Burton v Commissioner of Taxation (Special leave decision)

Court appealed from: Federal Court of Australia (Full Court)

Craig Ian Burton
v.Commissioner of Taxation

Citation(s):
[2019] FCAFC 141
2019 ATC 20-709

Date of decision: 14 February 2020

Result: Application refused with costs

Transcript of proceedings

Friday 14 February 2020 at 11.44 am

MR J.O. HMELNITSKY, SC: May it please the Court, I appear with my learned friend, MS C.A. BURNETT , for the applicant. (instructed by Herbert Smith Freehills)

KIEFEL CJ: Is there no appearance in Perth for the Commissioner of Taxation?

MR McINTYRE: Your Honour, there does not appear to be. I know my learned friend, Mr Musikanth, is appearing in that matter because he was in contact with me later last night, but I do not see him yet here in the Courtroom.

KIEFEL CJ: Yes, I see.

MR McINTYRE: Perhaps the matter could be stood over for a moment and inquiries can be made.

KIEFEL CJ: No, I do not think so, Mr McIntyre. Advice was given to the legal practitioners about when this matter was to be called for hearing. Mr Hmelnitsky.

MR HMELNITSKY: Thank you, your Honours. May I, just before coming to the first special leave question, frame the issue that arises in this way. Mr Burton, as an Australian resident who had made a capital gain in the United States, was required to pay tax on those gains both in the United States and in Australia.

If one looks at his position by reference to the gains, one sees that under US law he was required to pay 15 cents on the dollar in respect of those gains because the concessional rate for long-term capital gains in the United States for him was 15 per cent. In Australia, he was required to pay 22 and a half cents on the dollar in respect of those gains for the reason that under Australian law he pays his marginal rate of 45 per cent on half the gain.

EDELMAN J: That is not quite right, is it? It is not quite right to say he is paying 22 and a half per cent. He is really paying 30 per cent on half of it and nothing on the other half.

MR HMELNITSKY: No, your Honour. May I answer that this way? All I am seeking to do at the moment is to identify what his position in Australia is by reference to the gain as a whole. The point we make about that is that in relation to that capital gain, for each dollar of capital gain that he makes, the Act recognises that dollar of capital gain and the net result for him is that he bears 22 and a half cents tax on it because he pays tax at his marginal rate of 45 per cent on half the gain.

EDELMAN J: Yes.

MR HMELNITSKY: I accept I am only putting the issue by reference to the gain. It has this result, though, that so far as that gain is concerned, as between one jurisdiction that imposes an obligation that results in a 15 cents in the dollar tax obligation and our jurisdiction which imposes an obligation of 22½ cents in the dollar in relation to that gain, his overall position on the decision of the majority of the Full Court is that he pays tax of 30 cents in the dollar as between the two jurisdictions, which, as we point out in our written summary, is more than either jurisdiction imposes in relation to those gains.

That raises the issue that we have sought to identify in the first special leave question, which is whether that is the outcome that Article 22 of the USA/Australia Convention actually intends. Your Honours see the text of Article 22 at page 126 of the application book. It deals separately with claims by US residents in subsection (1), and that subsection does not matter for present purposes.

Subsection (2) that appears on page 127 is the relevant provision in these circumstances. It is the first sentence in subsection (2) that is critical, and if one just skips over the third to sixth lines in that rather long sentence, what it comes down to is this, that United States tax paid under the law of the United States and in accordance with this convention:

in respect of income derived from sources in the United States by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income.

Now, the submission that we made below and that we seek to advance on appeal would be that where the treaty here refers to the income and the tax that is paid on the income, it is using that expression "income" in the sense that it is otherwise used in the treaty, which is to say the gain. In my example, it is the dollar, it is the whole dollar.

KIEFEL CJ: Is not the first provision that is to be construed section 770-10 and, true it is you might do that by reference to the Convention, and if there is any disconformity you might take account of what the Convention was seeking to achieve and implicitly what the Commonwealth legislation was seeking to enact, but we are not quite clear whether you are suggesting that there is a disconformity between the article and the Commonwealth provision.

MR HMELNITSKY: We seek to address that by way of our ground 3. In our submission, if we are right about Article 22 - - -

KIEFEL CJ: If you are right about Article 22, where does that take you?

MR HMELNITSKY: Well, we say that if we are right about Article 22, then the applicant was entitled to the credit in the terms provided by Article 22.

KIEFEL CJ: But you have to address Article 22 through section 770-10.

MR HMELNITSKY: We say that that can be done and the specific task that your Honour raises with me, the question of construing 770 in the context of a treaty that contains this provision, is a task that was not undertaken by any of the members of the court below. Their Honours construed Division 770, as it were, in isolation. What did not occur was to ask whether that rather ample language in Division 770, which speaks of an amount paid in - - -

KIEFEL CJ: Well, is this correct, or did their Honours approach - their Honours in the majority approach section 770-10 on the basis that there was no doubting the clarity of the words "in respect of" and "included in assessable income", and that there was no disconformity between that and Article 22?

MR HMELNITSKY: Yes.

KIEFEL CJ: Is that not the approach they took?

MR HMELNITSKY: They did, your Honours. But one could start either way. One can start with Division 770 or one can start with the treaty. But the task involved is to construe all of those provisions together and our submission, whether one starts with Article 22, or as we did at trial, if one starts with Division 770, having regard to the command that we say appears in Article 22, the existence of that command is a powerful reason to construe Division 770 in the way for which we contend.

All that has happened in the courts below in relation to Division 770 is that the various members of the court have approached the language that appears in Division 770 just as a matter of ordinary English language without considering whether or not this part of Article 22 - this critical and operative part of Article 22 - informs that construction of Division 770. So to take up your Honour's point - - -

KIEFEL CJ: Well, Justice Jackson found specifically that section 770 was consistent with the first general principle in the article and Justice Steward found there was no disconformity between any of the general principles in Article 22.

MR HMELNITSKY: Yes, and that is what I am addressing - that is what I am seeking to address your Honour by taking your Honours to the article first because if your Honours come to - and could I invite the Court back to page 127 of the application book - what Article 22 says is that the tax paid in the United States in relation to the income, shall be allowed as a credit against tax paid in Australia in respect of the income.

EDELMAN J: That is payable.

MR HMELNITSKY: Yes, indeed, your Honour. Either way our argument runs the same course. Now, if one looks to see the way it is that the majority in the court below reason to the conclusion that income here means net capital gain, one starts with what Justice Steward said at paragraph 119. His Honour - and I will not take your Honours to all of the detail of it, but in paragraph 119 his Honour states a proposition that we agree with and indeed is the starting point of our argument, which is that where the treaty is talking about income it is talking about the gain - the whole dollar. That is so for the reason that Justice Steward points out at about line 30, which is that in the case of disposals of property, it is income or gains with which the treaty is concerned.

EDELMAN J: But you have to address the "in respect of" part.

MR HMELNITSKY: Indeed, your Honour, and so - I will come back to that your Honour. His Honour takes that proposition with which we respectfully agree, that when the treaty talks about income it is talking about gains and then says in paragraph 120, particularly over the page at page 88 of the application book:

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.

Now, it is probably not necessary for us to either agree or disagree with that. But his Honour then says:

Because of the operation of CGT 50% discount for individuals, Australia does not tax all of the gain made here; it taxes 50% of it . . . 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.

Now it is that sentence, your Honour, that we say most clearly exposes the error here, because that framing of the question simply cannot be read back into the text of Article 22 because it is not what Article 22 says. What his Honour is saying there is that that income is the net capital gain. But what Article 22 says is that what is allowed as a credit is the US tax paid under the law of the United States and in accordance with this Convention in respect of income.

So the error is in reading the reference to "income" in Article 22 as though it were a reference to the intermediate stepping stone in Australian domestic tax law, namely the concept of net capital gain.

EDELMAN J: Do you accept that Article 22 contains a symmetrical principle?

MR HMELNITSKY: It is not quite symmetrical, your Honour, in the sense that the nature of the relief for US residents who have made gains in Australia may not be precisely the same as - - -

EDELMAN J: It is an odd double tax treaty where, within the same provision, you have different treatment for the United States and Australia.

MR HMELNITSKY: Well, the different wording reflects the different way that the countries go about imposing tax locally and, insofar as Article 22(2) is concerned, what is relevant to note is that despite that obvious feature, what the treaty speaks of is the treaty concept of income. It does not pick up net capital gains and it is not possible to say that insofar as Article 22(2) is concerned, the purpose of the provision is only to relieve double tax in relation to net capital gains, because that is not what it says. It seeks to avoid tax on the income within the meaning of the treaty.

EDELMAN J: Do you accept that the approach of the majority would be consistent with Article 22(1)(a) - the appropriate amount of income tax paid to Australia, or paid to the Australian authorities in relation to United States credit being allowed?

MR HMELNITSKY: No, your Honour, I would not accept that. I think what your Honour is putting to me is that if Mr Burton were a US resident who had made a gain in Australia and the tables were turned, that the US would only allow him a credit for a proportion of the tax paid?

