submissions to the Committee of Managing Directors (CMD) which apply to the Shell group companies. 6. . . .(not pressed). 7. Documents listing power generation assets held: (a) directly by Shell Petroleum during the period 1st January 2000 and 31st December 2000; and (b) either directly or indirectly by subsidiary companies of Shell Petroleum during the period 1st January 2000 and 31 December 2000. 8. . . . (not pressed).' 6 The differences between the discovery ordered by the Registrar and the wider discovery, which is now sought, can be gleaned by comparing the two. 7 The issue in this interlocutory proceeding is whether the categories of documents requested by the Commissioner constitute a request that is too wide. In so far as it is relevant to the issue of discovery, the essence of the substantive dispute between the parties is whether the Agreement dated 7 December 1967 between the Government of the United Kingdom and the Government of the Commonwealth of Australia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income ('UK/Australia Treaty') operates to exclude the disputed amount from Australian income tax. The applicant contends that the UK/Australia treaty operates to exclude the disputed amount from Australian tax, irrespective of whether the disputed amount is characterised as income or capital in the applicant's hands. The respondent claims that the disputed amount is capital in the hands of the applicant and therefore is not protected from Australian tax by the operation of the UK/Australia treaty. Accordingly, one of the subsidiary issues which arises, is whether the disputed amount realised by the applicant upon sale of the shares is properly to be characterised as a capital profit or a revenue profit. The applicant contends that the gain was of a revenue character whilst the respondent asserts that the gain was of a capital character. 8 The orders made by the Registrar narrowed the category of documents originally sought by the respondents from those of the 'Shell Group' to the 'Shell Petroleum Company Limited', being the applicant in the proceeding. The applicant's case was that a long line of authorities support the proposition that it is only the purpose of the taxpayer itself which determines the character of the receipt: see Federal Coke v FCT (1997) 15 ALR 49 at 459 (per Bowen CJ), 471 (per Nimmo J) and 475 (per Brennan J); Williams v The Commissioner of Taxation of the Commonwealth of Australia (1972) 127 CLR 226 at 240 (per Barwick CJ) and 251 (per Gibbs J); Lamesa Holding BV v Federal Commissioner of Taxation (1997) 35 ATR 239 at 244 (per Einfeld J) and Federal Commissioner of Taxation v Lamesa Holdings BV (1997) 36 ATR 589 at 598 (per Burkett, Hill and Emmett JJ); Hampson v Federal Commissioner of Taxation (2003) ATR 521 at 523/4 (per Stone J). See also New Angel Court Ltd v Adam [2004] 1 WLR 1988 at 2014 (UK, Court of Appeal) ('New Angel Court'). In resisting the application for wider discovery, the applicant also relied on the following passage in Federal Commissioner of Taxation v Myer Emporium Ltd (1986-1987) 163 CLR 199 at 209/210 ('Myer'): 'But a gain made otherwise than in the ordinary course of carrying on the business which nevertheless arises from a transaction entered into by the taxpayer with the intention or purpose of making a profit or gain may well constitute income. Whether it does depends very much on the circumstances of the case. Generally speaking, however, it may be said that if the circumstances are such as to give rise to the inference that the taxpayer's intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer's business. Nor does the fact that a profit or gain is made as a result of an isolated venture or "one‑off" transaction preclude it from being properly characterized as income: Federal Commissioner of Taxation v. Whitfords Beach Pty. Ltd." 9 However, Myer was also relied on as part of a submission on behalf of the respondent, that the character of the receipt in the hands of the applicant upon disposal of the shares is 'in part to be answered and understood by reference to the character by which [the applicant] came to have them'. Therefore, counsel for the respondent submitted, the category of discoverable documents should not be limited to those which were addressed to the applicant but rather should be broadened to include any document within the possession, custody and control of the applicant, which bears on the question of how the applicant came to have the shares in the first place. It was submitted the applicant first came to have the shares pursuant to a reorganisation of Shell Group assets. Thus, the respondent sought, for example, discovery as set out in paras 1(a), (b) and (c) of the motion as set out above. 10 The respondent argued that the disputed amount was realised as a result of the disposal of a capital structure through which the applicant was conducting its business. The respondent's case seems to be that whether or not the profit or gain made on the share sale is characterised as income, per the test in Myer at 209, depends very much on all the circumstances of the case. Following on from that the respondent claims that the purpose of the discovery sought is to show that part of the circumstances of the case involved what was being done internally in the Shell Group in relation to dispositions between the Shell Group's entities. In support of this contention, counsel for the respondent cited the case of GRE Insurance Limited v Commissioner of Taxation (1992) FCR 160 at 166 ('GRE') where the Full Court held that although a subsidiary is a legally separate entity the part it plays in the affairs of a holding company may throw light upon the character of the activities of the taxpayer. Without going to the substantive dispute between the parties, the facts in GRE are distinguishable from the facts in this case as the taxpayer in GRE was set up to support the business of the parent whereas in the present proceeding, the taxpayer appears to be a separate entity with its own business affairs and not supporting the parent company's business. 