Case: Virgin Holdings SA v Commissioner of Taxation [2008] FCA 1503
Outcome: followed
in the recent case of Virgin Holdings SA v Commissioner of Taxation [2008] FCA 1503 ( Virgin Holdings ), a decision of Edmonds J given on 10 October 2008, the issue in each proceeding is whether income tax is not payable on the amount of a capital gain by reason of the operation of a Double Taxation Agreement (DTA). In Virgin Holdings the DTA was that between Australia and Switzerland. In the case of proceeding NSD 1283 of 2006 (the First Proceeding), in which Undershaft (No 1) Ltd (First Applicant) is the applicant, the DTA is between Australia and the United Kingdom of Great Britain and Northern Ireland (UK) (not the current DTA between those countries but an earlier one) (the UK Agreement). In the case of proceeding NSD 1282 of 2006 (the Second Proceeding), in which Undershaft (No 2) BV (Second Applicant) is the applicant, the DTA is between Australia and the Netherlands (the Netherlands Agreement). The full title of the UK Agreement is: Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains. The UK Agreement was signed on 7 December 1967. The full title of the Netherlands Agreement is: Agreement between Australia and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income. The Netherlands Agreement was signed on 17 March 1976. The UK Agreement was Schedule 1 to the International Tax Agreements Act 1953 (Cth) (Agreements Act). The UK Agreement was replaced in 2003 by a new DTA between Australia and the UK, which is the present Schedule 1 to the Agreements Act. This new UK Agreement is not presently relevant because the capital gain in question was made in the financial year ended 30 June 2001. The Netherlands Agreement is found in Schedule 10 to the Agreements Act. The following legislative chronology will serve to introduce provisions and events of relevance to the proceedings and to the parties' submissions: 2 June 1936 The ITAA 1936 was enacted by the Commonwealth Parliament. Section 25 was the familiar "income according to ordinary concepts" provision. Other receipts were also deemed to form part of a taxpayer's assessable income. For example, s 26(a) provided that the assessable income of a taxpayer also included: "(a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme." 29 October 1946 The first DTA between Australia and the UK was signed (the 1947 UK Agreement). It entered into force on 3 June 1947. 11 December 1953 The Agreements Act was enacted. The 1947 UK Agreement became Schedule 1 to the Agreements Act. 7 December 1967 The UK Agreement was signed. It became Schedule 1 to the Agreements Act, in place of the 1947 UK Agreement. 11 December 1973 Section 26AAA was introduced into the ITAA 1936. In general terms it included in the assessable income of a taxpayer any profit arising from the sale of property that the taxpayer purchased after 21 August 1973 and sold before the expiration of the period of 12 months from the date of purchase. 17 March 1976 The Netherlands Agreement was signed. It became Schedule 10 to the Agreements Act. A "First Protocol" to the Agreement was signed on the same day. 28 February 1980 A DTA between Australia and Switzerland was signed (later referred to as the Swiss Agreement). It became Schedule 15 to the Agreements Act. 25 June 1984 The Income Tax Assessment Amendment Act (No 3) 1984 (No 47 of 1984) came into operation. That Act omitted s 26(a) and enacted a similar provision as s 25A(1). 24 June 1986 Part IIIA was introduced into the 1936 Act by Income Tax Assessment Amendment (Capital Gains) Act 1986 (Cth) (No 52 of 1986), having an operation in relation to assets acquired after 20 September 1985. Section 26AAA was prevented from overlapping with the new Pt IIIA by s 160L(3), and s 25A was prevented from overlapping with the new Pt IIIA by s 25A(1A). 14 7" valign="top"> 30 June 1986 A Second Protocol to the Netherlands Agreement was signed. 4 November 1986 The Income Tax Act 1986 came into operation, levying income tax in respect of the 1986-1987 income year and all subsequent years. 4 November 1986 The Income Tax Rates Act 1986 came into operation, with effect for the 1986-1987 income year and subsequent income years. 1 July 1997 The ITAA 1997 commenced operation. 22 June 1998 Part 3 - 1 of the ITAA 1997 commenced operation, with effect for the 1998-1999 income year onwards (see s 102-1 of the Income Tax (Transitional Provisions) Act 1997 ). VIRGIN HOLDINGS COMITY The decision of Edmonds J In Virgin Holdings , Edmonds J considered whether Australia was precluded from taxing a capital gain made by the applicant in that case, a company which was incorporated in, and a resident of, Switzerland, by the Business Profits Article (Art 7) of the DTA between Australia and Switzerland (the Swiss Agreement). The Swiss Agreement was entered into in 1980, was found in Schedule 15 to the Agreements Act, and was given the force of law in Australia by s 11E of that Act. His Honour also briefly addressed an argument that if Art 7 did not apply, then Art 13(3), which denied Australia the right to tax income from the alienation of capital assets in certain