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

Logan J

1. Mr Craig Burton is an Australian tax resident. In the 2011 and 2012 income years, he derived capital gains from investments which he had made in the United States of America ( US ). Those gains were taxed at source under US revenue law. Mr Burton paid the applicable US tax.

2. By virtue of Mr Burton ' s residence, the gains were also taxable in Australia, albeit in a different way. In his Australian tax returns for the income years in question, Mr Burton claimed the benefit of the US tax which he had paid, either as a foreign tax credit pursuant to Article 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 (
[1983] ATS 16 ), signed in Sydney on 6 August 1982, as incorporated into Australian law pursuant to s 5 of the International Tax Agreements Act 1953 (Cth), ( International Tax Agreements Act ) or as a foreign income tax offset ( FITO ) under s 770-10 of the Income Tax Assessment Act 1997 (Cth) ( 1997 Act ).

3. The learned primary judge accurately summarised the effect of the differing taxation regimes as between the US and Australia in respect of the gains. Under US law, Mr Burton was entitled in the relevant years to concessional treatment of capital gains on assets held for more than a year, achieved by taxing them at a rate which was less than half the ordinary income tax rate. In Australia, those gains were also taxable as capital gains on assets held for more than a year. The concessional treatment provided under Australian law in those circumstances was to apply a 50% discount to the capital gain as part of the formula by which a net amount was included in assessable income.

4. The Commissioner did not allow in full either the tax offset or credit which Mr Burton claimed against his Australian tax liability. Instead, in making amended assessments of Mr Burton ' s taxable income, he allowed a tax offset of half of the US tax which he had paid. The Commissioner also concluded that no different position was dictated by Art 22(2) of the Convention. In each instance, the Commissioner ' s view was that, on the true construction of each of s 770-10 of the 1997 Act and Art 22(2) of the Convention, the purpose of avoidance of double taxation was achieved by the allowance of a tax offset (or credit) of 50% of US tax paid, because under Australian income tax law, only 50% of the gain formed part of the net amount included in Mr Burton ' s assessable income. The Commissioner termed this the " apportionment approach " .

5. Mr Burton objected against the amended assessments. His grounds were that he ought to have been allowed a tax offset (or credit) for the full amount of the US tax which he had paid. In his objection decision, the Commissioner adhered to his earlier position. Mr Burton then appealed against that objection decision to this Court in the exercise of the original jurisdiction conferred on it by s 14ZZ of the Taxation Administration Act 1953 (Cth). In the result, the learned primary judge concluded that the construction adopted by the Commissioner of both s 770-10 and Art 22(2) was correct and dismissed Mr Burton ' s taxation appeal.

6. Mr Burton has appealed against the dismissal of his taxation appeal. The issues in the appeal are as they have always been. Mr Burton contends that under either or each of s 770-10 of the 1997 Act or Art 22(2) of the Convention, he is entitled to a tax offset (or credit) of the whole of the US tax which he has paid, whereas the Commissioner contends that he is entitled to a tax offset (or credit) of 50%


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of that amount. More particularly, the grounds of appeal are:
  • 1. The primary judge erred in finding at [77]-[78] that the three capital gains in question, before application of capital losses and discount, were not " included in " the appellant ' s assessable income for the purposes of s 770-10(1) of the ITAA 1997.
  • 2. It should have been held that the appellant ' s capital gains on the three assets in issue, before application of capital losses and discount, were " included in " the appellant ' s assessable income for the purposes of s 770-10(1) of the ITAA 1997.
  • 3. The primary judge erred in finding at [113] that the full United States tax on the three gains was not paid " in respect of " the Australian net capital gain for the purposes of s 770-10(1) of the ITAA 1997.
  • 4. It should have been held, in the alternative to Ground 2 above, that the full United States tax on each gain was paid " in respect of " the corresponding Australian net capital gain for the purposes of s 770-10(1) of the ITAA 1997.
  • 5. The primary judge erred in finding at [126] that Article 22(2) of the Double Tax Convention between Australia and the United States does not require Australia to allow as a credit against the relevant Australian tax the full United States tax paid in respect of the three gains.
  • 6. It should have been held, in the alternative to Grounds 2 and 4 above, that Article 22(2) of the Double Tax Convention between Australia and the United States requires Australia to allow as a credit against the relevant Australian tax the full United States tax paid in respect of the three gains.

7. There was no evidentiary controversy before the primary judge. I therefore gratefully adopt the comprehensive summary offered by his Honour of the background facts and related tax treatment by the US Internal Revenue Service or, as the case may be, the Commissioner.

8. In the 2011 and 2012 income years, Mr Burton was the trustee of an Australian discretionary trust: the CI Burton Family Trust . He was also a member of the class of objects of the Trust at the relevant times. Three gains derived by Mr Burton as trustee of the Trust are relevant:

  • (a) the gain on the disposal of what is described below as the NEPA Investment;
  • (b) the gain on the disposal of what is described below as the Strega 1 Investment; and
  • (c) the gain on the disposal of what is described below as the Strega 2 Investment.

9. Mr Burton held each of these investments for more than 12 months and on capital account for Australian tax purposes.

NEPA Investment

10. On or around 18 November 2004, Mr Burton as trustee acquired certain rights in respect of oil and gas wells in Pennsylvania, US, which on 18 September 2010 he then sold to Chesapeake Energy Corporation. Those rights were a 1.75% option to participate in certain wells and an interest in other wells in respect of which Mr Burton as trustee had previously exercised an option ( Nepa Investment ).

11. The Nepa Investment arose under a Participation Agreement dated 18 November 2004 between Mr Burton as trustee, Tioga Oil & Gas Inc and Seaspin Pty Ltd as trustee of the Aphrodite Trust, under which the Nepa Investment and the other rights were acquired. The quantum of the option to participate was initially 6%.