EDELMAN J: Yes.

MR HMELNITSKY: No.

EDELMAN J: That seems to be a comfortable fit with the provision that is set out in paragraph 117.

MR HMELNITSKY: I could not accept that, your Honour. There is a very large question there as to how, as a matter of US law, that article would be interpreted. I can only tell your Honour this from the Bar table, and I am afraid I can do no more than that, but it is certainly my understanding that if the tables were turned, if that were even possible given their system, that he would be entitled to the credit.

Certainly that is the case insofar as Canada is concerned, which does have the similar discount, and has the same treaty obligation. One of the academics whose work we have put before the Court says exactly that, that if the tables were turned then Canada, for its part, would adopt a construction consistent with what I am submitting, and not what the majority has found.

Your Honours, that is the issue. The issue is really as to the construction of Article 22, and your Honours have heard what I have to say about the error there. One last point in relation to that that I should point out is that Article 22 does of course already contain a form of limitation - and that appears in the very next sentence - which is that:

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.

So that leaves open to the Parliament to enact limitations in accordance with, and consistent with, that limitation there. In none of those can it be said that there is a limitation that would be of the proportionate kind that has been found to exist here.

Your Honours, this is, of course, the central provision in this Convention dealing with the elimination of double tax. It is relevantly the same as provisions that appear in a great many other treaties - and we have identified those in the written material. It has the result, your Honours, that there a stark difference between the way cross-border investments are taxed - returns on capital fall to be taxed very differently to returns in the nature of income.

For those reasons, your Honours, in our submission, that first ground is one that warrants the attention of the Court. The second ground arises, really, together with or bundled with that first ground.

KIEFEL CJ: It depends upon the first ground, does it not?

MR HMELNITSKY: It depends on the fate of the first ground.

KIEFEL CJ: Yes.

MR HMELNITSKY: That is absolutely so, your Honour, and I do agree with that, but there is this - the question that arises in relation to the first ground, if we are right about it, spills into the question for the second ground because the question then arises as to how one reconciles the references in Article 22 to the credit, to the balance of the 1936 and 1937 Acts dealing with Mr Burton's liability.

That, ultimately, is quite a large - if I can put it this way - Project Blue Sky point that warrants attention. The only member of the court below who dealt with this was Justice Steward, although Justice Jackson appears to have agreed with Justice Steward in relation to this. The positive case that we put in the court below on this issue was quite straightforward and in circumstances where the result for which we were contending was agreed to by the Commissioner was put fairly briefly.

But the two ways that we put the argument were, first, that this treaty is of course also, in addition to being an international document or giving rise to international obligations, is also a piece of domestic legislation. Sections 4 and 5 of the Agreements Act have the result that Article 22, that I have just taken the Court to, of its own by reason of the fact that it appears as it does in the Commonwealth legislation, is reason enough for the Commissioner to allow the credit in the course of making an assessment.

As I say, the Commissioner agreed with that but does not agree with it now. But can I show the Court the way that it was dealt with in the Full Court? It appears in Justice Steward's reasons at paragraph 145. That is at page 98 of the application book. Your Honours see in paragraph 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.

His Honour then goes on to suggest, at around line 30 of that page that the only remedy available to Mr Burton is:

to seek declaratory relief -

as to whether or not Australia has complied with its obligations under Article 22.

Now, your Honours, that, in our submission, is erroneous if for no other reason than this, that the Commissioner is of course a member of the Executive Government and the obligations, which are obligations under domestic law, are obligations on the Commissioner. The command in Article 22, if we are right about it, is a command that is sufficiently clear and sufficiently well-articulated that it ought be acted upon by the Commissioner.

KIEFEL CJ: Mr Hmelnitsky, which ground does this argument go to?

MR HMELNITSKY: This goes to ground 2, which as your Honour raises with me, points out that we only get there if we are right about ground 1.

KIEFEL CJ: Yes.

MR HMELNITSKY: The difficulty is this.

EDELMAN J: It is effectively your direct application of Article 22.

MR HMELNITSKY: Yes, it is, via sections 4 and 5 of the International Tax Agreements Act. But the difficulty is this. There is in the Full Court - Justice Jackson has agreed with it, the Commissioner sees this as something that binds him and which one may assume he will act upon. What is the AAT to do, what is the Federal Court to do in relation to this proposition? In our submission, notwithstanding that we need to get past the hurdle of ground 1 to get there, the error that we identify in relation to this ground is one that warrants a grant of leave. If the Court pleases.

KIEFEL CJ: Yes, thank you. Yes, Mr Musikanth.

