• Internal Code :
  • Subject Code : TLAW603
  • University :
  • Subject Name : Law

Taxation Law and Practice

Brief Statement of Material Facts

The case is with respect to a dispute arise between the Commissioner of Taxation and the relevant taxpayers with respect to the residence of the corporation as the company was not incorporated in Australia but its place of Central management and control was residing in Australia only. There were four appellants in this case- Bywater Investments Limited, Chemical Trustee Limited, Hua Wang Bank Berhad and Derrin Brothers Properties Limited[1]. In this particular case, there was the involvement of two appeals against the decision which was finalized by the Full Federal Court for the purpose of tax assessment on corporate residency. The appellant companies of the case were incorporated outside the nation, Australia, and owned by Cayman Islands companies. One of the owners of the company, Borgas, was a Switzerland based businessman, who is the owner of the company as he was the sole shareholder in the Cayman Islands holding the different companies and was also acting as a director of each of the appellant companies of this case. The case is based on the fact that since the appellants is not a resident of Australia and have been managed by the outsiders, they cannot claim any benefit under the taxations legislation of Australia. It is also relevant that most of the meetings of directors of the company were held in Switzerland. Also, the third appellant of the case, Hua Wang Bank Berahad, was ultimately found to you have incorporation in Samoa. And the other directors were found to be the employees of an international trustee and corporate service provider which is located in Samoa and not Australia.

The issue which is the central focus of the case and leads to the development of this case was regarding the concern of the Commissioner of Taxation with respect to the profits which were derived from the sale and purchase of shares which were listed on the Australian Stock Exchange (the ASX). The objection was regarding the status of the appellants which were provided to being not an Australian resident and thus they cannot avail the profits provided under the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936).

Procedural History

The case of as a prolonged history of different quotes before getting the final judgement in its appeal. The court has 19 challenges to the evidence and procedure at the federal court. There are total 34 Court judgements with respect to the facts of this case. This taxation related case finally got into appeal and there were a total 4 full Court appeals along with one application to the High Court to finally get the justice regarding the matter of the residence of the corporation in the issue[2].

Issues to Be Decided

There was a total of three issues that has to be decided in this appeal of the case.

The issues of the case are provided as follows:

  • If the primary judge of this case was at fault in finding the control and the central management of each of the appellant of this case as staying in Australia during all the relevant years of the companies and accordingly each of the appellant of this case is having the status of a resident of Australia particularly for the tax purposes.
  • If the primary Judge was at fault in deciding the profits which were derived from the share sales of the appellants which were on the revenue account.
  • If the primary judge were at fault when they found out that the shares were trading stock and hold the section 70-40(2) of the Income Tax Assessment Act 1997 (Cth) which required for the valuation of the share of the appellant at the commencement of the income here provided that there was no assessment which was issued for the preceding income year.

Reasoning/Decision

Issue 1 of the Case: Central Management and Control

Considering the first issue of Central management and control with respect to each taxpayer of this particular case, the court concluded the appellants to be the resident of Australia for the purpose of tax assessment.

As provided in the Income Tax Assessment Act 1936 (Cth), the residents and residents of Australia[3]has been defined as a company which has been incorporated either in Australia or not operated in Australia but carry on the business of the company in Australia. this company has either the control and Central management based in Australia or they have the voting power which has been controlled by the shareholders who are exactly the resident of Australia.

As provided in chapter 3 of Act[4] which deal with the taxation of income, the profits of any of the company of a Contracting State are taxed only in that State unless they operate in another Contracting State through a permanent establishment in that State. If the company operates as described above, the company's profits may also be taxed in other states, but only due to this permanent establishment.

The issue with respect to this appeal of the case before the court was not regarding the conduction of business in Australia by the taxpayers through a permanent establishment but it was more concerned over the profit which has been made by the appellants to be considered as a profit made by one of the enterprises of Australia. The Article 3(1)(f) of Act which defines the term of ‘enterprise of one of the Contracting States’ and ‘enterprise of the other Contracting State’ as an enterprise which has been carried by any resident of Australia for a resident of Switzerland as required by the context of this case[5]. Also, a person has been entitled as a resident of Australia for the purpose of the agreement if he has been considered as resident of Australia for Australian tax law[6].

In this present appeal, the appellants contended that the judges are at fault by the misapplication of the relevant test which determines the central management and control of a company with respect to the determination of its residence. The contention was in respect to the inappropriate emphasis over the ultimate ownership of the taxpayers. In the case of De Beers Consolidated Mines Limited v Howe[7], Lord Loreburn dictated that the application of the concept of a residence of a company must be preceded similarly to the individual. Since the company cannot do acts like eating and sleeping but is only relied on the keeping house and doing business, the relevant residence of the company can be analysed by observing and finding out where the company actually keeps their house and are doing business. The decision held in the case of Calcutta Jute Mills v Nicholson and the Cesena Sulphur Co. v Nicholson[8] has also been considered as it involves a principle which suggests that the residence of a company, for the purpose of income tax, should be considered where the real business of the company has been carried on. The place where the company's real business being carried out is the place where the central management and control actually resides for the case.