12. On a number of occasions, the Participation Agreement was amended by further agreement. Amongst other things, the quantum of the option to participate varied. Immediately before 1 March 2010, this was at approximately 3.375%. On that date Mr Burton as trustee sold to Chesapeake 1.625% of his then 3.375% option. That transaction did not give rise to gains which are in issue in this proceeding.

13. Mr Burton as trustee in respect of the Nepa Investment paid costs totalling $1,864,355 in the calendar years 2009 and 2010.

14. There was a further sale by Mr Burton as trustee on 18 September 2010 to Chesapeake. This sale concerned the remaining 1.75% option to participate and his interest in other


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wells in respect of which he had previously exercised an option, that is, the NEPA Investment. The consideration was US$25,434,715. That consideration was paid to Mr Burton in five instalments of:
  • • US$2,712,480 on or around 13 October 2010;
  • • US$8,137,440 on or around 30 November 2010;
  • • US$8,137,440 on or around 28 January 2011;
  • • US$5,459,635 on or around 29 April 2011; and
  • • US$987,720 on or around 8 June 2011.

15. A resolution was made by Mr Burton in his capacity as trustee on 30 June 2011 to distribute all discount capital gains arising from the sale of assets other than shares (including the gains arising from the disposal of the NEPA Investment) to himself, in his capacity as an object of the Trust.

16. This gave rise to certain US tax treatment of Mr Burton ' s disposal of the NEPA Investment. Although he was not a resident of the US for tax purposes, Mr Burton was taxable on the sale of the NEPA Investment under US law because it represented a gain on a US ' real property interest ' , which is treated as ' income effectively connected with a United States trade or business ' ( ECI ). ECI is earned by a non-resident alien when it qualifies as a long-term capital gain by virtue of it being held for more than one year. Such ECI was taxed at 15% at the relevant time. This is in contrast to ordinary income in respect of which the tax rate was 35%.

17. Mr Burton was liable in his personal capacity to pay US tax on the long-term capital gain from the disposal of the NEPA Investment, as US law regarded the Trust of which Mr Burton was trustee as a ' grantor trust ' , the income of which is attributed to the ' owner ' of such a trust (for present purposes being Mr Burton in his personal capacity).

18. As a consequence, for the US tax year ended 31 December 2010, Mr Burton returned and paid US tax at 15% on the long-term capital gain from the disposal of the NEPA Investment of US$8,985,565 (being the two instalments received in the 2010 calendar year totalling US$10,849,920, less the cost of US$1,864,355). The US tax paid was US$1,347,834.

19. Secondly, for the US tax year ended 31 December 2011, Mr Burton returned and paid US tax at 15% on the long-term capital gain from the disposal of the NEPA Investment of US$14,584,795 (being the three instalments received in the 2011 calendar year). The US tax paid was US$2,187,720.

20. Across these two US tax years the total long-term capital gain from the disposal of the NEPA Investment was US$23,570,360 and the total US tax paid by Mr Burton on this gain was US$3,535,554.

Australian tax on the NEPA Investment

21. The consideration for the disposal of the NEPA Investment in respect of all five instalments was received in the year ended 30 June 2011.

22. It is common ground that, for Australian tax purposes, the gain on the sale of the NEPA Investment was a CGT event A1 within the meaning of s 104-10 of the 1997 Act. As such, it gave rise to foreign capital gains of the Trust in that financial year by means of this computation:

  • • The capital proceeds under s 116-20 of the 1997 Act from the disposal of the NEPA Investment were $25,322,008, being the then equivalent of US$25,434,715;
  • • The cost base, under s 110-25 of the 1997 Act for the NEPA Investment was $2,567,687, being the then equivalent of US$1,864,355;
  • • Under s 104-10 of the 1997 Act, subtracting the cost base from the capital proceeds derived from disposal (i.e. (b) from (a)) results in the capital gain on the disposal of the NEPA Investment, $22,754,321; and
  • • After application of the 50% CGT discount provided for in s 115-25 of the 1997 Act the amount of $11,366,161 was included in the net capital gain ( NCG ) of the Trust under s 102-5(1).

23. Mr Burton was personally liable for the tax on this capital gain because he was an object of the Trust and presently entitled to the capital gain on disposal of the NEPA Investment. Through the application of s 115-215, he had a capital gain of $22,754,321


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(being part of the capital gain in his tax return of $24,013,666 covering both the NEPA Investment and the Strega 1 Investment referred to below). After application of the 50% discount in s 102-5(1) and s 115-25, an NCG of $11,366,161 was included in his assessable income in respect of the disposal of the NEPA Investment (being part of the NCG of $12,006,833 that covered both the NEPA Investment and the Strega 1 Investment).

24. The Australian income tax payable by Mr Burton in his personal capacity on the NCG on the disposal of the NEPA Investment was $5,114,772 (being the NCG included in Mr Burton ' s assessable income in respect of the disposal of the NEPA Investment multiplied by his marginal tax rate).

25. In Mr Burton ' s tax return for the year ended 30 June 2011 in respect of the gain on the NEPA Investment he claimed a FITO of $3,414,207, representing the US$3,535,554 paid in US tax referred to above (being part of the total FITO of $3,875,952 claimed in respect of both the NEPA Investment and the Strega 1 Investment).

Strega 1 Investment

26. By agreement dated 5 March 2008, Mr Burton as trustee relevantly acquired a right to payment if the counterparty did not drill certain wells in Pennsylvania ( Strega 1 Investment ).

27. Mr Burton as trustee received US$1,260,000 in January 2011 by way of satisfaction of the Strega 1 Investment.

28. On 30 June 2011, Mr Burton as trustee resolved to distribute all discount capital gains arising from the sale of assets other than shares (including the gains arising from the disposal of the Strega 1 Investment) to himself in his capacity as an object of the Trust.

US tax on the Strega 1 Investment

29. In the US, the gain on the disposal of the Strega 1 Investment was taxed as ECI in the form of a royalty at the ordinary income rate of 35% in the year ended 31 December 2011. The US tax paid by Mr Burton in respect of the disposal of the Strega 1 Investment was US$481,000.

