Thiel v. Federal Commissioner of Taxation
Judges: Mason CJBrennan J
Dawson J
Gaudron J
McHugh J
Court:
Full High Court
Dawson J.
On 25 January 1984 the appellant, who is a resident of Switzerland, acquired four units for $12,500 each in an Australian trust known as the Energy Research Group Unit Trust. On 25 May 1984, he acquired a further two units for $50,000 each. On 22 October 1984 Energy Research Group Australia Ltd. (``ERG'') was incorporated. On 9 November 1984 the appellant sold his six units in the trust to ERG for $50,000 per unit to be satisfied by the allotment to him in respect of each unit of 100,000 fully paid ordinary shares in the capital of ERG. The shares were issued to the appellant and when they were listed on the stock exchange he began to sell them. Between 7 February 1985 and 6 March 1985 he sold 252,000 of the shares through Perth stockbrokers for $566,307.30. But for the respondent's claim upon the proceeds, the appellant would have sold all the shares. The respondent, relying upon sec. 26AAA of the Income Tax Assessment Act 1936 (Cth), assessed the appellant for the year ended 30 June 1985 as liable to tax in the sum of $346,220.50 based upon an assessable income calculated as follows:
``Energy Research Unit Trust Feb 84 acquired 4 units for $ 50,000.00 June 84 acquired 2 units for $100,000.00 ----------- 6 Units Cost $150,000.00 23.11.84 sold 6 units for 600,000 x 50c shares in Energy Research Group Australia Ltd Valued at par = $300,000.00 ----------- Profit caught by sec. 26AAA = $150,000.00
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Feb/Mar 85 sold 252,000 shares for $566,307.30 Cost price (252,000 x 50c) $126,000.00 ----------- Profit vide sec. 26AAA = $440,307.30 ----------- Total assessable profit = $590,307.00''
The appellant objected to the assessment and unsuccessfully appealed to the Supreme Court of Western Australia and, subsequently, to the Full Court of the Federal Court upon the basis that the profits derived from the transaction in question were exempt from taxation under the agreement between Australia and Switzerland for the avoidance of double taxation with respect to taxes on income (``the Swiss Agreement''). Under sec. 11E(1) of the Income Tax (International Agreements) Act 1953 (Cth) that agreement is deemed to have the force of law. The appellant bases his claim upon Art. 7(1) and, in the alternative, Art. 13(3) of the Swiss Agreement. Article 7(1) is as follows:
``Business Profits
(1) The profits of an enterprise of one of the Contracting States shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State, but only so much of them as is attributable to that permanent establishment.''
Article 13(3), so far as is relevant, is as follows:
``Alienation of Property
...
(3)... income from the alienation of capital assets of an enterprise of one of the Contracting States shall be taxable only in that Contracting State, but, where those assets form part of the business property of a permanent establishment situated in the other Contracting State, such income may be taxed in that other State.''
Article 3(1)(f) of the Swiss Agreement defines the terms ``enterprise of one of the Contracting States'' and ``enterprise of the other Contracting State'' as meaning ``an enterprise carried on by a resident of Australia or an enterprise carried on by a resident of Switzerland, as the context requires''. Incorporating those definitions, the first sentence of Art. 7(1) provides that the profits of an enterprise carried on by a resident of Switzerland shall be taxable only in Switzerland unless that enterprise carries on business in Australia through a permanent establishment situated therein. Similarly, Art. 13(3) provides that income from the alienation of capital assets of an enterprise carried on by a resident of Switzerland shall be taxable only in Switzerland, but, where those assets form part of the business property of a permanent establishment situated in Australia, such income may be taxed in Australia.
Article 3(2) of the Swiss Agreement provides that any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes to which the Agreement applies. This provision is, however, of no assistance because, as will be seen, the case turns upon the meaning of the term ``enterprise'' and that term has no established meaning in Australian tax law. It is from the Agreement itself that the meaning of the term must be deduced.
The respondent argues that neither Art. 7(1) nor Art. 13(3) is applicable because the profits which he seeks to tax arose from an isolated adventure on the part of the appellant which, as it had no continued operation, did not constitute an enterprise carried on by him. The respondent points to the words ``carried on'' which are contained in the definition of an enterprise in Art. 3(1) and says that they require continuing or repeated business activities. He relies upon those cases which deal with the ordinary meaning of the expression ``carrying on business''.
In
Smith
v.
Anderson
(1880) 15 Ch.D. 247
at pp. 277-278
,
Brett
L.J. said:
``The expression `carrying on' [business] implies a repetition of acts, and excludes the case of an association formed for doing one particular act which is never to be repeated.''
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In
Kirkwood
v.
