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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

Steward J

96. In this appeal, Mr Burton (the " taxpayer " ), a resident of Australia, has claimed the benefit of a foreign income tax offset ( " FITO " ) in respect of all of the income tax paid in the United States on the proceeds of the sale of certain assets in that country. In general terms, a FITO is a tax offset that reduces the amount of income tax that is payable in Australia (s 4-10(3) of the Income Tax Assessment Act 1997 (Cth) (the " 1997 Act " )). It was not disputed that the assets here were held on capital account for Australian income tax purposes and that CGT event A1 (s 104-10 of the 1997 Act) occurred when they were sold. Because the taxpayer is an individual, the gains made received concessional treatment; only 50% of the gain formed part of the calculation of the taxpayer ' s net capital gain for the purposes of ss 102-5 and 115-215 of Pt 3-1 of the 1997 Act. Mr Burton ' s assessable income included that net capital gain.

97. The respondent (the " Commissioner " ) contends that the taxpayer is not entitled to claim a FITO in respect of all the tax paid in the United States; he contends that the taxpayer is only entitled to a FITO in respect of that part of the United States tax paid ( " US tax paid " ) on the gain which was brought to account as assessable income by s 102-5 (that is, 50% of the net gain). The taxpayer disagrees. He submits that he is also entitled to a FITO for the US tax paid on that part of the gain which is not taxed in Australia.

Background

98. The facts were not in dispute. They are set out more fulsomely in the reasons of the learned primary judge which I gratefully adopt. Mr Burton was the trustee of an Australian discretionary trust. He was also a beneficiary of that trust. In the years of income in dispute (the years ended 30 June 2011 and 30 June 2012), he was presently entitled to all of the discount gains arising from the sale of the applicable assets for the purposes of s 97 of the Income Tax Assessment Act 1936 (Cth) (the " 1936 Act " ). Subject to the operation of s 115-215 of the 1997 Act (explained below), he was thus initially required to include in his assessable income that share of the net income of the trust as calculated in accordance with s 95 of the 1936 Act.

99. It is only necessary to describe one of the transactions which is the subject of this appeal because it sufficiently raises the issues for determination. In 2010, Mr Burton, in his capacity as trustee, held certain interests in respect of oil and gas wells in Pennsylvania (the " Nepa Investment " ). These were sold on 18 September 2010 to Chesapeake Energy

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Corporation. The consideration, payable in five instalments, was US$25,434,715. For the purposes of the United States Internal Revenue Code the taxpayer was liable to pay, and did pay, tax at the rate of 15% (instead of the usual rate of 35%) on the long-term capital gain he had made. For the year ended 31 December 2010, in respect of the instalments paid in that year that gain was calculated to be US$8,985,565. The US tax paid was US$1,347,834. For the year ended 31 December 2011, the gain was calculated to be US$14,584,795. The US tax paid was US$2,187,720. The total US tax paid over the period was US$3,535,554.

100. For Australian tax purposes, it was not disputed that CGT event A1 (s 104-10 of the 1997 Act) occurred when the Nepa Investment was sold. For the year ended 30 June 2011, the capital proceeds from the sale of the Nepa Investment was calculated to be A$25,322,008 (the Australian dollar equivalent of US$25,434,715). The cost base was calculated to be A$2,567,687. The resulting capital gain was A$22,754,321. However, this gain was required to be reduced by 50% by s 115-25 of the 1997 Act. This left A$11,366,161. Mr Burton paid Australian tax on that amount of A$5,114,772. He claimed a FITO for the full amount of tax paid in the United States of US$3,535,554 (being A$3,414,207), and in this way reduced his tax liability by this sum.

101. The Commissioner contends that only 50% of the amount of US tax paid should count towards a FITO because only 50% of the net gain was included in the assessable income of the taxpayer in Australia.

102. It should be noted that at the time the assets were disposed of here, there were and remain complex provisions contained in Pt 3-1 of the 1997 Act that deemed the beneficiary of a trust, in certain circumstances, to be the taxpayer that made the capital gain instead of the trust estate: s 115-215. The operation of similar predecessor provisions was explained by the Full Federal Court in
Federal Commissioner of Taxation v Greenhatch (2012) 203 FCR 134 . The parties agreed that those provisions applied to the taxpayer, and that we should proceed on the basis that it was the taxpayer, and not the trust estate, that incurred the various instances of CGT event A1. In other words, the 1997 Act treated Mr Burton as if he, in his personal capacity, sold the Nepa Investment (and the other assets sold). Accordingly, what was ultimately included in his assessable income was not his share of the net income of the trust attributable to that gain pursuant to s 97 of the 1936 Act, but rather, a net capital gain pursuant to s 102-5 of the 1997 Act. The taxpayer did not rely upon this statutory fiction in any way as a reason for contending that he was entitled to the FITO he claimed.

The Legislation

103. The domestic rules governing the availability of a FITO are found in Div 770 of the 1997 Act. Section 770-1 describes the content of that Division as follows:

What this Division is about

You may get a non-refundable tax offset for foreign income tax paid on your assessable income.

There is a limit on the amount of the tax offset.

A resident of a foreign country does not get the offset for some foreign income taxes.

You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia.

Section 770-5 describes the object of the Division as follows:

Object

  • (1) The object of this Division is to relieve double taxation where:
    • (a) you have paid foreign income tax on amounts included in your assessable income; and
    • (b) you would, apart from this Division, pay Australian income tax on the same amounts.
  • (2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts.

    (Notes omitted.)

As will be seen, this appeal concerns what it means to give relief against " double taxation " .

104.

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The operative provision is found in s 770-10, which is in the following terms (including the notes):

Entitlement to foreign income tax offset

(1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year.

Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax - even if you paid the foreign income tax in another income year.

Note 2: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)).

Note 3: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced: see subsection 121EG(3A) of the Income Tax Assessment Act 1936.

…

The notes form part of the 1997 Act: ss 2-45 and 950-100 of the 1997 Act. They may be used to identify accurately and quickly the relevant provisions and " to help " a taxpayer " to understand " those provisions: s 2-35 of the 1997 Act.

105. Subdivision 770-B sets out the rules for determining the amount of the FITO that may be used to reduce income tax otherwise payable. Section 770-65 describes the content of this subdivision as follows:

What this Subdivision is about

The amount of your tax offset is based on the amount of foreign income tax you have paid.

However, there is a limit on the maximum amount of your offset. The limit is the greater of $1,000 and an amount worked out under this Subdivision. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded.

You may choose to use the limit of $1,000 and not work out this amount.

There is an increase in the limit to ensure foreign income tax paid on some amounts that are not taxed always forms part of the offset.

106. Section 770-70 provides that the " amount of your tax offset for the year is the sum of the foreign income tax paid that counts towards the offset for the year. "

107. Section 770-75 sets out the limits on the amount of the offset that may be applied. It was not in issue and need not be reproduced.

108. Division 770 was introduced into the 1997 Act in 2007 replacing the former foreign tax credit rules contained in Div 18 of Part III of the 1936 Act. As originally enacted by Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth), former s 160AF(1) provided:

Where -

  • (a) the assessable income of a year of income of a resident taxpayer includes foreign income; and
  • (b) the taxpayer has paid foreign tax in respect of the foreign income, being tax for which the taxpayer was personally liable,

    the taxpayer is, subject to this Act, entitled to a credit of -

  • (c) the amount of that foreign tax, reduced in accordance with any relief available to the taxpayer under the law relating to that tax; or
  • (d) the amount of Australian tax payable in respect of the foreign income,

    whichever is the less.