Australian tax on the Strega 1 Investment

30. The consideration for the disposal of the Strega 1 Investment was received by Mr Burton in the year ended 30 June 2011. The NCG for Australian tax purposes as computed the same way described in [25] above with capital proceeds being $1,264,284 and the cost base $4,939 resulting in a capital gain of $1,259,345 and a discount capital gain of $629,673.

31. It followed that the Australian income tax payable by Mr Burton in his personal capacity on the NCG on the disposal of the Strega 1 Investment was $283,353. In his income tax return for 30 June 2011 Mr Burton claimed a FITO of $461,745 in respect of the gain on the Strega 1 Investment, representing the US$481,000 paid in US tax (being part of the total FITO of $3,875,952 claimed in respect of both the NEPA Investment and the Strega 1 Investment).

Strega 2 Investment

32. Under the same 5 March 2008 agreement, Mr Burton as trustee retained participation rights in future wells via a nominee entity ( Strega 2 Investment ). In May 2011, Mr Burton as trustee became entitled to proceeds of disposal of the Strega 2 Investment pursuant to an agreement dated September 2010.

33. As trustee, Mr Burton received a total of US$9,068,426 over the period 1 July 2011 to 30 June 2012 for the disposal of the Strega 2 Investment. Pursuant to a trust resolution dated 28 June 2012 Mr Burton as trustee resolved to distribute discount capital gains (including the gains arising from the disposal of the Strega 2 Investment) to himself in his capacity as an object of the Trust.

US tax on the Strega 2 Investment

34. The gain on this disposal was taxed in the US as long-term capital gain ECI at the rate of 15% for the years ended 31 December 2011 and 31 December 2012. The gains for these years were US$7,035,454 and US$2,032,972 respectively, totalling US$9,068,426.

35. The US tax was withheld from the proceeds due to Mr Burton and remitted to the US Internal Revenue Service in four tax payments totalling US$1,536,836, against which the US dollar equivalent of $291,470 was refunded (the net payment was the US dollar equivalent of $1,119,885).


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Australian tax on the Strega 2 Investment

36. The consideration for the disposal of the Strega 2 Investment was received by Mr Burton in the year ended 30 June 2012. The NCG for Australian tax purposes was calculated in the same manner described in [25] above (before the capital losses subtraction, described below), with the capital proceeds being $8,944,014. There was no cost base.

37. In the year ended 30 June 2012, Mr Burton had discount capital losses of $1,199,755 from separate transactions. These were subtracted from the $8,944,014 capital gain derived from the Strega 2 Investment in accordance with ' Step 1 ' of the method statement in s 102-5(1), resulting in $7,744,259. Under ' Step 3 ' of s 102-5(1), the 50% discount was applied to that net figure, resulting in a NCG of $3,872,129.

38. The Australian income tax payable by Mr Burton in his personal capacity on the NCG on the disposal of the Strega 2 Investment was therefore $1,742,458.

39. In his Australian tax return for the year ended 30 June 2012, Mr Burton claimed a FITO of $1,119,886 in respect of the gain on the Strega 2 Investment, representing the US tax referred to above.

Comparative tax concessions on capital gains on long term investments

40. In summary, the US, like Australia, allows concessions on capital gains made on long-term investments. The nature of the concessions differs as between the two countries. In the US, Mr Burton, for the most part, paid US tax at a discount rate of 15% on the whole of those gains; in relation to some (identified above) he paid at a rate of 35%. In Australia only 50% of the gain is included in the calculation of the net amount included in assessable income, but one pays one ' s normal marginal rate on the overall taxable income.

Legislative and Treaty Provisions

41. Section 5(1) of the International Tax Agreements Act provides that, " Subject to this Act, on and after the date of entry into force of a provision of [an international agreement], the provision has the force of law according to its tenor " . The Convention is one such international agreement.

42. Subject to a presently immaterial exception, a provision in an international agreement thus given the force of domestic law prevails over a provision in an Assessment Act or a law imposing taxation, to the extent of any inconsistency. This paramountcy is the result of s 4 of the International Tax Agreements Act, which provides:

Incorporation of Assessment Act

  • (1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.

    Note: An effect of this provision is that people who acquire information under this Act are subject to the confidentiality obligations and exceptions in Division 355 in Schedule 1 to the Taxation Administration Act 1953 .

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

By s 3 of the International Tax Agreements Act, " Assessment Act " is defined to mean the Income Tax Assessment Act 1936 (Cth) ( 1936 Act ) or the 1997 Act.

43. Article 22 of the Convention provides:

Relief from double taxation

  • (1) Subject to paragraph (4) and in accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), in the case of the United States, double taxation shall be avoided as follows:
    • (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
    • (b) in the case of a United States corporation owning at least 10 percent of the voting stock of a company which is a resident of Australia from which it receives dividends in any taxable year, the United States shall also allow as a credit against United States tax the appropriate amount of income tax paid to

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      Australia by that company with respect to the profits out of which such dividends are paid.

      Such appropriate amount shall be based upon the amount of income tax paid to Australia. For purposes of applying the United States credit in relation to income tax paid to Australia the taxes referred to in sub-paragraph (1)(b) and paragraph (2) of Article 2 (Taxes Covered) shall be considered to be income taxes. No provision of this Convention relating to source of income shall apply in determining credits against the United States tax for foreign taxes other than those referred to in sub-paragraph (1)(b) and paragraph (2) of Article 2 (Taxes Covered).

  • (2) 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.
  • (3) An Australian corporation that owns at least 10 percent of the voting power in a United States corporation is, in accordance with the law of Australia as in force at the date of signature of this Convention, entitled to a rebate in its assessment, at the average rate of tax payable by it, in respect of dividends paid by the United States corporation that are included in the taxable income of the Australian corporation. However, should the law as so enforce be amended so that the rebate in relation to the dividends ceases to be allowable under that law, Australia shall allow credit under paragraph (2) for the United States tax paid on the profits out of which the dividends are paid as well as for the United States tax paid on the dividends.
  • (4) For the purposes of computing United States tax, where a United States citizen is a resident of Australia, the United States shall allow as a credit against United States tax the income tax paid to Australia after the credit referred to in paragraph (2). The credit so allowed against United States tax shall not reduce that portion of the United States tax that is creditable against Australian tax in accordance with paragraph (2).

    [Emphasis added]

44. Section 102-5 of the 1997 Act sets out the steps entailed in determining how much of what is termed a " net capital gain " is included in assessable income:

102-5 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.


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    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.

    Note: For exceptions and modifications to these rules: see section 102-30.

  • (2) However, if during the income year:
    • (a) you became bankrupt; or
    • (b) you were released from debts under a law relating to bankruptcy;

      any *net capital loss you made for an earlier income year must be disregarded in working out whether you made a *net capital gain for the income year or a later one.

  • (3) Subsection (2) applies even though your bankruptcy is annulled if:
    • (a) the annulment happens under section 74 of the Bankruptcy Act 1966 ; and
    • (b) under the composition or scheme of arrangement concerned, you were, will be or may be released from debts from which you would have been released if instead you had been discharged from the bankruptcy.

45. Division 770 of the 1997 Act contains Australia ' s own tax offset regime in relation to foreign tax. By virtue of s 4-10(3) of the 1997 Act, a tax offset reduces the amount of income tax payable by a taxpayer in respect of a year of income. During the relevant income years, the material provisions provided:

Guide to Division 770

770-1 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.

770-5 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.

Note 1: This Division applies in relation to Medicare levy and Medicare levy (fringe benefits) surcharge in the same way as it applies to Australian income tax. See section 90-1 in Schedule 1 to the Taxation Administration Act 1953 .


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Note 2: The tax offset under this Division can be applied against your Medicare levy and Medicare levy (fringe benefits) surcharge liability for the year, if an amount of it remains after you apply it against your basic income tax liability. See item 22 of the table in subsection 63-10(1).

Subdivision 770-A - Entitlement rules for foreign income tax offsets

Table of sections

Basic entitlement rule for foreign income tax offset

770-10 Entitlement to foreign income tax offset

770-15 Meaning of foreign income tax , credit absorption tax and unitary tax

Basic entitlement rule for foreign income tax offset

770-10 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 .

[Emphasis added]

The Meaning and Effect of the Convention

46. The learned primary judge gave more detailed attention to the meaning and effect of s 770-10 within Div 770 of the 1997 Act than to the meaning and effect of Art 22(2) of the Convention. The meaning and effect of the latter derived by his Honour was said to follow from the same process of reasoning already adopted in relation to s 770-10. As was confirmed by the parties on the hearing of the present appeal, this approach was responsive to the way in which both Mr Burton ' s and the Commissioner ' s submissions had been presented to his Honour on the hearing of the taxation appeal. As will be seen, that presentation may well have led his Honour into error.

47. My preference is first to consider the meaning and effect of Art 22(2) of the Convention. That is for two reasons. First, the effect of s 4(2) of the International Tax Agreements Act is, as already noted, that that provision confers paramountcy. If Mr Burton were entitled to foreign tax credits by virtue of Art 22(2) as so applied, it would matter not whether he was or was not likewise entitled to tax offsets in the same amounts by virtue of s 770-10 (which is not to say that, to do justice to the parties to the appeal, it would then be rendered unnecessary to consider that subject). Secondly, the risk in first considering s 770-10 is that a process of reasoning informed or influenced by the text of that section in the context in which it appears in the 1997 Act and by the application of principles for the construction of a domestic statute may colour one ' s approach to the construction of the different text of a provision in the different context of an international agreement, according to principles applicable when such a provision is incorporated into domestic law. Grounds 5 and 6 of Mr Burton ' s notice of appeal allege error on the part of the primary judge in failing to uphold in full his claim for foreign tax credits under Art 22(2).

48. In Thiel v Commissioner of Taxation
(1990) 171 CLR 338 , at 344 contextual difference as between an expression found in an international tax agreement and in the 1936 Act was one of the factors which Mason CJ, Brennan and Gaudron JJ identified as making it " safer to look to the context of the Agreement itself " .

49. As was the case in relation to the State Parties to the bilateral international tax agreement considered in Thiel , Australia but not the other State Party, Switzerland in that case the US in the present, is a party to the Vienna Convention on the Law of Treaties done at Vienna, 23 May 1969, entered into force 27 January 1980 ( Vienna Convention ) . The US has signed but has never ratified the Vienna Convention: see United Nations Treaty Collection, Chapter XXIII, Law of Treaties. That the US is not a party to the Vienna Convention does not mean that the requirement found in Article 31 of the Vienna Convention that a treaty is to be interpreted in accordance with the ordinary meaning to be given to its terms " in their context and in the light of its object and purpose " is thereby rendered irrelevant. Nevertheless, as McHugh J, Mason CJ, Brennan and Gaudron JJ agreeing, explained in Thiel , at 356, " because the interpretation provisions of the Vienna Convention reflect the customary rules for the interpretation of treaties, it is proper to have regard to the terms of the Convention in interpreting the Agreement, even though [the other State Party] is not a party to that Convention " .

50. One of the expressed purposes of the Convention is the avoidance of double taxation, another is the prevention of fiscal evasion, each with respect to taxes on income. It necessarily follows from the permission found in Art 13(1) of the Convention that, " Income or gains derived by a resident of one of the Contracting States from the alienation or disposition of real property situated in the other Contracting State may be taxed in that other State " that " income " where it appears in, materially, Art 22(2) includes " gains " . The agreement between the parties to this effect was not misconceived.

51. To identify one purpose of the Convention as avoiding double taxation with respect to taxes on income leaves unanswered " What taxes and on what income? " The answer is supplied by Art 22(2). Omitting presently immaterial words, the taxes and income are, respectively, " United States tax paid under the law of the United States ... in respect of income derived from sources in the United States " and " Australian tax payable in respect of the income " . As a matter of construction flowing from the use of the definite article, " the " preceding " income " and context, " the income " must be one and the same as the " income derived from sources in the United States " . More particularly, given that the Convention includes as income a " gain " , the answer becomes, " United States tax paid under the law of the United States ... in respect of [a gain] derived from sources in the United States " and " Australian tax payable in respect of the [gain] " . The " gain " is always the same. It is, at all times, the " gain derived from sources in the US " .

52. Again as a matter of construction, the " gain derived from sources in the US " is not defined by US law for the purposes of the Convention. Neither is it defined by Australian law. The Convention looks to the result of the operation of the law of the US and the payment of the resultant US tax on the one hand and the operation of the law of Australia on the other to ascertain, respectively, the amount of US tax payable and paid and the amount of the Australian tax payable. For present purposes, it is otherwise concerned with US law only to the extent of whether that law can be said to be " in respect of " a gain derived from sources in the US. The Convention is likewise concerned with the taxation law of Australia only to the extent of whether that law can be characterised as a law by which tax is payable " in respect of " that gain, i.e. the gain derived from sources in the US.

53. The double taxation sought to be avoided by the allowance of a credit in respect of US tax so paid is that US tax and the Australian tax so payable, each " in respect of " the gain as so construed, derived from the sources in the US.

54. More particularly, Mr Burton did not, in terms of the Convention, derive what the 1997 Act terms a " discount capital gain " from sources in the US. He derived what the Convention terms a gain and thus income. The amount of that gain was not one and the same


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as the " discount capital gain " . It was much more than that, as his taxation return disclosed. The Convention requires that there be a gain derived from sources in the US. Whether that " gain " is taxable under US law and, if so, whether the US tax has been paid are consequential questions. In the same way, whether that gain is taxable under Australian law is a further, consequential question. For the purposes of Art 22(2), neither US nor Australian revenue law defines whether or not a gain from sources in the US has been made, only whether such a gain is taxable in the respective jurisdictions.

55. What, as used in Art 22(2), does " in respect of " mean?

56. As a matter of ordinary English, " in respect of " means regarding, relating or referring to: Oxford English Dictionary , Online Edition, meaning P2a(b) of " respect " , as used in the phrase, " in respect of " . It connotes a relevant connection but not necessarily absolute precision in application or association.

57. It was in this sense and in a materially similar context that the meaning of the phrase was understood in Duckering v Gollan , both by the Court of Appeal
[1964] 1 WLR 1178 and, on further appeal, by the House of Lords
[1965] 1 WLR 680 . In the Court of Appeal, Lord Denning MR, with whom Danckwerts and Diplock LJJ agreed, with reference to an analogue of Art 22(2) in the then United Kingdom-New Zealand Double Taxation Agreement, observed at 1184:

It seems to me that [the article in the agreement] is dealing with the chargeable income, that is, the income assessable in respect of any year. It is not referring to the measure by which it is computed.

The point was even more explicitly made by Lord Donovan (with whom the other members of the House sitting agreed) in relation to the meaning of " in respect of " on the dismissal of the appeal to the House of Lords. His Lordship stated at 690-691:

As regards the " natural meaning " of the expression now under construction I would not dispute that the man in the street may regard himself as paying income tax " in respect of " his income of the previous year; but this is hardly an interpretation which can be preferred to that which is already well established in law, namely, that one pays income tax " in respect of " the income of the year of assessment for which the tax was granted by Parliament. As regards the assertion that anomalies will follow from acceptance of the respondent ' s interpretation, I think one must remember that any scheme designed to give relief in one country from income tax suffered in another on the same income for the same or a corresponding period is productive of many difficulties, not all of which can be perceived and provided against in advance. The disputes which have come before the court in this connection amply bear this out. In these circumstances, anomalies cannot be treated as a satisfactory guide in matters of construction, though no doubt there are cases where they may turn the scale. The present is not such a case, and the courts can here do no more than look at the language used and give it a fair and reasonable construction.

58. Duckering v Gollan was one of the cases relied upon by Mr Burton in support of his submission that both US and Australian tax were payable " in respect of " the same gain. As a matter of construction, he submitted that each tax was payable " in respect of " the whole of each gain. In amplification of that submission, Mr Burton put that there was an analogy to be drawn with these observations made by Fullagar J (with whom Dixon CJ agreed) in Mutual Life and Citizens ' Assurance Co Ltd v Commissioner of Taxation
(1959) 100 CLR 537 , at 550 and 554:

at 550 -

If you impose a tax on a/b of x , you are taxing x , and, if x includes y , you are taxing y . In other words, as my brother Menzies put it during argument, if you impose a tax on 10 per cent of an amount which includes several items, then you are imposing a tax on every item which is included in that amount.

at 554 -

... 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,


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though it is excluded from the actual calculation of assessable income, the rate of tax is increased by reference to its existence.

59. The point presently of interest is not precisely the same as the example mentioned in Mutual Life by Fullagar J. Here, x , each " gain " , included y , the discount capital gain, the latter a construct solely for the purposes of Australian taxation law. Under Australian taxation law, the measure or mechanism by which Australian tax payable was computed included a 50% discount but that does not detract from a conclusion that the Australian tax was nonetheless payable " in respect of " x, the gain as a whole. That, in my view, is the point made as to " in respect of " in Duckering v Gollan .

60. In Commissioner of Inland Revenue v Lin
[2018] NZCA 38 (leave to appeal subsequently refused, qv
Lin v Commissioner of Inland Revenue [2018] NZSC 54 ), a case to which attention was directed in the course of submissions, New Zealand ' s Court of Appeal, in construing an analogue of Art 22 found in the then New Zealand - China Double Taxation Agreement, made, at [29] - [30], these observations in relation to the meaning of " in respect of " in the article concerned:

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 [the article concerned]. Mr Clews [counsel for the taxpayer, Lin] 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 [the article concerned]. Its meaning should be consistent throughout.