MR A.J. MUSIKANTH, SC: May it please the Court, I appear with my learned friend, MR P.A. WALKER , for the respondent. (instructed by Australian Government Solicitor)

I apologise to the Court for us not being here when the matter was called. Your Honour, special leave should not be granted for three reasons: first, no question of fundamental principle emerges from the application; secondly, the decision of the Full Court itself is in any event correct and not attended by sufficient doubt to warrant the grant of special leave; and, third, none of the other factors relied upon unrelated to the merits reveals any other reason to grant special leave.

If I may address the Court briefly on the first reason why special leave ought to be refused, namely that no question of fundamental principle emerges, perhaps this is best illustrated by the applicant's first and it would seem primary special leave point involving Article 22(2). Reduced to the essence, the issues raised by the applicant in the context of Article 22 effectively boil down to this. Was the majority of the Full Court right in not construing Article 22(2) as entitling the applicant to receive a credit for all of the United States tax paid on the gain, rather than for the portion of the tax corresponding to the portion of the gain treated as income and subject to tax under Australian law?

EDELMAN J: Well, it is really what is payable in respect of the income.

MR MUSIKANTH: Precisely, your Honour, precisely. The submission is, though, that resolving this inquiry does not involve a question of principle, let alone one of fundamental principle of a kind usually required in tax matters, but rather it ultimately concerns the application of well-established general principles of construction, and no question is raised by the applicant as to the correctness of any of those principles at all.

EDELMAN J: Well, it is a provision in a treaty which affects many taxpayers.

MR MUSIKANTH: It potentially does, your Honour. That is not in doubt. The question is, to what extent does it actually affect as many taxpayers as is suggested by the applicant in the submissions. This is one aspect of one treaty, albeit that the phrase that is used is substantially similar in a number of different treaties. It deals ultimately with the question of whether an Australian taxpayer who has paid US tax with respect to a capital gain is entitled to the full amount of the gain or something less than the full amount of the gain.

The different aspects of both this treaty and also other treaties, and it all depends, really, on the nature of the credit that is claimed - so it ought not to be assumed, I suppose, by the applicant that it affects such a great number of taxpayers as is suggested, perhaps by the application.

KIEFEL CJ: That is perhaps not your strongest point.

MR MUSIKANTH: I will move on, your Honour. The point I am attempting to make is that the question of construction itself is not one of fundamental principle. The other point, your Honours, is that there is no sufficient reason to doubt the correctness of the Full Court's decision, or at least the judgment of the majority with respect to Article 22(2).

The approach is consistent, in my submission, with settled principles on the interpretation of international treaties. The reasons why the Commissioner says the majority was correct are more fully explained at paragraphs 6 to 17 of the Commissioner's response. In the Commissioner's submission there is nothing really in the applicant's reply which detracts from the conclusion that the decision of the majority is not open to sufficient doubt.

In his reply the applicant criticises the Commissioner for not articulating a coherent construction. This criticism is rejected. The Commissioner's construction is that adopted by the majority, which is in the Commissioner's submission both coherent and correct for the reasons explained in the Commissioner's response.

EDELMAN J: What do you say about the applicant's opening example about the circumstances in which an Australian taxpayer paying 45 per cent tax ends up paying 22.5 per cent even in circumstances in which the rate would be lower in both Australia and the United States?

MR MUSIKANTH: Your Honour, that is the focus on the potential - and I emphasise the word "potential" - effect of the operation of the provision, rather than on a proper construction of the provision having regard to the purpose of the provision. The submission is that it would be a danger to focus on the potential of its perceived effect, perhaps, in different circumstances, rather than on the text, the context, and most importantly the purpose of the provision.

I think Justice Steward in his reasons made it somewhat clear as to what the meaning of double taxation was within the context of the proper construction of this treaty. His Honour deals with it at paragraph 121 of the reasons and he says the following. About halfway down the paragraph, his Honour says:

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 -

and then his Honour goes on. One of the important points which his Honour raises, with respect, is that permitting a credit to a taxpayer to the full extent of all tax paid to the first country in these circumstances would grant a taxpayer more protection or relief than was truly needed. So it is a matter of construing what the purpose of the provision is - it is to avoid double taxation. What does avoidance of double taxation mean within the context of this treaty?

EDELMAN J: It is really what the Commissioner's position is. The Commissioner's position is that the concern of Article 22 is the income that is exposed to tax, whereas the applicant's position is the concern is with the whole of the income.

MR MUSIKANTH: Precisely, your Honour, with respect. Your Honours, unless any particular questions as to the Commissioner's submission as to why the decision is not affected by sufficient doubt, I might move on to special leave question 2.