109. Something should next be said about the operation of Pt 3-1 of the 1997 Act, which is headed " Capital Gains and Losses: General Topics " . Australia does not separately tax

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capital gains made from the sale of a capital asset. Rather, it includes in the assessable income of a taxpayer, as an item of statutory income, a net figure, being a net capital gain, which is the product of a calculation mandated by s 102-5 of Pt 3-1. That provision is relevantly in the following terms:

Assessable income includes net capital gain

(1) Your assessable income includes your net capital gain (if any) for the income year . You work out your net capital gain in this way:

Working out your net capital gain

Step 1. Reduce the *capital gains you made during the income year by the *capital losses (if any) you made during the income year.

Note 1: You choose the order in which you reduce your capital gains. You have a net capital loss for the income year if your capital losses exceed your capital gains: see section 102-10.

Note 2: Some provisions of this Act (such as Divisions 104 and 118) permit or require you to disregard certain capital gains or losses when working out your net capital gain. Subdivision 152-B permits you, in some circumstances, to disregard a capital gain on an asset you held for at least 15 years.

Step 2. Apply any previously unapplied *net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of *capital gains under step 1 (including any capital gains not reduced under that step because the *capital losses were less than the total of your capital gains).

Note 1: Section 102-15 explains how to apply net capital losses.

Note 2: You choose the order in which you reduce the amounts.

Step 3. Reduce by the *discount percentage each amount of a *discount capital gain remaining after step 2 (if any).

Note: Only some entities can have discount capital gains, and only if they have capital gains from CGT assets acquired at least a year before making the gains. See Division 115.

Step 4. If any of your *capital gains (whether or not they are *discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions.

Note 1: The basic conditions for getting these concessions are in Subdivision 152-A.

Note 2: Subdivision 152-C does not apply to CGT events J2, J5 and J6. In addition, Subdivision 152-E does not apply to CGT events J5 and J6.

Step 5. Add up the amounts of *capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year.

(Emphasis added.)

Step 3 is in issue in this proceeding. When it applies it reduces the " amount " of a discount capital gain before that gain is included in the assessable income of a taxpayer. Subdivision 115-A sets out rules for the determination of what is a discount capital gain. Relevantly, a discount capital gain is one made by an individual (s 115-10). Subdivision 115-B contains rules for determining the discount percentage. Relevantly, where the discount capital gain is made by an individual, the discount percentage is 50% (s 115-100).

110. In my view, the effect of applying the discount percentage to an amount of a capital gain, is to exclude an amount of that gain from inclusion in a taxpayer ' s assessable income. The concept of what is included in a taxpayer ' s assessable income is a critical feature of the 1997 and 1936 Acts. It forms a vital part of the formula for determining the taxable income upon which tax is payable. Section 4-15(1) of the 1997 Act provides:

Work out your taxable income for the income year like this:

Taxable income = Assessable income - Deductions

Method statement

Step 1. Add up all assessable income for the income year.

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To find out about your assessable income, see Division 6.

Step 2. Add up your deductions for the income year.

To find out what you can deduct, see Division 8.

Step 3. Subtract your deductions from your assessable income (unless they exceed it). The result is your taxable income. (If the deductions equal or exceed the assessable income, you don ' t have a taxable income.)

Note: If the deductions exceed the assessable income, you may have a tax loss which you may be able to utilise in that or a later income year: see Division 36.

111. Division 6 of the 1997 Act sets out rules for determining a taxpayer ' s assessable income. The language used is that of inclusion; the Division specifies what is in and what is out. Assessable income " includes " ordinary income (s 6-5) and statutory income (s 6-10). Pursuant to s 6-15(1), if an amount is not ordinary income, and is not statutory income, it is not assessable income. Pursuant to s 6-15(2), exempt income (as defined) is not assessable income. Pursuant to s 6-15(3), non-assessable non-exempt income (as defined) is not assessable income. As we shall see, s 770-10 (the operative provision in Div 770) also adopts this nomenclature. It refers to an amount " included " in assessable income.

112. Here, it was not suggested that the amount of the net proceeds of sale excluded by step 3 of s 102-5 was non-assessable non-exempt income or exempt income. However, it was also not said to be ordinary income and it was not statutory income. As such it was not assessable income. In contrast, all of the net proceeds of sale were taxed in the US (albeit at, in some cases, at a concessional rate).

The Convention

113. The taxpayer claimed an entitlement to a FITO pursuant to s 770-10. But he also relied, in the alternative, upon Art 22(2) 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 (entered into force on 31 October 1983) as amended (the " Treaty " ). The Treaty has the force of domestic law by reason of s 5 of the International Tax Agreements Act 1953 (Cth) (the " Agreements Act " ). As such, it may possibly be invoked in certain cases by a taxpayer as, what is sometimes called, a " shield " when tax is imposed inconsistently with Australia ' s obligations under the Treaty. The " shield " arises from the fact that the Treaty allocates taxing powers between nations and then from the enactment of that allocation into domestic law. As the Full Court of this Court observed in
Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597 at 600-601 in relation to the 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, and Protocol, signed on 17 March 1976,
[1976] ATS 24 (entered into force on 27 September 1976):

The Agreement is an agreement for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Although, therefore, the Agreement has this dual object, the Agreement substantially concerns allocation of taxing power.

Thus, as will be seen, the agreement allocates to the State, where business is carried on or through a permanent establishment, the right to tax business profits of that State (Art 7). It allocates to the country of residence the power to tax aircraft and ship profits (Art 8). Sometimes, as with Arts 7 and 8, the power allocated to the jurisdiction named is exclusive. Sometimes, as is the case with interest, both jurisdictions may tax but with a nominated limit of 10 per cent in one (Art 11). The allocation is of the right to tax. There is nothing in the Agreement which compels a jurisdiction to exercise that right. Australia, for example, does not tax " exempt income " , although such income could fall within the business profits Article.

114. Article 22 of the Treaty is headed " Relief from double taxation " . It is not concerned with the allocation of taxing power. Rather, at least in the case of Art 22(2), it

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operates on the assumption that each sovereign nation has validly imposed tax on the same amount, thus giving rise to the need for relief. Article 22(2) provides as follows:

Subject to paragraph (4), United States tax paid under the law of the United States and in accordance with this Convention, other than United States tax imposed in accordance with paragraph (3) of Article 1 (Personal Scope) solely by reason of citizenship or by reason of an election by an individual under United States domestic law to be taxed as a resident of the United States, 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.

Article 22(1) imposes on the United States a reciprocal obligation to allow in respect of a taxpayer in the United States, a credit for income tax paid to Australia. Article 22(3) deals with rebates on dividends paid by a United States corporation and is not in issue. Article 22(4) is also not in issue and need not be reproduced.

115. I make the following observations about the operation of Art 22(2).

116. First, the Article contains three elements. The first is an expression of a general principle about relief from double taxation (the " First General Principle " ). The language used to express that principle is generic in nature, consistently with the primary function of a double tax treaty which is to allocate taxing powers and responsibilities between two sovereign powers. For that purpose, the language deployed invokes commonly held concepts to enable the allocation of taxing power to work in the context of what might be very different domestic laws relating to the taxation of income. The second is another expression of general principle, namely that there is to be a limitation on the credit to be allowed: it must not exceed the amount of Australian tax payable on the income " or any class thereof or on income from sources outside Australia " (the " Second General Principle " ). The third is not an expression of general principle. It allocates to Australia a measure of freedom to determine domestically what sort of rules it may enact to allow, or not allow, foreign tax credits. That freedom or capacity is limited to the enactment of rules which are subject to, or consistent with, the First and Second General Principles.

117. That Art 22(2) expresses principles in only a generalised way is consistent with the language of Art 22(1). Article 22(1)(a) relevantly states:

(a) the United States shall allow to a resident or citizen of the United States as a credit against United States tax the appropriate amount of income tax paid to Australia; and

…

Such appropriate amount shall be based upon the amount of income tax paid to Australia …

118. Secondly, what is the content of the First General Principle? In my view, the answer to that question will be dispositive of this part of the appeal. The taxpayer submitted that the word " income " as it first appears is to a gain made, namely here the gain made from the sale of the assets in the United States (it was not in dispute that the United States had the right to tax that gain by reason of Art 13 of the Treaty which deals with " income or gains " from a disposition of " real property situated " in that country). On this basis, it was said, the word " income " when used a second time in the phrase " Australian tax payable in respect of the income " needed to be read as Australian tax payable in respect of that same gain made in the United States. That is because it refers to " the income " . The " general principle " thus said to be expressed by Art 22(2) was that Australia must allow a credit for all of the US tax paid on a gain when calculating the Australian tax payable on that same underlying transaction. Focusing on the subject matter of the underlying transaction, it was contended, enabled the Treaty to apply in circumstances

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where Australia and the United States taxed the same gain very differently. Inferentially, and for that purpose, the " gain " is a singular indivisible amount of income. Thus, here, because the taxpayer paid US tax of US$3,535,554 on the sale of the Nepa Investment it was submitted that he was entitled to a credit of this amount for Australian tax payable in respect of that sale.

119. I respectfully disagree with that statement of the First General Principle. The contention that the word " income " refers to an underlying gain is perhaps too imprecise. Moreover, there is no reason to read the word " income " as referring to one indivisible gain which is the subject matter against which competing sovereign states seek to impose tax. Nor is the reference to " income " a reference to " assessable income " , as contended for by the Commissioner. Rather, " income " should be read as a concept which is independent of, but not divorced from, the domestic income tax regimes of each sovereign power (respectively income tax imposed by the Internal Revenue Code (US) and income tax imposed under the federal law of Australia: Art 2(1)). In that respect, the very subject matter and purpose of the Treaty concerns taxes on " income " . Whilst that term is not defined, we can observe generic species of income addressed throughout the Treaty. It deals with business profits (Art 7); " income " from real property (Art 6); " profits " from shipping and air transport (Art 8); dividends (Art 10); interest (Art 11); royalties (Art 12); " income or gains " from the disposal of real property (Art 13); income from independent personal services (Art 14); income from dependent personal services (Art 15); income derived by entertainers (Art 17); pensions, annuities, alimony and child support (Art 18); wages, salaries and similar remuneration paid to an employee of a state (Art 19); and payments made to a student (Art 20). Each of these is an item of income for the purposes of the Treaty. We know this because this is what the Treaty says they are. Article 21(1) provides:

Items of income of a resident of one of the Contracting States, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.

(Emphasis added.)

The word " income " , where it appears in Art 22(2), should thus be read as a reference to those items of income covered by the Treaty, including those addressed in Art 21. Context does not otherwise permit giving the word " income " its meaning under domestic Australian law: cf Art 3(2).

120. Thirdly, the language of Art 22(2), is not confined to a simple comparison of the tax paid in different countries on the same underlying transaction. In each case, the word " income " must bear a nexus, expressed by the words " in respect of " , with US " tax paid " and " Australian tax payable " . That directs attention to how each taxing regime taxes that income. The mistake which the taxpayer makes here is to commence its consideration of Art 22(2) with the identification of all of the US tax paid on the underlying gain. But because the purpose of Art 22(2) is the allowance by Australia of a credit against tax payable, in my view, the starting point must be the identification of what income Australia taxes. Because of the operation of the CGT 50% discount for individuals, Australia does not tax all of the gain made here; it taxes 50% of it (leaving aside the effect of any offsetting capital losses). That is the income, for Art 22(2) purposes, in respect of which Australian tax is payable. The question which then must be answered is what was the US " tax paid … in respect of " that income. In my view, only half of the US tax paid can be said to be in respect of the income taxed in Australia. In other words, the applicable general principle expressed in the first element of Art 22(2) is that US tax paid on income the subject of Australian tax shall be allowable as a credit against the Australian tax paid on that income.

121. Fourthly, expressing the principle in this way is a precise expression of the relief which should be given where a taxpayer has been subject to double tax. It ensures that Mr Burton does not pay double tax on the same amount of income he has earned. In contrast, if the taxpayer ' s interpretation were to prevail, the taxpayer would get more protection or relief than he truly needs. Here, it would

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permit Mr Burton to claim as a credit against Australian tax payable, US tax paid on income (50% of the net proceeds) never brought to tax in Australia. I do not think that this was the intended outcome. In my view, " double taxation " takes place in the context of Art 22(2) when the same amount is taxed by different countries twice. However, it is not double taxation if one jurisdiction seeks to tax more aspects of a singular transaction than the other; it is only double taxation when they both seek to tax the same thing - that is, the same business profits, the same " income " from property, the same " profits " from shipping and air transport, the same dividend, the same interest, the same royalty, the same " income or gains " from the disposal of real property, the same income from independent personal services, and so on. As Viscount Dilhorne observed of the equivalent article in the then Double Taxation Relief (Taxes on Income) (New Zealand) Order, 1947 (S.R. & O. 1947, No. 1776), in
Duckering (Inspector of Taxes) v Gollan [1965] 2 All ER 115 at 116:

The object of [the article] is clearly to secure that credit shall be given for New Zealand income tax paid in a particular year against United Kingdom tax payable in the same year in respect of the same income .

(Emphasis added.)

122. Fifthly, the parties were in agreement that in construing Art 22(2) regard should be had to the Vienna Convention on the Law of Treaties , opened for signature on 23 May 1969,
[1974] ATS 2 (entered into force on 27 January 1980) (the " Vienna Convention " ) and in particular Art 31 of that Convention. In
McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 , the Full Court of this Court summarised the applicable principles arising from that Convention at 143 [38] as follows:

The application of the Convention has been discussed by McHugh J in
Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225 and in
Thiel v Commissioner of Taxation (1990) 171 CLR 338 , the latter case being concerned with the interpretation of the double taxation agreement between Australia and Switzerland. The leading authority in this Court on interpretation of double taxation agreements is Lamesa . It is unnecessary here, to set out again what is there said. The following principles can be said to be applicable:

  • • Regard should be had to the " four corners of the actual text " . The text must be given primacy in the interpretation process. The ordinary meaning of the words used are presumed to be " the authentic representation of the parties ' intentions " : Applicant A at 252-253.
  • • The courts must, however, in addition to having regard to the text, have regard as well to the context, object and purpose of the treaty provisions. The approach to interpretation involves a holistic approach.
  • • International agreements should be interpreted " liberally " .
  • • Treaties often fail to demonstrate the precision of domestic legislation and should thus not be applied with " taut logical precision " .