11 The applicant submitted the respondent is seeking material, which is not relevant to the Objection proceeding, and in addition is unnecessary for the fair conduct of the dispute as it seeks material in respect of facts, which are not in dispute and/or material to which the respondent already has access. The reference to facts, which are not in dispute, includes a reference to a concession by the applicant that the shares in question constituted a capital asset in the hands of the prior holder. In particular, there was a great deal of discussion before me concerning the respondent's request for discovery of documents relating to 'Project IKE'. Broadly understood, Project IKE is the term used to describe the abovementioned reorganisation of the assets of the Shell Group Companies. Those documents had been obtained pursuant to an audit undertaken by the respondent of the Shell Group's activities in relation to Project IKE. The applicant's solicitor asserted in oral submissions in this proceeding that the respondent has already taken copies of 'something like 350 documents in investigating Project IKE'. Whilst not agreeing with that figure, the respondent does not dispute it has some Project IKE documents in its possession. The respondent pressed its request for discovery of those documents relating to Project IKE on the ground that they were required to consider how the applicant's business should be characterised. 12 As adverted to above, the applicant concedes that the relevant assets, prior to the acquisition by the applicant formed part of the profit making structure through which SCHAL derived income in the form of dividends. The applicant's solicitor asserted that the applicant acquired the shares for the sole and dominant purpose of disposing of them at a profit. The solicitor for the applicant also contended that what was being done internally in the Shell Group is immaterial in relation to dispositions between Shell entities. In this regard, the applicant relied on a statement by Jonathan Parker LJ in New Angel Court at 2014 where he stated: '. . . in the case of intra-group transfer there will almost invariably be an element of "group-purpose", but this cannot negative the trading purpose which … would have existed but for the such "group purpose"… A fortiori, as it seems to me, the fact that the group in the instant case had adopted a policy of selling off its commercial properties says nothing as to whether [the applicant company] acquired the properties as "trading stock"." 13 The submissions so far summarised were in relation to the principles to be applied to a case requiring the characterisation of a receipt in a taxpayer's hands. They were made in the context that representatives of both parties accepted the current rules to be applied in this Court, in respect of discovery, reflect a more restrictive approach than the approach which obtained prior to the Federal Court Amendment Rules (No. 6) (SR 1999 No. 295). 14 The present regime governing discovery in this court has been described by Lindgren J. in Australian Competition and Consumer Commission v Advanced Medical Institute Pty Ltd [2005] FCA 366 at [17] - [21] and [23]. His Honour there explains the difference between the criteria for discovery under the Court's former rules and the more restrictive approach to discovery reflected in the current form of O15 r 2(3) and the Practice Note 14, para 3. This renders it unnecessary for me to repeat that exercise. This case is governed by O15 r 2(3). O15 r 2(3) provides: '[Documents to be disclosed] Without limiting rule 3 or 7, the documents required to be disclosed are any of the following documents of which the party giving discovery is, after a reasonable search, aware at the time discovery is given: (a) documents on which the party relies; and (b) documents that adversely affect the party's own case; and (c) documents that adversely affect another party's case; and (d) document that support another party's case; and (e) document that the party is required by a relevant practice direction to disclose.' The effect of O15 r 2(3) is to limit discovery, ordinarily, to documents which are directly relevant to the proceedings. This more restrictive approach can be contrasted with the earlier rules permitting discovery of all documents that directly or indirectly 'lead to a train of enquiry which would, either advance a party's own case or damage that of an adversary': see Wellcome Foundation Ltd v VR Laboratories (Aust) Pty Ltd (1980) 42 FLR 266 at 269 and the earlier case there discussed. 15 As to the current test for discovery, Justice Stone in Nozzi Pty Ltd and Anor v FCT 52 ATR 521 at 523 ('Nozzi') stated: 'The test for relevance for discovery as traditionally understood is generous and includes not only documents that may provide evidence on an issue but also those that, directly or indirectly, would lead a party to the well-known "train of inquiry" that might advance its own case or damage that of an opponent; Compagnie Financiere du Pacifique v Peruvian Guano Company (1882) 11 QBD 55 at 63 per Brett LJ. This does not however, make the question of relevance otiose. In fact, amendments to the Federal Court Rules were made in 1999 "manifesting a quite new and restrictive policy in relation to the discovery to be allowed in this Court".' 16 In Nozzi, the Commissioner of Taxation refused to allow a company to claim deductions on a commercial property, which it had acquired from a group of companies, on the ground that the company did not hold the property as trading stock. The company requested discovery of all documents in the Commissioner of Taxation's possession relating to the business affairs of the group of companies from which the property had been acquired. Stone J refused that request on the ground that the documents sought were not relevant to the company's case. 17 Applying the principles set out above, both as to characterising a receipt in a taxpayer's hands and as to the more restrictive rules applying to discovery in this Court, I find the further documents now sought by the applicant are not directly relevant to the issues to be determined in this proceeding because I am bound by authorities which identify the principle that the purpose of the taxpayer in acquiring and disposing of the shares determines the character of the receipt in the taxpayer's hands. Accordingly, any characterisation given to such activities by the corporate Group or set out in the Project IKE documents (which are documents of the corporate group) is not 'directly relevant' to the purpose of the taxpayer as an independent and separate entity. The characterisation or 'group purpose' identified in corporate group documents (to adopt the language of New Angel Court) says nothing about the taxpayer's purpose, which is the directly relevant purpose for the determination of the issues in the proceeding. 18 For those reasons, the motion will be dismissed with costs. The parties are agreed that the orders made by Registrar Efthim on 1 March 2005 as set out above should be varied as follows: