• Legal database
Legal database

Burton v FC of T

Judges: Logan J
Steward J

Jackson J

Court:
Federal Court of Australia, Full Court

MEDIA NEUTRAL CITATION: [2019] FCAFC 141

Judgment date: 22 August 2019

Jackson J

162. I respectfully agree with Logan J and Steward J, for the reasons they each give, that grounds of appeal 1 to 4, concerning Div 770 of the Income Tax Assessment Act 1997 (Cth) ( ITAA 1997 ) should not be upheld.

163. I respectfully agree with Steward J that grounds of appeal 5 and 6, concerning Art 22 of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income , signed on 6 August 1982,
[1983] ATS 16 (the Treaty ) should not be upheld. I agree generally with his Honour ' s reasons, but I prefer to express my own reasons in relation to the key question of the proper construction of Art 22(2) of the Treaty. I gratefully adopt Logan J ' s and Steward J ' s respective expositions of the issues and the relevant legal principles, which permit me to be brief.

164. Stripped of matters that are presently not relevant, Art 22(2) of the Treaty reads as follows:

… United States tax paid under the law of the United States and in accordance with this Convention … in respect of income derived from sources in the United States by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. The credit shall not exceed the amount of Australian tax payable on the income or any class thereof or on income from sources outside Australia. Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time.

165. It is important to appreciate that the first sentence of Art 22(2) expresses a general principle. That is how the third sentence of the article refers to it. And reading it that way is consistent with the approach to the construction of international tax treaties which Logan J and Steward J have summarised. Insofar as s 5 of

ATC 22085

the International Tax Agreements Act 1953 (Cth) gives the article the force of domestic law, it is necessary to take the same approach. Section 5 gives the Treaty the force of Australian law ' according to its tenor ' .

166. The general principle expressed in the first sentence of Art 22(2) is that if a person who is an Australian resident for the purposes of Australian taxation law pays United States tax in respect of income (including a gain) derived from sources in the United States, the Australian government must allow a credit against Australian tax payable in respect of that income. That does not purport to define exactly what double taxation is, and what it is not. It does not say how much of the amount of United States tax paid must be allowed as a credit. It says nothing about whether the Australian tax against which a credit is to be allowed must be treated as having been payable in respect of all of the income from any given transaction in respect of which United States tax has been paid.

167. A few relevant matters must be established in order to conclude that there has been compliance with the general principle in the first sentence of Art 22(2). There must be United States tax paid under the law of the United States. It must be paid in respect of an amount of income (a gain) that is derived from sources in the United States. Such tax must be allowed as a credit against Australian tax. And the Australian tax against which the credit is to be allowed must be tax payable in respect of the amount of income that was derived from sources in the United States.

168. The requirement that the amount of income be the same in the case of each of the United States tax paid and the Australian tax payable emerges from the syntax of Art 22(2). But it does not follow that this amount of income must be all the income derived from a given source in the United States that is also subject to taxation in Australia. The term that is used to indicate a connection between the relevant amount of income, whatever that may be, and each of the United States tax and the Australian tax is ' in respect of ' . That is indeterminate. No doubt, in each case the connection cannot be a distant, arbitrary or illogical one. But to the extent that it is necessary to identify the connection more precisely, that must be done in accordance with the provisions of the law of Australia. That is what the third sentence of Art 22(2) requires.

169. In considering the present case, it does not stretch the language of the article to read ' Australian tax payable in respect of the income ' as referring to capital gains tax payable in Australia on assessable income being an amount equal to only 50% of the gain. So reading ' the income ' as referring to 50% of the gain derived in the United States is consistent with the general principle in the first sentence of Art 22(2) (acknowledging there will also be differences, such as treatment of capital losses, in the way the laws of different countries calculate the gain).

170. Division 770 of ITAA 1997 is, likewise, consistent with the general principle. It satisfies the requirements that I have identified above. Under s 770-10, the entitlement to a tax offset arises where ' foreign income tax ' has been paid. That term is relevantly defined as tax that is imposed by a law other than an Australian law on profits or gains, whether of an income or capital nature: s 770-15(1). Applying that here, it captures United States tax payable under the law of the United States on income (gains) derived from sources in the United States.

171. Section 770-10 grants an entitlement to a ' tax offset ' , which is defined in s 995-1, by reference to s 4-10, as something that reduces the amount of income tax, necessarily Australian income tax, that the taxpayer has to pay. That allows a credit against Australian tax, to use the terminology of Art 22(2).

172. Finally, when Div 770 is applied here, the Australian tax against which the credit is allowed is payable in respect of an amount of income that is the same as an amount of income derived from sources in the United States and in respect of which United States tax has been paid. That is the amount included in the taxpayer ' s ' assessable income ' for the purposes of Australian tax. The fact that United States tax has also been paid on an amount of income not included in ' assessable income ' does not change that. Nor is it to the point that the law of the United States treats the total of both amounts as a single indivisible item on which tax is paid (if that is indeed

ATC 22086

what United States law does). Article 22(2) requires that the credit be in accordance with the provisions of the law of Australia, not the law of the United States.

173. Since Div 770 is consistent with the general principles expressed in Art 22(2), the Commissioner was correct to allow the tax offset to the extent that he did. The Treaty requires no different result. It is therefore not necessary for me to express any views as to the basis on which the Treaty, read together with Australian legislation, may have authorised and required the Commissioner to give a credit for United States tax greater than the tax offset required under Div 770.

174. The appeal should be dismissed with costs.

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The appellant pay the respondent ' s costs of and incidental to the appeal, to be taxed if not agreed.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 .


Back to top

This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.