Gadd
(1910) A.C. 422
, Lord
Atkinson
cited this passage with approval (at p. 431) and Lord
Loreburn
L.C. said at p. 423: ``What is carrying on business? It imports a series or repetition of acts.'' And in
Premier Automatic Ticket Issuers Ltd.
v.
F.C. of T.
(1933) 50 C.L.R. 268
at p. 297
,
Dixon
J. gave consideration to the words ``profit arising... from the carrying on or carrying out of any profit-making undertaking or scheme'' which now appear in more than one place in the
Income Tax Assessment Act
. Whilst that phrase does not refer to the carrying on of business, the juxtaposition of ``carrying on'' with ``carrying out'' led
Dixon
J. to conclude that ``carrying on'', by way of contradistinction, involved a degree of repetition. He said (at p. 298) of those words:
``The alternative `carrying on or carrying out' appears to cover, on the one hand, the habitual pursuit of a course of conduct, and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system.''
In
Smith
v.
Capewell
(1979) 142 C.L.R. 509
,
Gibbs
J. referred to these cases and said at p. 517:
``The expression `carry on business', in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts, and not simply the effecting of one solitary transaction.''
In these cases the expression ``carrying on'' takes its colour from its context which is that of a business or its equivalent. In none of them is any attention given to the use of the expression in conjunction with the equivocal word ``enterprise''.
The respondent submits that not only must an enterprise within the meaning of the Swiss Agreement have a sufficient continuity to enable it to be said that it is carried on rather than carried out, but that it must operate through a vehicle which is capable of carrying on business (Art. 7(1) and 5(1)) and thus must amount to something more than a single adventure. The respondent argues that an enterprise must be capable of having ``a permanent establishment'' (Art. 5), of carrying on activities (Art. 5(4)), of participating in the management, control or capital of another enterprise (Art. 9), of having not only profits (Art. 7) but also capital assets (Art. 13(3)). These requirements, the respondent submits, point to some identifiable entity as the means of carrying on business.
At first instance, the appellant sought to establish that his activities in Australia were part of a wider enterprise which he carried on in Switzerland. However, the learned trial Judge rejected this submission and found that his Australian activities constituted ``an isolated transaction of a speculative nature''. The trial Judge found that the evidence went
``no further than to show that the appellant invested in the units with the clear purpose and intention of selling all of them and or the shares into which they might be converted for profit upon the planned public float whatever its form might be.''
It is upon the basis of these findings that the respondent contends that the appellant did not carry on any enterprise in Australia.
The Swiss Agreement is one of a number of bilateral agreements, or treaties, concluded between Australia and other countries based upon a model convention, known as the 1977 OECD Model Convention for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, which was adopted by the Organisation for Economic Co-operation and Development. The model convention is accompanied by official commentaries. Australia is a member of the OECD as is Switzerland, although both are included among the countries which have recorded reservations to some of the articles of the model convention. In at least one case (
Sun Life Assurance Co. of Canada
v.
Pearson
(1986) 59 T.C. 250
at p. 331
), the model convention and commentaries have been used in the construction of a double taxation agreement. This is, I think, permissible under the Vienna Convention on the Law of Treaties. Switzerland is not a party to the Vienna Convention (although Australia is) but the relevant rules which it lays down are applicable, being no more than an indorsement or confirmation of existing practice:
The Commonwealth
v.
Tasmania (the Tasmanian Dam case)
(1983) 158 C.L.R. 1
at pp. 93-94, 222
;
Fothergill
v.
Monarch Airlines Ltd.
(1981) A.C. 251
at pp. 276, 282
. Moreover, as Lord
Radcliffe
observed in
Ostime
v.
Australian Mutual Provident Society
(1960) A.C. 459
at p. 480
, an expression such as the word ``enterprise'' may have no exact counterpart in
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domestic tax laws, being part of an ``international tax language''.Article 31 of the Vienna Convention provides that a treaty is to be interpreted ``in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose''. The context includes, in addition to the text, any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. For my part, I do not see why the OECD model convention and commentaries should not be regarded as having been made in connection with and accepted by the parties to a bilateral treaty subsequently concluded in accordance with the framework of the model. However, some doubts have been expressed about the applicability, as a matter of language, of Art. 31 to the commentaries in the case of a bilateral treaty such as a double taxation agreement: see Jones et al., ``The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD Model-II'', (1984) British Tax Review 90 at p. 92.
I turn, therefore, to Art. 32 of the Vienna Convention which allows recourse to be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Art. 31, or to determine the meaning when the interpretation according to Art. 31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable. Whilst the model convention and commentaries may not strictly amount to work preparatory to the double taxation agreement between Australia and Switzerland, they are documents which form the basis for the conclusion of bilateral double taxation agreements of the kind in question and, as with treaties in pari materia , provide a guide to the current usage of terms by the parties. They are, therefore, a supplementary means of interpretation to which recourse may be had under Art. 32 of the Vienna Convention.