Similarly in the case of Koitaki Para Rubber Estates Limited v The Federal Commissioner of Taxation of Taxation[9], Dixon J provided that the consideration of the residence of a company should always be a matter of degree which has been constituted with the combination of different factors. One of the factors which must be considered as provided in this case was the directing of superior authority which has been acting as a means of controlling the affairs of the company.

This suggests that the focus of determination of the residence of a company should be e observed and analysed through the place where the activities of the company are carried out and controlled irrespective of the place where the company was actually incorporated.

The term Central management and control with respect to a corporation refers to the direction and control of the operation of the company[10]. It has been provided that the residence of a corporation does not refer to the physical location of a corporation where the control and direction of the company reside[11]. In this case it was provided that a corporation can be directed and control from where the high-level decisions of the corporation have been made decided as a matter of fact[12]. It is irrelevant to consider the place where those high-level decisions are merely formalized and recorded[13]. Considering the place of the recording of those high decisions are the companies constitution is irrelevant with respect to the question of control and direction of a company live[14].

Another test which is relevant with respect to the determination of residence of a corporation is regarding the influence of the person over the decision of the activity and control of the company. One of the contentions of the Commissioner of Taxation was with respect to the fact that the actual place of the appellant's central management and control was in Australia only as it was completely controlled by the accountant called Mr Vanda Gould. In the case of Unit Construction Co Ltd v. Bullock[15] , it was provided that the identification of the person who has been actually exercising the central management and control of the company is a question of fact and should not be determined only based on the person who has held the legal authority to control and direct the given company. It has been underlined that the most vital question is with respect to the person who's actually in the control and direction over the operation of the company in reality. In general, it is considered that if there are directors who are running a company with respect to the constitution and the company law rules which is applicable in that particular country[16], it will be the company's directors who will have the control and direction over the operation of the company.

The court in this case concluded that having legal power authority for the management of the company's operation is not the sufficient factor for the establishment of exercise of Central management and control of the corporation. Arose held that all the relevant facts and circumstances with respect to the operation of the corporation must be considered while determining the person who has been exercising the central management and control over the company's operation. for the determination of the person who has been exercising the central management and control over the company, the code provided to analyse and scrutinize the role of any person who has been assuming the role of directors with respect to the management and control of the affairs of the company or who has been having a role in the decision-making process of the governance of the company. It was concluded that the accountant was the one with the central management and control of the operation of the corporation and not the directors who were stating to have meetings abroad.

Issue 2 of the Case: Revenue or Capital Account

The second issue of the present case before the primary judge was with respect to the determination of revenue or capital account from the profits made on the sale of shares held as a long-term investment. The Commissioner of Taxation of taxation argued before the court in the first instance that even if the profits of the corporation bought on revenue account then the shares cannot be on trading stock. Although, the Commissioner of Taxation did not challenge the status of trading stock of the corporation. The parties argued in the court that the prophets were on capital account but the shares what trading stock and were on revenue account only. The primary judge of the case analysed to the profits to be on revenue account considering the fact that the profitss had been gained from the ordinary course of the appellants business along with the intention of making a profit from the corporation's business. Similarly, the shares were found to be with the trading stock as the taxpayer word in a business which runs respect of making a profit with the selling and buying of shares. In the appeal, the appellants contended that the findings of profit being on the revenue account it is not correct but they did not challenge the are finding in respect of shares which suggesting it to be trading stock.

Since not a single party of the case argued or provided any intention over the findings of the primary judge in this regard, the appellant Court considered it to be inappropriate to get into the findings of the primary judge and analyse it to be correct or not. there are provisions in the Act which is applicable for the inclusion of the procedure from the sale of trading stock which is applicable for the inclusion of the income and provides for the questioning of the nature of shares held to be on capital or revenue account[17].

Issue 3 of the Case: Application of Section 70-40 of the Income Tax Assessment Act 1997 (Cth)

On the basis of the findings, it was suggested that the shares were traded stock. The court was asked to analyse and implement s 70-40(2) of the 1977 Act in the appeal. The above- mentioned section provides that if the item had not been taken into account under division 70 at the finish of the last income year concerning the trading stock, then the opening value of an item of trading stock is considered to be a Nil amount[18]. This particular issue regarding the given section of the Income Tax Assessment Act 1997 (Cth) is concerned with determining in the context that not any of the appellant of this particular case had lodged tax returns, with respect to the income years that has preceded the income year in which the dispute with the Commissioner of Taxation arose. The Commissioner of Taxation argued in this case that with the provision of the above-mentioned section, the above- mentioned provision does not require that the trading stock at the commencement of the income year which is in dispute has to be valued at Nil since an item of trading stock chin only be considered with the context of the section if that particular item had been an item in the issuance of the assessment. On the other hand, the taxpayers argued that the word used in the provided section, " taken into account", is not concerned with the process of assessment but it has been included in order to understand the independent operation of the trading provisions by their own force. Although, the appellate court provided that the words, "taken into account under Division 70", has the meaning of "taken into account as part of the process of the assessment carried out by the Commissioner of Taxation". Considering this the court made a declaration with respect to the provision of section 70-40(2) of the 1977 Act. This declaration provided that the above-mentioned section demands the value of the taxpayers share in every year in the dispute to be valued at nil if there has been no assessment issued for the preceding income year.