In my view, the interpretation I have reached is consistent with the foregoing principles of construction. It considers the meaning of the words of Art 22(2) in the context of the entire Treaty.

123. Sixthly, for the reasons that follow, there is no disconformity between Div 770 and the general principles established by Art 22(2). Division 770 is authorised by that Article.

124. Seventhly, it was a fundamental plank of the taxpayer ' s case, both in reliance upon Art 22(2) and s 770-10, that the Commissioner was wrong to contend that double taxation only arises where foreign tax and Australian tax are imposed on " exactly the same amount " . It was said that double taxation arises where foreign tax and Australian tax are imposed on the same " subject matter " ; namely, here, the same underlying gain. With great respect, I do not agree with this submission. The taxpayer ' s inspiration for this expression of the test is found in some words contained in the introduction to the OECD ' s Model Tax Convention on Income and Capital (and which language first appeared in 1995). The words were as follows:

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International juridical double taxation can be generally defined as the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter and for identical periods.

Consideration of the OECD Model Convention and the commentary to it is well established, and I will assume that this includes the introduction to the Model itself:
Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 . However, putting aside the fact that these words were written some 12 years after the Treaty here was signed, it appeared to be accepted that the Treaty was based not only on the OECD Model. It was also based on the United States Model Income Tax Convention for the avoidance of double taxation and the prevention of tax evasion with respect to taxes on income. In that respect, it was not established that the two Models were materially and relevantly the same. In any event, and for my part, I was not assisted by the generalised words relied upon. They do not specifically address the issue before the Court. In my view, care should be taken before relying upon highly generalised statements in a bi-lateral document, the wording of which is likely to have been the product of competing sovereign interests and then the reaching of a compromise. Such statements are usually of very limited use:
Stevens v Kabushiki Kaisha Sony Computer Entertainment (2005) 224 CLR 193 at 231 [126] per McHugh J. The safer course is to construe the words of the Treaty itself in their context and in accordance with the Vienna Convention.

125. Eighthly, I do not think that my approach lacks that " degree of pragmatism " which Lord Reed recently relied upon for the construction of the equivalent article in the United Kingdom-United States double tax treaty:
Anson v Commissioners for Her Majesty ' s Revenue and Customs [2015] UKSC 44 ; 4 All ER 288 at [114]. I do not think it pragmatic to award a taxpayer a credit for foreign tax paid on income not included in assessable income in Australia.

126. Finally, the taxpayer contended that if the Commissioner ' s approach were to be adopted there would be an anomalous outcome concerning the treatment of capital losses and revenue deductions. Because step 1 of s 102-5 requires the capital gain to be reduced by reference to other capital losses incurred during the income year, step 2 then requires the capital gain to be further reduced by any previously unapplied net capital losses from earlier income years, and steps 3 and 4 then require the application of available discount percentages, the FITO is limited to the resulting net capital gain. In contrast, it was said, the position was different for revenue gains. It was said that in such a case any deductions from ordinary income do not " burn " the amount of FITO that can be applied. It was then said that this differing treatment was anomalous, and was unlikely to be what Parliament intended. However, the reason for the difference, if there be a difference, arises from the treatment of capital gains and losses giving rise to a net capital gain which is only then included in assessable income. It does not arise, it seems to me, from adoption of the Commissioner ' s construction of Art 22(2) or s 770-10 as against that favoured by the taxpayer. As for the availability of the CGT 50% discount, no anomaly arises from the inability to apply a FITO against amounts which are never included in assessable income. In these circumstances, the observation of Black CJ and Sundberg J in
Esso Australia Resources Ltd v Federal Commissioner of Taxation (1998) 83 FCR 511 would appear to be apt. At 519 their Honours said:

Especially when different views can be held about whether the consequence is anomalous on the one hand or acceptable or understandable on the other, the Court should be particularly careful that arguments based on anomaly or incongruity are not allowed to obscure the real intention, and choice, of the Parliament.

See also
ConnectEast Management Ltd v Federal Commissioner of Taxation (2009) 175 FCR 110 at 119 [41].

127. For these reasons, I do not think that Art 22(2) supports the taxpayer ' s case. The learned primary judge reached the same conclusion below. His Honour said at [126]-[127]:

In my view, the same process of reasoning should apply. Under Australian law, the only

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income forming part of the assessable income is 50% of the capital gain on which tax is paid in the US. Where Art 22(2) refers to Australian tax payable in respect of income, the income is only 50% of the capital gain.

Secondly, the word ' all ' does not appear before the words ' United States tax paid ' in the first line of Art 22(2). The Article does not suggest that a credit is allowed against Australian tax payable for the whole amount of the US tax paid. The general principle is that one is allowed a credit. It simply says a credit against US tax paid. It does not prescribe how much is to be allowed as a credit. The credit is subject to the provisions and limitations of Australian law. Division 770 serves to determine the credit allowable and importantly nothing in the Art 22 is inconsistent with the construction of s 770-10 advanced by the Commissioner.

I respectfully agree with and adopt these reasons of his Honour.

128. I should finally record that neither party addressed the Court as to what would happen if the Court were to decide that no offset was available under Div 770 but nonetheless was of the view that the taxpayer ' s construction of the Treaty was correct. The parties were invited to make submissions in writing about this after the hearing.

129. The taxpayer submitted that s 16 of the Agreements Act provided the " mechanism " whereby the Commissioner could grant a credit for the US tax paid in conformity with Art 22(2). His argument, however, well illustrates the danger of a literal reading of the text of legislation without regard to statutory history. The relevance of that history can sometimes play a decisive role: cf
Woodside Energy Ltd v Commissioner of Taxation (No 2) [2007] FCA 1961 ; (2007) 69 ATR 465 . In some cases it does not: cf
Jeffrey James Prebble Pty Ltd v Commissioner of Taxation (2003) 131 FCR 130 . In this case it does.

130. Section 16 of the Agreements Act provides:

Rebates of excess tax on income included in assessable income

  • (1) This section applies in relation to each relevant part of a taxpayer ' s income of the year of income that consists of income in respect of which a provision of an agreement limits the amount of Australian tax payable.
  • (2) The taxpayer is entitled, in respect of each relevant part of the taxpayer ' s income of the year of income to which this section applies, to a rebate of the amount (if any) by which the amount ascertained in accordance with the last preceding section as the amount of Australian tax payable in respect of that part exceeds the limit applicable under the provisions of the agreement in relation to that part.
  • (3) The rebate to which a taxpayer is entitled under this section in respect of a relevant part of the taxpayer ' s income shall be allowed in the taxpayer ' s assessment in respect of income of the year of income in the assessable income of which that part is included.
  • (4) A rebate, or the sum of the rebates, a taxpayer is entitled to under subsection (2), in respect of income of a year of income, must not exceed the amount of Australian tax payable in respect of the taxpayer ' s taxable income of that year after all other rebates of, and deductions from, that tax have been taken into account.

131. The taxpayer submitted:

Article 22(2) of the Australia-US Convention limits the amount of Australian tax payable, in terms of s 16(1). It does so by requiring, in the present circumstances, that a credit for the full amount of the US tax on the three gains in issue " shall be allowed " against Australian tax.

Under s 16(2), the appellant is entitled, in respect of his income for the 2011 and 2012 years of income, to a rebate of the amount by which the amount ascertained under the former s 15 of the Agreements Act exceeds the limit applicable under Article 22(2). Section 15 was repealed in 1986, but this does not deny s 16 effect, and the relevant part of s 16(2) should be construed as referring to the amount of tax otherwise payable but for the limit in the agreement:
Satyam Computer Services Ltd v Commissioner of Taxation (2018) 362 ALR 589 ; [2018] FCAFC 172 at [27]. In the event that

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the Court agrees with the Commissioner ' s construction of s 770-10(1), this is the Australian tax in respect of the three gains before the Article 22(2) credit. The limit applicable under Article 22(2) is the Australian tax payable after a credit has been allowed for the full amount of US tax. The rebate under s 16(2) is the difference, that is, the full amount of the US tax.

I respectfully disagree.

132. Section 16, in its current form, was introduced into the Agreements Act by the Income Tax (International Agreements) Act 1968 (Cth). This Act gave domestic force to a new double tax treaty that had been entered into between the governments of the Commonwealth of Australia and that of the United Kingdom in 1967. That amending Act also repealed and substituted s 14 of the Agreements Act (reproduced below). As will become clear, s 14 was the " mechanism " whereby Australia ' s obligations concerning double taxation were at that time to be enforced by the giving of a credit for foreign tax paid. In contrast, s 16 was not that mechanism. Section 14 was then repealed by the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 (Cth) when general rules for the allowance of a credit for foreign tax paid were introduced into the 1936 Act (Div 18 of Pt III). Section 14 provided:

Provisions relating to credits for foreign tax.

  • (1) This section has effect for the purpose of the determination of the credit or credits allowable, under an agreement, for foreign tax paid or payable by a person in respect of any income.
  • (2) Where the income of the person of the year of income includes only one amount of income in respect of which a credit is allowable under the agreement, a credit is allowable in respect of that amount of income.
  • (3) Where the income of the person of the year of income includes two or more amounts of income in respect of which credits are allowable under the agreement -
    • (a) if those amounts of income comprise one class of income only - one credit is allowable in respect of the total of those amounts; or
    • (b) if those amounts of income comprise two or more classes of income - a separate credit is allowable in respect of the total f those amounts included in each class of income.
  • (4) The amount of the credit allowable in respect of any income shall not exceed the amount of Australian tax payable in respect of that income.

133. The Explanatory Memorandum which accompanied the Income Tax (International Agreements) Bill 1968 (Cth), relevantly said of s 14:

Provisions relating to credits for foreign tax

The main purpose of the new section 14, as of the section 14 being repealed, is to provide that where credit for foreign tax in respect of any income is allowable under the provisions of an agreement, the amount of that credit is not to exceed the amount of Australian tax payable in respect of the income.

Because of the exemption under section 23(q) of the Assessment Act, credits were, in practice, previously allowable only in the case of dividends and the existing section 14 requires the calculation of a separate credit in respect of each dividend derived from each country with which Australia has a double taxation agreement.

Following the new United Kingdom agreement credits will now be available also in respect of United Kingdom interest and royalties. With this extension of the area in which credits are allowable it is proposed to keep to a minimum the number of credit calculations required.

The proposed section 14 will apply on the basis of a separate credit for all income of a particular class that is derived from any one country with which Australia has a double taxation agreement. The limitation on the amount of credit will, therefore, be applied separately to each class of income derived from each such country.

…

134.

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In contrast, s 16 is not concerned with the provision of a " credit " but with the conferral of a " rebate " in defined circumstances. As the Explanatory Memorandum makes clear, s 16 is concerned with the payment of dividends, royalties and interest to non-residents in circumstances in which a double tax treaty has limited Australia ' s taxing rights. For example, in 1968 the then 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 , signed on 7 December 1967,
[1968] ATS 9 (terminated on 17 December 2003) limited Australia ' s right to tax royalties paid to a resident of the United Kingdom to 10% of the amount paid. The Explanatory Memorandum thus stated about s 16:

This clause proposes the repeal of section 17 of the Principal Act and its replacement by a modified section - section 16.

The existing section 17 provides for the allowance of a rebate to give effect to provisions in Australia ' s double taxation agreements limiting the amount of Australian tax payable by assessment processes in respect of dividends flowing to countries with which Australia has double taxation agreements. Where the amount of Australian tax on the dividend, as ascertained in accordance with the present section 16, exceeds the amount to which the Australian tax is limited, a rebate is to be allowed in the shareholder ' s assessment.

It is necessary to extend the provisions now contained in section 17 because the new United Kingdom agreement, in addition to limiting the amount of Australian tax payable on dividends derived by United Kingdom residents, also provides for limitations on the Australian tax on interest and royalties paid to United Kingdom residents. The new section 16 will operate for these purposes.

The section will not apply in relation to income that is subject to withholding tax. Where United States, Canadian and New Zealand taxpayers derive dividends in respect of which the Australian tax is limited to 15%, the dividends will in general be subject to withholding tax and section 16 will accordingly not be applicable. Except in isolated cases, therefore, section 16 will in practice apply only in relation to United Kingdom residents.

135. With the repeal of s 14 of the Agreements Act and then Div 18 of the 1936 Act, in my view, the only " mechanism " left for the enforcement of Australia ' s obligations in relation to double taxation is Div 770. Section 16 is not another form of this " mechanism " . It simply does not deal with the subject of double taxation. Read in the context of s 14 and the explanation of it found in the Explanatory Memorandum, it cannot, with respect, do the work contended for by the taxpayer.

136. Moreover, and in any event, s 16 cannot be given any sensible operation. Subsection (2) provides that the rebate is to be calculated as the amount by which the Australian tax payable " in accordance with the last preceding section " exceeds the limit applicable in a double tax agreement. That " preceding section " (s 15) set out a series of rules for the calculation of the " Australian tax " payable. However, s 15 was also repealed in 1986. Without those rules, s 16 cannot be made to work. Of course, the Court must " strive " to give meaning to every word of a provision, such as s 16:
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 . But no amount of striving can supply legitimate meaning and operation to a provision which is dependent upon another section which Parliament has seen fit to repeal.

137. The taxpayer also relied upon a decision of the Full Court of this Court in
Satyam Computer Services Limited v Commissioner of Taxation [2018] FCAFC 172 ; (2018) 362 ALR 589 which concerned Art 23 of the Agreement between the Government of Australia and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income , signed on 25 July 1991,
[1991] ATS 49 (entered into force on 30 December 1991). At [27] the Full Court said:

If, and to the extent that, s 16 of the Agreements Act has any bearing upon the

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proper construction of the statutory scheme, the repeal of the former s 15 should not be treated as denying s 16 any effect and it should be construed as referring to the amount of tax otherwise payable but for the limit in the agreement: Project Blue Sky at [71].

I do not think that this passage has any bearing on the proper outcome here. The Court in Satyam was dealing with a different issue, namely the correct interpretation of Art 23 of the India-Australia double tax treaty.

138. It was next submitted that the 1997 Act supplied the " machinery " to enable the credit arising under Art 22(2) to be enforced. It was said that the definition of " tax offset " in the method statement found in Step 3 of s 4-10(3) of the 1997 Act would include the " credit " conferred by Art 22(2). Section 4-10(3) provides:

Method statement

Step 1. Work out your taxable income for the income year.

To do this, see section 4-15.

Step 2. Work out your basic income tax liability on your taxable income using:

  • (a) the income tax rate or rates that apply to you for the income year; and
  • (b) any special provisions that apply to working out that liability.

See the Income Tax Rates Act 1986 and section 4-25.

Step 3. Work out your tax offsets for the income year. A tax offset reduces the amount of income tax you have to pay.

For the list of tax offsets, see section 13-1.

Step 4. Subtract your tax offsets from your basic income tax liability. The result is how much income tax you owe for the financial year.

139. It was submitted that the credit referred to in Art 22(2) answers the description of an amount that " reduces the amount of income tax you have to pay " . It was said that the Commissioner ' s " own practice recognises this " . I respectfully disagree. The offsets referred to in Step 3 are those provided by the 1936 and 1997 Acts, such as those found in Div 770. They are the ones listed in s 13-1 of the 1997 Act. That is why the provision directs the reader to that provision where there is found an applicable " list of tax offsets " . Whilst the provision is a " Guide " (see s 950-150 of the 1997 Act for the use to be made of a Guide), there is nothing to suggest, as submitted by the taxpayer, that it is not " exhaustive " . In my view, the list can be considered to confirm the meaning of Step 3 (s 950-150(2)(b)). It can be used to affirm that the offsets referred to in Step 3 are those supplied by the 1936 and 1997 Acts. The Commissioner ' s practice cannot alter that conclusion.

140. It was then said, in the alternative, that Step 2(b) in s 4-10(3) supplied the necessary " machinery " . This was on the basis that " Article 22(2), as incorporated and given priority by ss 5 and 4(2) of the Agreements Act, is a ' special provision ' " . Again, I respectfully disagree. Step 2 is directed at the identification of the rate of tax which is payable on taxable income ascertained by Step 1. It does not deal with offsets or credits. They are addressed by Step 3. The offset can only have work to do once the quantum of tax has first been ascertained by Steps 1 and 2.

141. Finally, and in the alternative, ss 4(2) and 5 of the Agreements Act were relied upon. Those provisions are relevantly as follows:

4 Incorporation of Assessment Act

…

(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the [1936 Act or 1997 Act] (other than Part IVA of the [1936 Act]) or in an Act imposing Australian tax.

…

5 Current agreements have the force of law

(1) Subject to this Act, on and after the date of entry into force of a provision of an agreement mentioned below, the provision has the force of law according to its tenor.

…

142. It is said that because of these provisions, Art 22(2) has the force of law with domestic application independent of Div 770. The taxpayer relies on an income tax ruling () for that purpose. The Commissioner generally supported this view of the application of Art 22(2) but observed that " there may well be scope for unforeseen anomalies, or practical difficulties, in computing credit by force of the article directly " .

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143. Again, I respectfully disagree. As already mentioned, ordinarily, whilst it has the force of domestic law, the provisions of the Treaty serve to allocate taxing powers between nations; they do not operate to assess and then impose any tax. They are not a source of power to tax:
Chevron Australia Holdings Pty Ltd v Federal Commissioner of Taxation (No 4) [2015] FCA 1092 ; (2015) 102 ATR 13 at [61]; but note the exceptional circumstances in Satyam . As a result, as this Court observed in Lamesa Holdings , the business profits article in a double tax treaty does not authorise the Commissioner to impose tax on income which is treated by the 1936 and 1997 Acts as being exempt. For one thing, the language used often lacks the specificity required to impose tax (or to give a credit).

144. However, as the taxpayer points out here, the language of Art 22(2) is stronger. The critical phrase is " shall be allowed as a credit " . This was said to impose a domestically enforceable obligation to give a credit for foreign tax in the circumstances mandated by that article. But upon whom is the obligation imposed and what is its content? Three observations may be made:

  • (a) No obligation is imposed by Art 22(2) on the Commissioner. Rather, it is imposed on " Australia " . That term is relevantly defined in Art 3(1)(k) as the " Commonwealth of Australia " and, when used in a geographical sense, includes certain geographic areas, such as Norfolk Island. That term does not include the Commissioner. Various articles in the Treaty impose obligations and duties on the " competent authority " of each Contracting State. That term is defined in Art 3(1)(e)(ii) as meaning " the Commissioner of Taxation or his authorized representative " . Art 22(2) does refer to the competent authority of either Contracting State;
  • (b) Article 22(2), as already mentioned, expressly contemplates that the means of conferring a " credit " will be the enactment of separate domestic law. The credit which is allowable " shall be in accordance with the provisions and subject to the limitations of the law of Australia " (emphasis added); and
  • (c) Article 22(2) does not allocate taxing power (unlike, for example, Art 7). It thus cannot be invoked as a " shield " .

145. In my view, imposing the obligation on " Australia " and not on the Commissioner as a competent authority, strongly suggests that the intention here was to impose obligations at the level of two sovereign states. The obligation relevantly owed is to the Republic of the United States as a sovereign nation by the Commonwealth of Australia. That conclusion is consistent with the second observation I have made. The obligation is to be discharged by the enactment of domestic legislation. Here that is Div 770. This conclusion does not foreclose the availability of relief were Australia to be in breach of its obligation in Art 22(2). It may, for example, be open to a citizen of Australia to seek declaratory relief in this Court to determine whether Australia had complied with Art 22(2). But that citizen could not, in such proceedings, seek a credit outside the terms of Div 770. The Commissioner thus has no lawful authority, absent Div 770, to grant the FITO sought and the Treaty is no other source of power to do so. What he has said in makes no difference to that outcome.

Division 770

146. The learned primary judge decided that s 770-10 allowed a FITO equal to only 50% of the US tax paid on the sale of the assets in the United States. Much of that conclusion turned upon the meaning to be attributed to the words " in respect of " and " included in assessable income " in that provision. His Honour concluded at [113]:

The words ' in respect of ' require connection to, and they take their meaning from, their content and the purpose of the provision in context. The intent of the provision is that where only part of an amount in respect of which foreign income tax was paid equates to assessable income under Australian tax law, it is that portion to which the words are directed. The analysis set out

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above in relation to ' included in ' applies also in relation to this debate. Assessable income is the limiting factor. In Australia, s 102-5 of the 1997 Act dictates that 50% of the capital gain is not assessable income.

For the reasons that follow I respectfully agree with his Honour ' s conclusion.