[Emphasis in original]

61. It is not apparent either from the judgment of the Court of Appeal, or on the subsequent, unsuccessful, leave application in the Supreme Court, that either court ' s attention was drawn to Duckering v Gollan . However that may be, " in respect of " is used but twice in Art 22(2) of the Convention, in each instance in the first sentence. In contrast, it is the word " on " which is used in the second sentence of Art 22(2), " 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 " (emphasis added). So the meaning, " on " discerned in Lin for " in respect of " does have some contextual support in Art 22(2). It does appear that " in respect of " and " on " are being used synonymously in Art 22(2). The order of use in Art 22(2) rather suggests that " in respect of " is predominant, with " on " carrying the ordinary meaning of " in respect of " , set out above and as adopted in Duckering v Gollan . But even if this is not so, it does not strain language to regard Australian tax as payable " on " the " gain " . Further and in any event, the second sentence is prescriptive of the maximum amount of the credit, not what it is payable " in respect of " . That is set out in the first sentence of Art 22(2) of the Convention, which describes the general intention of the State Parties. So an alternative and synonymous way to construe " on " in the second sentence of Art 22(2) is that it means " in respect of " . I do not regard Lin as an authority fatal to Mr Burton ' s submission as to the meaning to give " in respect of " .

62. What is clear, in my view, is that neither " in respect of " nor " on " carries the meaning, " to the extent to which " . Yet that is the meaning adopted by the Commissioner is his " apportionment " approach.

63. Another case relied upon by Mr Burton is Revenue and Customs Commissioners v Anson
[2015] 4 All ER 288 . Mr Burton cited Anson for the following observation made by Lord Reed SCJ (with whom Lord Neuberger P and Lords Clarke, Sumption and Carnworth SCJJ agreed) at [114]:


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The words ' the same ' are ordinary English words. It should however be borne in mind that a degree of pragmatism in their application may be necessary in some circumstances if the object of the Convention is to be achieved, for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax is computed in the two jurisdictions. It appears that some potential difficulties of this kind are in practice avoided by the Commissioners ' accepting that the profits on which foreign tax is computed and in respect of which relief can be claimed are not confined to those arising under UK tax principles in individual UK chargeable periods: see Munro, UK Tax Treaties (2013), para 4.26.

64. That observation was made in relation to another analogue of the present Art 22(2), Art 23(2)(a) of the double taxation agreement between the US and the United Kingdom. As is apparent even from Lord Reed ' s observation, the treaty article under consideration in Anson explicitly used the words, " the same " . Article 22(2) does not explicitly do that. But that is the sense and effect of the use of the definite article, " the " in Art 22(2) to govern " income " . So, the reliance by Mr Burton on the quoted observation was not, in my view, misplaced. Lord Reed ' s counselling in Anson of a " degree of pragmatism in their application " is akin, in my respectful view, to what Lord Donovan had earlier counselled in the House of Lords in Duckering v Gollan namely, the affording of " a fair and reasonable construction " to an instrument intended to afford relief from double taxation. Duckering v Gollan and Anson each offer illustrations of how to resolve a case where the State Parties to a double taxation agreement have reached common ground as evidenced by a provision akin to Art 22(2) of the Convention for providing relief from double taxation and the allowance of foreign tax credits in circumstances where each State Party has a different measure of taxation. That is this case. A conclusion that, in each jurisdiction and for the purposes of Art 22(2) of the Convention, tax is payable " in respect of " the whole of the gain better accords with the counselling as to their resolution evident in these cases than the Commissioner ' s " apportionment " approach. As with Her Majesty ' s Revenue and Customs Commissioners in Anson , the Commissioner has succumbed to vice of viewing the construction and application of an international agreement approved by State Parties through the false prism of language in legislation approved by the parliament of but one of those State Parties.

65. Anson has other relevance in the resolution of the present appeal, in my view. It is also noteworthy for the affirmation by Lord Reed, at [110] - [111] of the approach in the United Kingdom to the construction of double taxation agreements:

Article 31(1) of the Vienna Convention requires a treaty to be interpreted ' 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 ' . It is accordingly the ordinary (contextual) meaning which is relevant. As Robert Walker J observed at first instance in
Memec [1996] STC 1336 at 1349, 71 TC 77 at 93, a treaty should be construed in a manner which is ' international, not exclusively English ' .

That approach reflects the fact that a treaty is a text agreed upon by negotiation between the contracting governments. The terms of the 1975 Convention reflect the intentions of the US as much as those of the UK. They are intended to impose reciprocal obligations, as the background to the UK/US agreements from 1945 onwards makes clear. The terms of art 23(2), in particular, broadly reciprocate those of art 23(1), and are important to businesses in the US as well as to the UK investors who may receive dividends or other income from them. In that context, one would be predisposed to favour an interpretation which reflected the ordinary meaning of the words used and the object of the Convention. This is indeed a point which has been repeatedly made, in other cases concerned with the construction of the UK/US double taxation conventions, in the face of narrow and technical constructions: see, for example,
Lord Strathalmond v IRC [1972] 3 AII ER 715 at


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721,
(1972) 48 TC 537 at 544-545, and IRC v Commerzbank AG ,
IRC v Banco do Brasil SA [1990] STC 285 at 303, 63 TC 218 at 242.

The approach described by Lord Reed is completely congruent with the observations made in Thiel . In particular, " narrow and technical constructions " are to be deprecated. Mr Burton ' s contended construction of the meaning to give " in respect of " is neither " narrow " nor " technical " .

66. Anson has yet further utility for present purposes, in my view. As with the double taxation agreement considered in that case, the Convention, in Art 3(2), provides:

(2) As regards the application of this Convention by one of the Contracting States, any term not defined herein shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes to which this Convention applies.