circumstances, applied. There is no equivalent to Art 13(3) in either the UK Agreement or the Netherlands Agreement. His Honour commenced by considering whether tax imposed pursuant to the Pt IIIA r&eacute;gime fell within the Taxes Covered Article (Art 2) of the Swiss Agreement. Article 2 provided, relevantly, that the Swiss Agreement applied to "the Australian income tax" (subpara 1(a)), or any "identical or substantially similar tax" (para 2). His Honour considered whether the expression "the Australian income tax" in the Swiss Agreement included tax imposed on a "net capital gain" under the Pt IIIA r&eacute;gime. The expression "the Australian income tax" was not defined in the Swiss Agreement which, in those circumstances, gave it the meaning that it had under Australian law. Edmonds J referred (at [30]) to the definition of "Australian tax" in s 3(1) of the Agreements Act as meaning, relevantly, "income tax imposed as such by an Act". His Honour referred (also at [30]) to s 4(1) of the Agreements Act which provided, relevantly, that the ITAA 1936 was incorporated and to be read as one with the Agreements Act. He observed (also at [30]) that s 6(1) of the ITAA 1936 defined "income tax" or "tax" as meaning "... income tax imposed as such by any Act as assessed under [the ITAA 1936]". The Commissioner in that case had sought to argue that, having regard to the existence of Art 13 of the Swiss Agreement headed "Alienation of Property", Art 7 was concerned only with revenue profits of an enterprise. Edmonds J did not agree, concluding (at [72]) that Art 7(1) of the Swiss Agreement denied Australia the right to tax the capital gain concerned. Relevance of Virgin Holdings to the First Proceeding and the Second Proceeding The Commissioner submits in the First Proceeding that Virgin Holdings is distinguishable, and in both proceedings that I should not consider myself obliged by considerations of comity to follow Virgin Holdings . First, he submits that the terminology of the UK Agreement differs from that of the Swiss Agreement that was before Edmonds J. In support of this submission, the Commissioner refers to the UK Agreement's use of the expression "the Commonwealth income tax" rather than "the Australian income tax" in the Taxes Covered Article. He also refers to differences between the Business Profits Articles of the two Agreements: Art 5 of the UK Agreement and Art 7 of the Swiss Agreement. Article 5 of the UK Agreement uses the expression "industrial or commercial profits" which is defined in para (7) of that Article to mean "income derived by an enterprise from the conduct of a trade or business..." (see [22] above). Article 7 of the Swiss Agreement, on the other hand, uses the expression "profits" which it does not define. In my view, there is no substance in the difference between the expressions "the Commonwealth income tax" and "the Australian income tax". However, the Commissioner's submission in relation to the definition of "industrial or commercial profits" is of more substance. I address the meaning of that expression at [112]ff below. Second, the Commissioner submits that the UK Agreement was entered into 13 years before the Swiss Agreement was entered into, and, in particular, that it was entered into before the Parliament inserted s 26AAA into the ITAA 1936 in 1973 (by s 7 of the Income Tax Assessment Act (No 5) 1973 (No 165 of 1973) with effect from 11 December 1973). In my view it is not to the point that s 26AAA was not introduced into the ITAA 1936 until 1973, and therefore did not form part of that Act when the UK Agreement was signed. Edmonds J referred to s 26AAA only as one of several illustrations of the inclusion of capital gains in assessable income. His Honour's adoption (at [44]) of the examples given in the submissions (noted at [38]) supported a proposition that rested on the reasons for judgment in Resch of Rich J at 210-211 and Dixon J (as Dixon J then was) at 224-225, and the reasons of the majority joint judgment in South Australia v Commonwealth at 251. (I refer to Resch at [94]-[97] below and to South Australia v Commonwealth s at [100] below). Edmonds J stated (at [45]) that Pt IIIA was introduced into the ITAA 1936 as part of the same legislative scheme and history as were referred to by Dixon J in Resch and by the majority in South Australia v Commonwealth . In sum, the unavailability of the s 26AAA example in respect of the UK Agreement does not serve to make Virgin Holdings distinguishable. The Commissioner recognises that, in relation to the Second Proceeding, the precise wording of the Swiss Agreement differs from that of the Netherlands Agreement in various respects, but does not suggest that the provisions of the Swiss Agreement were materially distinguishable from those of the Netherlands Agreement. I turn now to the comity aspect. Judicial comity The notion of judicial comity raises interesting questions. I am not bound to follow Edmonds J in Virgin Holdings , it being a decision of co-ordinate authority. However, the answers to the following questions are not so obvious. In what circumstances, if at all, am I bound to accord influence