Thiel v. Federal Commissioner of Taxation

Members:
Mason CJ
Brennan J
Dawson J
Gaudron J
McHugh J

Tribunal:
Full High Court

Decision date: Judgment handed down 22 August 1990.

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Mason C.J., Brennan and Gaudron JJ.

The facts and the relevant provisions of the agreement made between Australia and Switzerland for the avoidance of double

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taxation with respect to taxes on income (``the Agreement'') are set out in the reasons for judgment of McHugh J.

The central question in the appeal concerns the interpretation to be given by an Australian court to the words ``profits of an enterprise of one of the Contracting States'' in Art. 7 of the Agreement.

The key terms ``profits'' and ``enterprise'' are not defined in the Agreement, although Art. 3(1)(f) defines ``enterprise of one of the Contracting States'' to mean ``an enterprise carried on by a resident'' of Australia or Switzerland, as the context requires. Further, Art. 3(2) states:

``In the application of this Agreement by one of the Contracting States, 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 this Agreement applies.''

The expression ``the taxes to which this Agreement applies'' includes Australian income tax: Art. 2(1)(a).

Article 3(2) provides no assistance in ascertaining the meaning of the words ``enterprise'' or ``profits'' because these words have no particular or established meaning under the laws relating to Australian income tax which is relevant to the outcome of the question for decision. That question must be resolved by reference to the Agreement itself and any extrinsic materials which may properly be considered.

Outside of Art. 3(1)(f), the expressions ``carried on'' and ``carries on'' are used only in association with the word ``business'', which bears its own connotations and is not used in Art. 3(1)(f). In Art. 3(1)(f), the word ``enterprise'' is associated with the words ``carried on''. The expressions ``enterprise'' on the one hand and ``carried on'' on the other hand are each ``terms'' for the purposes of Art. 3(2), though they must be read together in order to achieve the correct interpretation of Art. 3(1)(f) and 7.

In one sense, the words ``carried on'' have a particular meaning in Australian income tax law, as the Full Court of the Federal Court held, signifying repetitive or recurrent, rather than isolated, activity. Indeed, that particular meaning of ``carried on'' in Australian income tax law was critical to the Federal Court decision that Art. 7 had no application to the present case.

However, the meaning of ``carried on'' in Australian income tax law has been influenced by the fact that the Income Tax Assessment Act 1936 (Cth) uses in juxtaposition both expressions ``carrying on'' and ``carrying out'' and that a distinction has been drawn between them, the former meaning ``the habitual pursuit of a course of conduct'' and the latter meaning ``the carrying into execution of a plan or venture which does not involve repetition or system'': see, for example,
Premier Automatic Ticket Issuers Ltd. v. F.C. of T. (1933) 50 C.L.R. 268 at pp. 297-298 . Decisions as to the meaning of expressions such as ``carrying on the business of a skin dealer'' (see
Smith v. Capewell (1979) 142 C.L.R. 509 at pp. 514-515, 517-518 ) are not strictly part of the law relating to Australian income tax and are therefore not made relevant by Art. 3(2). In any case, the use of the term ``business'' distinguishes such phrases from that presently under consideration. If Australian income tax law does not ascribe a particular meaning to ``carry on'' otherwise than by reference to its association with ``carry out'', then it provides no assistance in ascertaining the meaning of ``carry on'' in the context of the Agreement, because those words are not used in association with ``carry out'' in the Agreement (cf. the expression ``the carrying out of international conventions'' in Art. 22(3)).

In these circumstances, it is safer to look to the context of the Agreement itself. In that context, the term ``carried on'' in Art. 3(1)(f) is no more than a linking expression used to explain the connection between an enterprise and a Contracting State which the expression ``enterprise of one of the Contracting States'' imports. Accordingly, no element of repetition or system should be attributed to that expression by reference to the use of the words ``carried on''.

The meaning of ``enterprise'' can then be ascertained from the Agreement construed in the light of such extrinsic materials as may be relevant. As the English and German texts of the Agreement were agreed to be equally authoritative, the meaning of ``enterprise'' might have been illuminated by evidence of the

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meaning of the corresponding German text, but no such evidence was given and the parties before this Court were unable to agree upon a translation of the German text. However, for the reasons given by McHugh J., it is appropriate to consider the OECD Model Convention and the associated commentaries. Importantly, the commentary on Art. 3 states:

``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.''

This statement plainly recognises that an activity, as well as a framework within which activities are engaged in, may constitute an ``enterprise'' for the purposes of the Agreement.

Moreover, we agree with Sheppard J. in thinking that an enterprise ``may consist of an activity or activities and be comprised of one or more transactions provided they were entered into for business or commercial purposes'': (1988) 21 F.C.R. 122 at p. 146. Article 7, especially the heading ``Business Profits'', supports the notion that one or more transactions entered into for business or commercial purposes is an enterprise for the purposes of the Agreement. The result is that the activities of the taxpayer in this case constituted an enterprise and were an ``enterprise of one of the Contracting States'' for the purposes of Art. 7. Indeed, it might be thought that the taxpayer's activities possessed the attributes necessary even to meet a more restrictive requirement of recurrence.

Once an activity is held to constitute an enterprise, the heading ``Business Profits'' in Art. 7 imports no additional limitation. Ex hypothesi , the activity is undertaken for some business or commercial purpose. The Article speaks of `` the profits'' (our emphasis) of such an enterprise and in describing such profits as ``Business Profits'' the heading is accurate.

In the result we would allow the appeal.