In Anson , the equivalent article was said by the Commissioners to mean that it was necessary to determine the source of the income taxed in each jurisdiction in accordance with UK tax law. That submission was rejected (at [98]) on the basis that it was inconsistent with the context in which the word " sources " was used in the equivalent of Art 22 of the Convention. By parity of reasoning, the meaning of " income " (for which, read " gain " ) referred to in Art 22(2) cannot, in context, be dictated for the purposes of the Convention by Australian taxation law, any more than it can be dictated by US taxation law. Regard to Art 13(1) of the Convention discloses that income or gains, " derived by a resident of one of the Contracting States from the alienation or disposition of real property situated in the other Contracting State may be taxed in that other State " . In turn, Art 13(2) supplies definitions of " real property " and " real property situated in the other Contracting State " . Thus, the Convention does not leave to domestic law what constitutes a gain from the alienation of real property. " Gain " just has the meaning as the word is ordinarily understood. Materially, the domestic taxation law of each State Party becomes relevant only in the determination of whether, under that law, tax is payable " in respect of " such a " gain " .

67. Such a construction of Art 22(2) is, as Mr Burton submitted, supported by the understanding of the Organisation for Economic Co-operation and Development ( OECD ) as to what constitutes " double taxation " - " the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter " : OECD, Model Tax Convention on Income and on Capital (OECD, Paris, 2017), Introduction, 9, [1] (unaltered since before Protocol to the Australia-US Convention was agreed in 2001, see e.g. 1995 Model Tax Convention). The Convention closely follows the OECD model of the day. Thiel exemplifies the appropriateness of reference to an OECD commentary for assistance in the construction of a double taxation agreement. The assistance which I derive is confirmatory of a construction which does not delimit " gain " by the taxation mechanism of either Australia or the US. It is both necessary and sufficient if the subject matter, a gain as ordinarily understood has been derived from a source in the US.

68. This same understanding is evident in a pithy statement made by Professor Rebecca Kysar of Fordham Law School in her recent, illuminating, article " Double taxation occurs when more than one country lays claim to taxing an item of income " : Rebecca M Kysar, Unraveling the Tax Treaty , 104 Minnesota Law Review (forthcoming, 2020). A preliminary draft of this paper was the subject of a presentation by Professor Kysar at New York University ' s Law School Tax Policy Colloquium, Vanderbilt Hall, 29 January 2019, and is cited by me with the author ' s permission. The sentence quoted appears at 6 of that draft (I refer hereafter to the paper as " Kysar " ).

69. What Professor Kysar terms " item of income " the OECD terms the " same subject matter " . In neither, in my view, is the level of abstraction of understanding delineated by domestic revenue law. The " laying claim " is so delineated but that is for the different purpose of ascertaining whether tax is payable " in respect of " that subject matter or item, here the gain derived from a source in the US.

70.


ATC 22062

Professor Kysar comprehensively and persuasively argues that the merits of adherence to a double taxation agreement regime as exemplified by the Convention may be moot from a tax policy perspective in the 21 st century by comparison with their rationale as postulated almost a century ago in economists ' views which informed initial League of Nations ' drafted model double taxation agreements. These models continue to inform the contents of double taxation agreements such as the Convention. But this case is concerned not with the fiscal merits of high tax policy and probably also foreign relations and trade choices by State Parties but rather with the meaning and effect of a particular policy choice by Australia and the United States as found in the Convention and implemented into Australian domestic law by the International Tax Agreements Act. In relation to the exercise of Australian judicial power in the determination of Mr Burton ' s challenge to the amended assessments, it is nothing to the point that the Convention might perhaps be thought by some to be disadvantageous to Australia in relation to a gain derived by an Australian resident from a source in the US, because of the differing ways in which US and Australian taxation laws bring to tax such a gain. If, on the true construction of the Convention, Australia is obliged to allow a credit of the full amount of US tax paid by Mr Burton and that result is considered by Australia to be overly generous, then it is for the Australian Executive to endeavour to renegotiate or withdraw from the Convention and to persuade the Australian Parliament to amend the International Tax Agreements Act. It is not for the Australian judiciary to adopt a meaning of, materially, Art 22(2) which it cannot bear on the basis of some apprehended Australian fiscal disadvantage.

71. For completeness and in fairness, I should record that Professor Kysar also opines at 13:

Treaties also do not resolve conflicts of characterization, again leaving a significant amount of double taxation in place. This is because the treaties defer to the domestic rules to assign character of income.

[Footnote reference omitted]

Insofar as judicial authority is directly cited for this proposition, reference (Kysar, 13, fn 57) is made to the US Tax Court case, Boulez v. Commissioner 83 T.C. 584 (1984). With respect, on my reading of that case, while the court did refer to US authority in relation to the ownership of property generating royalty income, the court also stated at 593, " the treaty embodies the same fundamental concept of ownership " . US domestic tax law was used not to the exclusion of the treaty ' s meaning but rather as a convenient way of explaining a concept expressed in no different way by the treaty. The last sentence of Art 22(2), " 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 " does defer to Australian taxation law in relation to the calculation and allowance of the foreign tax credit, but that is subject of the general principles found in the preceding part of Art 22(2). It is not a means by which, contrary to the general principles in Art 22(2) already discussed, an " apportionment " approach may permissibly be adopted by the Commissioner so as but partially to allow a foreign tax credit.

72. The foregoing takes up and expands upon Mr Burton ' s submissions. It follows that I respectfully disagree with the following conclusion of the learned primary judge at [126]:

Under Australian law, the only 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.

73. This approach, which reflects the Commissioner ' s position, impermissibly conflates, in my view, the mechanism for the computation of Australian taxation with the more general question of whether such taxation is " in respect of " " the gain " .