to his Honour's decision? Am I bound independently to reach my own conclusion? If so, and my conclusion does not accord with that of his Honour, by reference to what principles, if at all, am I at liberty to discard my own conclusion in favour of his Honour's? Before referring to the authorities, I will state my understanding of the role of considerations of judicial comity by reference to the task confronting me. First, I must embark on my own independent consideration of the issues for decision with a view to reaching my own independent conclusion on them. The oath of judicial office requires me to do no less. If my own conclusion, independently reached, is consistent with his Honour's, there is no scope for his decision to influence me beyond "fortifying" me in my conclusion. Second, I must not follow his Honour should I reach the view that his Honour was "clearly" or "plainly" wrong. Third, I may (not must) follow his Honour's (supposedly inconsistent) decision once it is clear that that decision is not "plainly" or "clearly" wrong. Fourth, accepting the strong desirability of certainty and stability in judicial decision-making in the administration of justice, I will in fact follow his Honour's inconsistent decision unless I conclude that it was clearly or plainly wrong, or that for some other reason those same interests of justice demand that I adhere to my own conclusion in preference to his Honour's supposedly erroneous one. While the expression "clearly wrong" and "plainly wrong" may be open to criticism, they usefully remind the later judge of the interests of justice in consistency of decision-making in a system of which the individual judge is but a part. The "choice" to follow an earlier inconsistent decision of co-ordinate authority is, however, as a matter of law, discretionary and depends on the circumstances of a particular case. These will properly include considerations of the length of the period during which the earlier decision has stood, and whether it has been relied upon in the arrangement of human affairs. I turn now to the authorities to which I was referred. Submitting that I should follow Virgin Holdings , the applicants cite Cooper v Commissioner of Taxation [2004] FCA 1063 ; (2004) 139 FCR 205 at [46] - [47] per Lander J and Hicks v Minister for Immigration, Multicultural &amp; Indigenous Affairs [2003] FCA 757 at [76] per French J. In the first case, Lander J followed a statement by me in Bank of Western Australia Ltd v Commissioner of Taxation (1994) 55 FCR 233 at 255 that I would follow a certain earlier decision unless I thought it was "clearly wrong". In the second case, French J accepted (at [75]) that it was well established that a judge of this Court should follow an earlier decision of another judge of the Court unless of the view that the earlier decision was "plainly wrong". French J added (at [76]) that where questions of law and statutory construction are concerned, the proposition that a judge who had taken one view of the law or statute was "clearly wrong" was one not lightly to be advanced having regard to the choices that so often confront the courts, particularly in the area of statutory construction. I do not see the approach taken by the Western Australian Court of Appeal in Mustac to be in conflict with the practice to which Lander J and French J (and I) referred. Clearly, and inevitably, their Honours accepted that an earlier decision of a court of coordinate authority is not required, as a matter of binding judicial precedent, to be followed. Moreover, French J quoted the following passage from the judgment of Burchett J in La Macchia v Minister for Primary Industries and Energy (1992) 110 ALR 201 at 204: ... the authorities illustrated that [the approach of usually following a decision of another judge as a matter of judicial comity] may be influenced, either towards or away from an acceptance of the earlier decision, by circumstances so various as to be difficult to comprehend within a single concise formulation of principle ... (my emphasis) Although Virgin Holdings is not a decision of a court of another jurisdiction, that case and the present proceedings concern the interpretation of Commonwealth legislation and DTAs that are given the force of law in Australia by that legislation. In this respect, therefore, the circumstances fall within class (a) identified by Mason P. Assuming it to be indistinguishable, I will follow Virgin Holdings unless I consider it to be clearly wrong or plainly wrong. The breadth of the nature of "income" for the purposes of income tax statutes recognised in these cases is demonstrated by the fact that when the UK Agreement was signed in 1967, the ITAA 1936 already included in assessable income several amounts that were not income in accordance with ordinary concepts. In Virgin Holdings, Edmonds J referred, inter alia, to the following examples (at [38]): Notional amounts that were not derived by the taxpayer at all; eg where stock was disposed of at less than market value and outside the ordinary course of trade, the market value was included in assessable income (s 36 of the ITAA 1936, re-enacting