Curiously, recourse to the commentary upon the ``definition'' of the term ``enterprise'' in Art. 3 of the model convention, which is the same as Art. 3 of the Swiss Agreement, serves at first sight to confirm rather than remove its ambiguity. The commentary merely observes:
``The question whether an activity is performed within the framework of an enterprise or is deemed to constitute in itself an enterprise has always been interpreted according to the provisions of the domestic laws of the Contracting States. No definition, properly speaking, of the term `enterprise' has therefore been attempted in this Article.''
But that comment makes it plain that, as far as the Swiss Agreement itself is concerned, the term ``enterprise'' may cover both an activity itself and the means by which an activity is engaged in. Thus, when Art. 7(1) speaks of ``an enterprise of one of the Contracting States'', it is not necessarily referring to anything more than an activity and the reference to an enterprise being ``carried on'' in Art. 3(1) is not a reference to anything in the nature of a business which requires continuity or repetition. The words ``carries on'' and ``business'' combine in the expression ``carries on business'' in Art. 7(1) to convey a meaning which involves a series or repetition of acts and that is why in the cases those words have been so interpreted. But that is merely to give the words their ordinary meaning; they have no special meaning given to them by law. The carrying on of an enterprise involves no similar notion of continuity; an enterprise, if it is merely an activity and not a business, is carried on when it is undertaken.
The commentary upon Art. 7(1) of the Swiss Agreement confirms this construction. It commences as follows:
``This paragraph is concerned with two questions. First, it restates the generally accepted principle of double taxation conventions that an enterprise of one State shall not be taxed in the other State unless it carries on business in that other State through a permanent establishment situated therein. It is hardly necessary to argue here the merits of this principle. It is perhaps sufficient to say that it has come to be accepted in international fiscal matters that until an enterprise of one State sets up a permanent establishment in another State it should not properly be regarded as participating in the economic life of that other State to such an extent that it comes
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within the jurisdiction of that other State's taxing rights.''
The reference in Art. 7(1) to an enterprise which carries on business in the other Contracting State is, of course, entirely appropriate since it is a reference made in the context of an enterprise with a permanent establishment. An enterprise making profits through a permanent establishment may properly be described as carrying on business. And in setting out the principles to be employed in determining whether an enterprise has a permanent establishment, Art. 5 of the Swiss Agreement naturally speaks of the ordinary attributes of business. Similarly, it is appropriate in Art. 9 to speak of one enterprise participating in the management, control or capital of another enterprise and in Art. 13 of the capital assets of an enterprise, because the term ``enterprise'' may cover an entity or framework through which an activity is carried on, for which those concepts are appropriate, as well as an activity itself. The need to acknowledge isolated profit-making activities as well as continuing commercial conduct, both of which can be subsumed under the term ``enterprise'', is recognised by sec. 3(2) of the Income Tax (International Agreements) Act which provides:
``For the purposes of this Act and the Assessment Act, a reference in an agreement to profits of an activity or business shall, in relation to Australian tax, be read, where the context so permits, as a reference to taxable income derived from that activity or business.''
Article 7 is headed ``Business Profits'' and, as that heading indicates, it deals with business profits. But once it is recognised that ``enterprise'' includes an isolated activity as well as a business, business profits cannot be confined to profits (or taxable income) derived from the carrying on of a business but must embrace any profit of a business nature or commercial character. Profit from a single transaction may amount to a business profit rather than something in the nature of a capital gain even if it does not involve the carrying on of a business. Of course, the repetition of a transaction may constitute the carrying on of a business and so confirm its business character, but a single transaction may amount to a business dealing so as to characterise the profit derived from it as a business profit. If it were not so, Art. 7(1) would have the capricious result of denying relief from double taxation simply because the same transaction was not repeated a sufficient number of times. I should add that it is far from clear that the appellant's activity amounted to a single transaction involving no element of repetition or continuity. But the finding of the trial Judge that the appellant ``invested in the units with the clear purpose and intention of selling all of them and or the shares into which they might be converted for profit'' confirms that what he did was by way of an adventure of trade and was of the requisite business character: cf.
Minister of National Revenue
v.
Tara Exploration and Development Co. Ltd.
(1972) 28 D.L.R. 135
.
This conclusion makes it apparent that the applicable article of the Swiss Agreement is Art. 7 rather than Art. 13. Having regard to the nature of the appellant's activity, it would clearly be inappropriate to regard his gain as being by way of income from the alienation of capital assets. Necessarily, the nature of the enterprise upon which the appellant was engaged did not involve the acquisition of capital assets.
It follows that, as the enterprise of the appellant was not carried on through a permanent establishment in Australia, the appellant is entitled to the protection of the relevant double taxation agreement.
For these reasons, I would allow the appeal.
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