KIEFEL CJ: Yes.

MR MUSIKANTH: As my learned friend, Mr Hmelnitsky, has said, the fate of that really lies with the fate of the special leave question one. There is no utility in the Commissioner's submission in granting special leave on the one and not the other. Again, the Commissioner's submission is that the decision of the majority or more precisely, the reasons of Justice Steward are not attended by sufficient doubt to warrant the grant of special leave.

A fairly close and detailed analysis has been provided by his Honour as to why Article 22 by direct force does not give a right to an individual taxpayer to the credit. Article 22(2) contemplates the enactment by Australia, and I emphasise Australia being the Commonwealth of Australia, of legislation consistent with the general principles enshrined within the article, and that is as far as the obligation goes.

That does not leave a taxpayer without a potential remedy. His Honour has identified two potential remedies within his reasons. The first - if I may just find it - I might just take your Honours to the relevant passage in the reasons. I think, in substance, what his Honour said is that an individual taxpayer aggrieved by a failure by the Commonwealth to enact legislation may apply, potentially, for declaration and there is another mechanism built in later in the treaty which permits a taxpayer in either jurisdiction - it is Article 24, your Honours, which provides:

Where a resident of one of the Contracting States considers that the action of one or both of the Contracting States results or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the domestic laws of those States, present his case to the competent authority of the Contracting State of which he is a resident or citizen. The case must be presented within three years from the first notification -

So there is a mechanism built within the treaty itself of some form of redress for taxpayers aggrieved by failure by one of the contracting parties to comply with the obligations under the treaty. I might add, your Honours, that the construction adopted by Justice Steward, namely that the obligations are binding on sovereign states, as distinct from giving rights to individual taxpayers, is confirmed really by the language of the treaty itself in various parts.

Your Honours will note, for instance, if you turn to Articles 22(1), 22(4) and also 22(3), your Honours will notice the language used includes, in Articles 22(1) and 22(4):

the United States shall allow-

and in Article 22(4) "Australia shall allow". That is language consistent with binding nations as sovereign states. So the submission, in short, really, is that the construction which his Honour Justice Steward adopted that is relevant to special leave point 2, and with which Justice Jackson appears to have agreed, is not open to sufficient doubt to warrant the grant of special leave.

I might turn briefly to special leave question 3, which I do not believe received that much attention. The short submission is that there is no reason to doubt the construction, the unanimous construction of all three justices sitting in the Full Federal Court, nor of Justice McKerracher, whose decision was under challenge. There is therefore no reason to believe there is sufficient doubt in the reasons of the Full Court relating to the subject matter of question 3 to warrant the grant of special leave.

Your Honours, unless there are any further questions which you have for me, those are the Commissioner's submissions.

KIEFEL CJ: Yes, thank you. Yes, Mr Hmelnitsky.

MR HMELNITSKY: Thank you. Your Honours, the one point I would raise by way of reply is as to what the Commissioner describes as the potential of the decision of the majority below. It was said to be just the potential of the language of the treaty to give rise to the circumstance that I identified by reference to percentages at the very outset.

May I say this? The circumstance I have described is precisely what has happened here, not as a matter of potential. The circumstance that exists here is that - and I can make this point by reference to what Justice Steward says about the 2011 year on page 79 of the application book.

Your Honours will see a tangle of numbers in paragraphs 99 and 100, which I will not take your Honours through in any detail at all, but the short point, the point I was attempting to make by way of opening, was that in fact Mr Burton has paid 15 cents on the dollar for the gains in the United States and in fact he has paid 22 and a half cents on the dollar in relation to these gains in Australia and that is before any discounts, before any credits, because he is paid at his top marginal rate on half the gain.

The issue in the proceedings is what sort of credit should he get against that 22 and a half per cent. What we contend for is this, that he should get a credit for all of the tax paid in the United States because in that way he is left in the position where, having paid tax in both countries, he has paid an amount that represents the higher of the tax in the two jurisdictions.

So the outcome that I described at the outset, namely, that as between jurisdictions that impose tax at seven and a half per cent and 22 and a half per cent respectively, he is in the position where he has borne tax in relation to gains of 30 per cent. It is that that is the starting point for the analysis, not some notion of a potential. If the Court pleases.

KIEFEL CJ: We consider there are insufficient prospects of success to warrant the grant of special leave. Special leave is refused, with costs.

The Court will now adjourn to 10.00 am on Wednesday, 11 March in Canberra.

AT 12.21 PM THE MATTER WAS CONCLUDED