s 17(3) of the ITAA 1922); and, where its criteria were satisfied, amounts caught as a result of the operation of s 260 of the ITAA 1936; Distributions by a liquidator in satisfaction of a shareholder's interest in a company to the extent to which they represented income derived by the company (s 47 of the ITAA 1936); Consideration received on the disposal of property in respect of which depreciation had been allowed, to the extent that the consideration exceeded the depreciated value (s 59 of the ITAA 1936); Gains made on the disposal of capital assets in cases where certain circumstances of acquisition were met (s 25A and its predecessor s 26(a) of the ITAA 1936 s 26(a) formed part of the ITAA 1936 from its commencement, but its predecessor, para (ba) of the definition of "income" in s 4 of the ITAA 1922 , had been introduced into that definition by s 2(c) of Act No 50 of 1930). The meaning of the expression "the Commonwealth income tax" in 1967 The expression of present interest is not "income" in isolation but the expression "the Commonwealth income tax" in Art 1(1)(b). As mentioned, this expression was not defined in the UK Agreement. Nor was the expression defined in the ITAA 1936. It has not subsequently been defined in either the ITAA 1936, or its successor, the ITAA 1997. However, in 1967 this was a well-known category of tax the tax imposed by the Commonwealth on "income" as assessed under the ITAA 1936. Section 6(1) of the ITAA 1936 defined "income tax" to mean "income tax ... imposed as such by any Act, as assessed under the [ITAA 1936] or under that Act as amended at any time " (my emphasis). First, the First Applicant submits that the tax on net capital gains imposed by the Pt IIIA r&eacute;gime is a "substantially similar tax" to "the Commonwealth income tax". In this respect, the First Applicant relies on the reasons given by Edmonds J in Virgin Holdings at [54]-[58] with respect to the Swiss Agreement. The First Applicant submits that a similar conclusion was reached in both Canada and Ireland, citing Gadsden v Minister of National Revenue [1983] CTC 2132 ; 83 DTC 127 at 132; Gladden Estate v Minister of National Revenue [1985] 1 CTC 163; 85 DTC 5188 ; and Kinsella v Revenue Commissioners [2007] IEHC 250. The First Applicant also submits that this approach is consistent with that of the commentator Klaus Vogel in Klaus Vogel on Double Tax Conventions (Kluwer Law International, 1997) at p 157 where the author states: Taxation of capital gains is normally dealt with in income tax laws, though in some instances separate legislation is devoted to that subject (...). Consequently, any new capital gains tax will for treaty purposes normally have to be considered as being at least similar to income tax; .... Resolution of the issue that arises under Art 1(2) requires me to make assumptions, the nature of which are not obvious. If the assumption to be made is that the Pt IIIA r&eacute;gime tax is not within the expression "the Commonwealth income tax" because the latter expression embraces only tax on income according to ordinary concepts, then the Pt IIIA r&eacute;gime tax is not substantially similar to "the Commonwealth income tax". But to construe "the Commonwealth income tax" so narrowly would also mean that tax on the various other forms of capital gain that the ITAA 1936 included in a taxpayer's assessable income as at the time of the signing of the UK Agreement (referred to at [101] above) would likewise be excluded, and tax on them would also not be a "substantially similar tax" to "the Commonwealth income tax". In my view, the only assumption to be made for the purposes of Art 1(2) is that the Pt IIIA r&eacute;gime tax is not within the expressions "the Commonwealth income tax" and I am not to go further and make any assumptions as to the reason. The Pt IIIA r&eacute;gime tax can then be seen to be substantially similar to the remaining tax for which the ITAA 1936 provided, if for no other reason than because other kinds of capital gains remain included in a taxpayer's assessable income. It will be clear from my reasoning above that I have independently reached conclusions on the issues that were common to the present proceedings and Virgin Holdings. It will also be clear, for what significance it may be thought to have, that I do not think that Virgin Holdings was wrongly decided. Both appeals succeed, the Commissioner's objection decisions should be set aside and the objections allowed. The Commissioner should be ordered to pay the costs of the applicant in each proceeding. I certify that the preceding one hundred and seventy-four (174) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren. Associate: Dated: 3 February 2009 In each proceeding Counsel for the Applicant: Mr DH Bloom QC, Mr SH Steward and Ms K Deards Solicitor for the Applicant: Clayton Utz Counsel for the Respondent: Mr BJ Sullivan SC, Mr MT Flynn and Mr TM Thawley Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 27 October 2008 Date of Judgment: 3 February 2009 AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback URL: http://www.austlii.edu.au/au/cases/cth/FCA/2009/41.html