147. Before addressing the taxpayer ' s submissions on appeal, I should explain why I agree with the learned primary judge. In my view the conclusion his Honour reached accords with:

  • (1) the ordinary and natural meaning of the words used in s 770-10. The provision is concerned with two amounts. The first is an " amount " of foreign income tax which has been paid. The second is an " amount " included in the assessable income of the taxpayer. If the first amount was paid " in respect of " the second, a FITO arises. Here, US$3,535,554 was not paid " in respect of " the amount of the Nepa Investment gain that comprised the net capital gain included in the assessable income of the taxpayer. That US tax was payable and paid in respect of a different amount: double the amount included as assessable income under Australian tax law. In other words, only half of the US tax paid was " in respect of " an amount included in assessable income. In that respect, it may be inapt to describe that as a " proportionate " approach. It would be more accurate to say that the provision requires the identification of the amount of foreign tax paid on income which has also been taxed in Australia. Like Art 22(2), one must first identify what has been included in assessable income, and then what foreign tax has been paid on that sum.
  • (2) the object and purpose of Div 770. Section 770-1 expresses the function of Div 770 as being the provision of a FITO " for foreign income tax paid on your assessable income " . Here, only 50% of US tax was paid " on " the assessable income of the taxpayer. Section 770-5 expresses the object of Div 770. It states that relief is given where you paid foreign tax " on amounts included in your assessable income " and Australian tax would be paid " on the same amounts " , but for Div 770. I note here that the taxpayer urged upon the Court a construction of s 770-10 which did not limit the availability of a FITO to tax paid twice " on the same amounts " ; the provision should be read, it was said, as being engaged where tax was paid twice on the same subject matter . That construction is not supported by the language of s 770-10 and is squarely inconsistent with the clear words of s 770-5. If it be the case that s 770-10 uses language which permits constructional choices, for example by the use of words of nexus such as " in respect of " , s 770-5 would mandate a constructional choice here in favour of the Commissioner and against the taxpayer.
  • (3) the " notes " to s 770-10. Note 2 expressly addresses a case where one amount is treated partly as assessable income and partly not (because it is treated as non-assessable non-exempt income). It states that in such a case " only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset " . In my view, this note may be used to help " understand " the reach of s 770-10. It is also not limited to a case of non-assessable non-exempt income. As a matter of logic, the approach it mandates would apply whenever an amount is only partly included in assessable income. It would extend to an amount which is in part exempt income. It would extend to an amount which, as here, requires the exclusion of part of it in a determination of a net capital gain.
  • (4) the Explanatory Memorandum which accompanied the introduction of the Tax Laws Amendment (2007 Measures No.4) Bill 2007 (Cth) (the " 2007 Explanatory Memorandum " ). Paragraph 1.40 of that document states:

    Entitlement to the tax offset will only arise when, and to the extent that, the foreign income tax has been paid on an amount included in assessable income [ Schedule 1, item 1, subsection 770-10(1) ]. Foreign income tax paid on non-assessable non-exempt amounts (except for section 23AI and 23AK

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    amounts) is disregarded. Only where the taxpayer has paid foreign income tax on an amount included in assessable income will double taxation, and consequently relief from double taxation, arise. If only part of an amount on which an amount of foreign income tax has been paid is included in assessable income (eg, foreign income tax paid on the foreign branch income of an Australian company), only the same fraction of the foreign income tax counts towards the tax offset [Schedule 1, item 1, note 2 in subsection 770-10(1)] .

    (Emphasis added.)

  • (5) the conclusions I have reached concerning Art 22(2) and the concept of double taxation more generally. The taxpayer does not need a FITO for US tax paid in respect of income which is not brought to account in Australia.

148. The taxpayer advanced a number of contentions to show appealable error. The contentions reflect the complex nature of the issues before the Court - they were, with the greatest of respect, well argued. However, I find myself unable to agree with them. The submissions were as follows.

149. First, it was contended that the entire net gain made from the sale of the assets was " included " in the assessable income of the taxpayer. It formed part of the calculation of the net capital gain. When the assets were sold CGT event A1 occurred. A capital gain was made in each case equal to the extent to which the capital proceeds exceeded each asset ' s cost base. The whole gain was thus the subject of income taxation. Those gains were then included in Step 1 of s 102-5. At this point they had not been reduced by 50%. That only took place at Step 3. Australia ' s choice to make that reduction, it was said, should not deny to Mr Burton his right to a credit for all the tax he had paid in the United States. Reliance was placed upon the observations of Fullagar J in
Mutual Life and Citizens ' Assurance Co Ltd v Commissioner of Taxation (1959) 100 CLR 537 . At 550, his Honour said:

If you impose tax on a proportion of x , you are taxing x , and, if x includes y , you are taxing y .

At 553-554, his Honour then said:

The general scheme of the Commonwealth legislation is not to impose tax by reference to specific categories of income. It contains, of course, many special provisions as to what does and does not constitute income, but its general plan is to treat as " assessable income " - gross income - whatever is income within the general conception of that term, and to require the " taxable income " to be ascertained by subtracting from assessable income what are called " allowable deductions " . Consistently with this general plan no income can be regarded as exempt from income tax either if it is required to enter into the calculation directly as itself a part of the assessable income, or even if, though it is excluded from the actual calculation of assessable income, the rate of tax is increased by reference to its existence.

(Emphasis added.)

150. I respectfully disagree with this submission. The language of s 770-10 relevantly directs attention to an amount that is " included in … assessable income " . In my view, that is a reference to what is included within the assessable income of a taxpayer by reason of Div 6 of the 1997 Act, and which then forms part of the formula for the determination of " taxable income " for the purposes of s 4-15 of the 1997 Act. Here, the amount that is included in the assessable income of the taxpayer is the net capital gain, being an item of " statutory income " and calculated in accordance with s 102-5, and no more. That is made clear by the opening words of that provision: " [y]our assessable income includes your net capital gain " . By choosing the words " included in … assessable income " in s 770-10, Parliament intended to refer to this method of assessment, and not to any broader concept. In particular, I note that s 770-10 does not refer to amounts that may form part of the computation of an item of assessable income, but which nonetheless, ultimately does not form part of the assessable income of the taxpayer. It is not concerned with whether an amount more broadly can be said to have been taxed or is exempt. In that respect, I can accept, that colloquially speaking, it can be said that the 1997

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Act taxes the entire gain in the sense that the whole amount is brought to account by CGT event A1. But s 770-10 is not concerned with that more general enquiry. It is concerned with those amounts actually included in assessable income; for the reasons already given, 50% of the capital gain is not so included. Indeed, the taxpayer never suggested that it had been for the purposes of s 4-15.

151. Secondly, the taxpayer pointed out that s 770-10 does not refer to double taxation in respect of the " same amounts " . This, it was said, was deliberate. It was intended to enable Div 770 to apply to cases where foreign tax may not have been paid on the same amount, but on the same subject matter. In that respect, the significance of the phrase " same amounts " in s 770-5 was said to be of no moment; that is because ss 770-1 and 770-5 are not operative provisions, and describe the function and purpose of Div 770 at a high level of generality.

152. I am afraid that I disagree with this submission. I accept that Div 770 must be made to operate in circumstances where a foreign tax regime may tax a gain or a receipt or an earning in a different way. But what will be taxed will nonetheless comprise a quantified gain, profit, receipt or earning. Where that " amount " is included in a taxpayer ' s assessable income, in the sense I have described above, s 770-10 will be engaged. Where only part of that " amount " is included in assessable income, to that extent, s 770-10 will also be engaged. It is precisely for that reason that s 770-5 refers expressly to the payment of Australian tax on the " same amounts " .