Ratio

The appeal had a unanimous decision held by the high called which held the judgement made by the Full Court of the federal court. It was finally held that the by water companies what actually Australian residents as they have their business and Central management and control based in Australia only and should be considered in the tax assessment as provided for the Australian residents. The contention of the appearance of having oversea board meetings for suggesting that the central management and control was overseas had been thoroughly rejected in the case. the court concluded that the exact place and the person who was effectively managing the operation of the corporation was not Mr Bogas but it was Mr Gould in Australia. The court concluded that the control of the company was in the hand of Vanda Gould only. Ultimately, the company was analysed to pay a heavy amount as outstanding tax and penalties to the Australian Tax Office.

Obiter

The Court in this case clarified the various provisions and their interpretation with respect to facts and circumstances of this particular case. The Court provided with respect to the provisions of the s 70-40(2) of the 1977 Act, that the words, "taken into account under Division 70", has the meaning of "taken into account as part of process of assessment carried out by the Commissioner of Taxation". The court concluded in this case to upheld the earlier judgement and provided that the corporation under the issue was basically an Australian resident and will be liable to pay the taxes as provided for the Australian tax residents. The central management and control of the corporation were found in Australia vested with the accountant of the corporation called Mr Gould.

The judgement of this case followed the release of Draft Tax Ruling TR 2017/D2[19]. The draft provided for the Commissioner of Taxation's “preliminary but considered view” regarding the application of Central management and control test after the case of Bywater company. The escapism of liability with providing the facts of having abroad meetings and the central and management to be in hands of directors were also rejected by the Court and consequently the corporation was penalised for the taxation provided under the Act for any resident of Australia having the business activities taking place and carried off in the nation. The case provided new dimension to the issue of residence for the taxpayers and clarified the interpretation and context of the central management and control of corporation and the person and place holding this authority with respect to the activities and operations of the company whether it is incorporated in Australia or not.

Orders

The court concluded in this case to upheld the earlier judgement and dismissed the appeal of the appellants The Court in this case provided that the corporation under the issue was basically an Australian resident and will be liable to pay the taxes as provided for the Australian tax residents. The central management and control of the corporation were found in Australia vested with the accountant of the corporation called Mr Gould and not the directors of the companies.

Bibliography for Taxation Law and Practice

Cases

Calcutta Jute Mills v Nicholson and the Cesena Sulphur Co. v Nicholson

De Beers Consolidated Mines Limited v Howe [1906] AC 455

John Hood & Company Ltd v. Magee (1913-1921) 7 TC 327 (John Hood) at 357.

Koitaki Para Rubber Estates Limited v The Federal Commissioner of Taxation of Taxation (1940) 64 CLR 15; [1940] HCA 33 at 19 (CLR).

North Australian Pastoral Co Ltd v. FCT (1946) 71 CLR 623.

Re Little Olympian Each Ways Ltd [1994] 4 All ER 561 (Little Olympian) at 569.

Unit Construction Co Ltd v. Bullock (Inspector of Taxes) [1960] AC 351.

 Waterloo Pastoral Co Ltd v. FCT (1946) 72 CLR 262.

Legislations/ Acts

Article 3(1)(f) of Income Tax Assessment Act 1936 (Cth).

Article 4 of the Income Tax Assessment Act 1936 (Cth).

Article 7 of Chapter 3 of the Income Tax Assessment Act 1936 (Cth).

s 198A of the Corporations Act 2001.

s 6 of the Income Tax Assessment Act 1936 (Cth).

s 70-40(2) of the Income Tax Assessment Act 1997 (Cth).

s 70-80 of the Income Tax Assessment Act 1997 (Cth).

Websites/ journals

Tax Talk, The story behind the Bywater case, (n.d), <https://www.taxtalks.com.au/bywater/#:~:text=The%20Verdict,management%20and%20control%20in%20Australia>.

Tax talk, Tax residency of a company – has the status quo been changed?, (2017), https://www.pwc.com.au/tax/taxtalk/assets/alerts/taxalert-31mar17-tax-residency-of-a-company-has-the-status-quo-been-change.pdf

High Court of Australia, Bywater Investments Limited v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 (16 November 2016), (2018), < http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/2016/45.html>

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