153. Thirdly, the taxpayer relied upon s 121EG(3A) of the 1936 Act which was introduced at the same time as Div 770. This provision is contained within Div 9A of Pt III of the 1936 Act which contains rules for the concessional taxing of Offshore Banking Units ( " OBU " ). Generally speaking, the company tax rate is applied to only a fraction of the OBU ' s income (10%). A specific provision was introduced to deal with the calculation of the amount of foreign income tax paid by an OBU. It makes clear that only the same fraction of foreign income tax is taken to have been paid. Section 121EG(3A) provides:

Subject to section 121EH, this Act applies to an OBU as if only the eligible fraction of each amount of foreign income tax (within the meaning of the I ncome Tax Assessment Act 1997 ) the OBU paid in respect of an amount of assessable OB income had been paid in respect of that income.

It was submitted that the Commissioner ' s construction of s 770-10 should not be accepted because it would render this provision otiose: see Project Blue Sky at 382 [71].

154. Once again, I regret that I cannot accept this submission. The learned primary judge said of it at [87]:

However, this provision is targeted at a discrete issue, namely, the treatment of assessable income of OBUs (or offshore banking units). It also forms part of a different division in a different Act, albeit that it was introduced at the same time as Div 770. Further, and unlike Note 2, it is not an example but an operative provision which operates on its own terms. Indeed it has its own discrete genesis as explained in its Explanatory Memorandum (particularly [1.90]-[1.93] and [1.306]-[1.308]), which describes the reasons why the provision was introduced. The reason was the fact that, at the time of the Explanatory Memorandum, foreign tax paid on assessable offshore banking income was quarantined from that paid on other assessable foreign income. The provision was to ensure that any excess foreign tax in respect of assessable offshore banking income could not be used to shelter other low foreign-taxed income earned by the offshore banking unit from Australian tax. It is a different regime with a discrete purpose which operates on its own terms.

I respectfully agree with and adopt his Honour ' s reasons. The 2007 Explanatory Memorandum describes the function and purpose of s 121EG(3A) in language that does not support the taxpayer ' s case. Paragraphs 1.90 to 1.93 state:

1.90 Foreign income tax paid on assessable offshore banking income of an offshore banking unit will be adjusted by the (offshore banking) eligible fraction.

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1.91 Entitlement to an offset for foreign income tax paid on assessable offshore banking income will therefore only arise for a fraction (currently one-third) of the amount of foreign income tax paid. This is consistent with the treatment afforded to assessable offshore banking income as well as the allowable offshore banking deductions . [ Schedule 1, item 1, subsection 770-10(1) and items 55 to 61, paragraph 121B(3)(d), subsection 121EG(3A) and paragraph 121EH(e), subsection 121EJ(1) of the ITAA 1936 ]

1.92 The reduction of foreign income tax recognises that two-thirds of foreign income tax paid in respect of offshore banking income relates to offshore banking income that is non-assessable non-exempt income. Double tax does not arise to the extent that the foreign income tax paid relates to non-assessable non-exempt income .

1.93 Although this treatment is not currently applied to foreign tax paid on assessable offshore banking income, the consequences are less prevalent. This is because the foreign tax currently paid on assessable offshore income is quarantined from that paid on all other assessable foreign income. Moreover, an offshore banking unit would seldom have an opportunity to utilise the additional foreign income tax. With the removal of foreign tax credit quarantining, the offshore banking unit could use this additional foreign tax to shelter other types of low-taxed foreign source income, which is not the desired outcome.

(Emphasis added.)

155. The statements that s 121EG(3A) is " consistent with the treatment afforded " under s 770-10 and that double tax does not arise to the extent that foreign tax is paid on non-assessable non-exempt income, support the conclusion reached by the learned primary judge. Section 121EG(3A) is a provision dealing with double taxation in a very specific instance in a way that is entirely consistent with the construction of s 770-10 favoured by his Honour.

156. Fourthly, the taxpayer made the same point about capital losses reducing the amount of FITO that might be available. I have addressed that point already.

157. Fifthly, it was submitted that the full amount of US tax was, in any event, paid " in respect of " the net capital gain included in the taxpayer ' s assessable income. It was contended that, in contrast to the decision of the Court of Appeal of New Zealand in
Commissioner of Inland Revenue v Lin [2018] NZCA 38 , the phrase " in respect of " in s 770-10 did not mean " on " (the same phrase appears in the clause dealing with double taxation in the New Zealand-China double tax agreement which was considered in Lin ). Rather, we were urged to read the phase as " capable of breadth and flexibility " and as " referring to matters of substance " , namely the taxation of the same economic gain by two sovereign nations. Div 770 was concerned, it was said, with this substance because foreign tax is never paid on amounts of assessable income. By reason of the payment of US tax on the gains made here, the full amount of that tax should, it was submitted, count towards a tax offset; the full amount of foreign tax paid was relevantly " in respect of " the net capital gain included in the taxpayer ' s assessable income.

158. Again, I do not agree with this submission. It assumes that the " substance " of double taxation is the taxation of the same substance or subject matter. For the reasons I have already given, that is not a correct statement. In my view, the words of nexus deployed within s 770-10, namely the phrase " in respect of " , probably does mean " on " . In that respect, Lin is instructive. It was concerned with Art 23(2) of the double tax agreement between New Zealand and China which was relevantly in the following terms:

(a) Subject to any provisions of the laws of New Zealand which may from time to time be in force and which relate to the allowance of a credit against New Zealand tax of tax paid in a country outside New Zealand (which shall not affect the general principle hereof), Chinese tax paid under the laws of the People ' s Republic of China and consistently with this Agreement, whether directly or by deduction, in respect of income derived by a resident of New Zealand from sources in the

ATC 22084

People ' s Republic of China (excluding, in the case of a dividend, tax paid in respect of the profits out of which the dividend is paid) shall be allowed as a credit against New Zealand tax payable in respect of that income;

…

159. Harrison, Cooper and Asher JJ said at [29]-[30]:

… The phrase " in respect of " is amorphous and can lead to linguistic uncertainty and confusion. It is often used where one word would more accurately convey its meaning and purpose. The phrase is used in three separate places in art 23(2)(a). Mr Clews accepts the logic of consistency, of giving the same phrase the same meaning wherever it is used in the same provision. He accepts also that where the phrase " in respect of " is used in the second place ( " tax paid in respect of the profits " ) and the third place ( " tax payable in respect of that income " ) its meaning is synonymous with " on " . The phrase refers to tax paid on profits out of which a dividend is paid to the New Zealand resident; and to tax payable by the New Zealand resident on that income - that is, the " income derived by [a New Zealand resident " ] from sources in ... China " .

We are satisfied that the phrase " in respect of " is used synonymously with " on " in all three places in art 23(2)(a).

160. In the context of Div 770, I also think that the phrase " in respect of " in s 770-10 probably means " on " . The phrase links two amounts: an amount of foreign income tax and an amount included in assessable income. In my view, s 770-1 informs the nature of that link when it states that a taxpayer may get an offset " for foreign tax paid on your assessable income " . The same word, " on " is used again in s 770-5 to describe the type of nexus Parliament had in mind: it refers to a taxpayer having " paid foreign income tax on amounts included in your assessable income " . There are no grounds for ignoring this immediate statutory context, and these manifest descriptions of what Parliament intended. For this reason I reject the taxpayer ' s final submission.

161. The appeal should be dismissed with costs.


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