74. I also respectfully disagree with his Honour ' s further observation (at [127]) that, " The Article does not suggest that a credit is allowed against Australian tax payable for the whole amount of the US tax paid. " What Art 22(2) states is that a credit is to be allowed for " United States tax paid under the law of the


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United States ... in respect of income [a " gain " ] derived from sources in the United States " . For the reasons given above, Mr Burton paid the whole of the US tax " in respect of " the gains. That is the amount of the foreign tax credit. An error in his Honour ' s statement is in the understanding of the effect in context of " in respect of " . A further error is that, in effect, such a construction rewrites Art 22(2) so that it obliges the allowance of a credit only of so much of the gain as constitutes a discount capital gain for Australian taxation law purposes. That construction is more than the text, read in context, can bear.

75. Necessarily, this means that Mr Burton ' s appeal ought to be allowed.

76. This result must follow, irrespective of whether Mr Burton is also entitled to an equivalent foreign tax offset pursuant to Div 770 of the 1997 Act. That is because the International Agreements Act makes the convention prevail to the extent of any inconsistency.

77. After the close of oral submissions, it was thought appropriate by the Court to extend to the parties an opportunity to make supplementary written submissions directed to the contingency that Mr Burton might succeed under Art 22(2), as applied by the International Tax Agreements Act but fail under Div 770 with the question then being as to how, lawfully, the resultant foreign tax credits were to be allowed and accounted for under Australian revenue law. Each of the parties availed themselves of that opportunity. The following reflects the result of my consideration of their supplementary submissions.

78. As noted above, the paramountcy afforded Art 22(2) and the other articles in the Convention is only to the extent of inconsistency with the provisions contained in the 1997 Act or the 1936 Act (other than Part IVA of the 1936 Act). As with the meaning to give to " in respect of " , the approach to be adopted in relation to the allowing of the credit dictated by Art 22(2) must be informed by the same approach as that counselled by Lord Donovan in Duckering v Gollan in the passage excerpted above so as to prefer constructions which avoid, to the extent to which language of provisions reasonably admits, inevitable anomalies and difficulties. Mr Burton cannot receive both the full credit under Art 22(2) and the foreign income tax offset to which the Commissioner accepts he is entitled under Div 770 of the 1997 Act. The paramountcy afforded to the credit which must be allowed by virtue of Art 22(2) is only to the extent of inconsistency. It is the excess above the conceded foreign income tax credit which he must be allowed (but not so as to exceed the amount of Australian tax payable on the gain). So I accept the Commissioner ' s submission that, if Mr Burton succeeds on his Art 22(2)-based grounds, it would be necessary to account for any foreign income tax offset otherwise supplied by s 770-10 of the 1997 Act. I also accept the Commissioner ' s submission that s 16 of the International Tax Agreements Act does not provide for a rebate in circumstances such as the present.

79. By virtue of the International Tax Agreements Act, the effect of Article 22(2) is to require that Mr Burton be allowed the tax credit " 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 " . For present purposes, that means that the consequence of the allowing of his appeal and the consequential setting aside of the objection decision must be given effect by the Commissioner in the usual way by his making the requisite amended assessments so as to give effect to the basis upon which the appeal has been allowed.

80. I turn then to consider the meaning and effect of Div 770 of the 1997 Act.

Division 770 of the 1997 Act

81. It does not at all follow that the conclusions reached in relation to Art 22(2) of the Convention dictate that Mr Burton is also entitled to a tax offset for the whole of the US tax which he has paid. The text of the entitlement provision in the 1997 Act, s 770-10, is different. So, too, is the context in which that text appears. It is that statutory text, read in that statutory context and with regard to the evident purpose of that statutory provision, not that of the Convention, which is determinative of entitlement. This approach is dictated by
Commissioner of Taxation v Consolidated Media Holdings Ltd (2012) 250 CLR 503 at


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519, [39]. Thiel is not a relevant authority for the purposes of the construction of s 770-10.

82. Further, the construction of the text of s 770-10 ought not to be approached with any a priori assumption as to its meaning derived from the Convention, any other double taxation agreement or any OECD commentary in relation to any model double taxation agreement.

83. Yet further, while at a general level of abstraction, it may readily be accepted, as Mr Burton submitted, that the purpose of Div 770 is to offer relief from double taxation, that Division ' s object section, s 770-5 specifies the circumstances " where " it is intended to grant that relief.

84. Read in context, the text of s 770-10 is, in my view, fatal to the success of the alternative foundation of Mr Burton ' s appeal, grounds 1 to 4 of which challenge the correctness of the conclusion adverse to him reached by the learned primary judge in relation to the allowance of foreign tax offsets under s 770-10 of the 1997 Act. An amount of foreign tax paid only counts towards a tax offset if it was paid " in respect of an amount that is all or part of an amount included in your assessable income for the year " .

85. Mr Burton submitted, relying upon Duckering v Gollan and Anson , that the meaning to afford to " in respect of " was the same as that discerned above in relation to its use in Art 22(2) of the Convention by reference to its ordinary meaning and such authorities. Reading it in context, I accept that the use of that phrase in s 770-10 is sufficiently similar to its use in a double taxation provision such as Art 22(2) of the Convention to make relevant by analogy that understanding as to its meaning found. So all that is needed is a relevant connection. But the connection must be with " an amount that is all or part of an amount included in your assessable income for the year " , not with ' all or part of an amount that is all or part of an amount included in your assessable income for the year ' .

86. Section 770-10 looks to " an amount that is all or part of an amount included in your assessable income for the year " . The term " assessable income " is defined in s 995-1 of the 1997 Act, which is not the same as " income " as understood for the purposes of the Convention. As defined in the 1997 Act, assessable income includes " ordinary income " (s 6-5) and, materially, what is termed " statutory income " (s 6-10). One form of statutory income included in assessable income is a net capital gain included pursuant to s 102-5(1) of the 1997 Act. As a matter of ordinary language flowing from the text of s 770-10 and, in turn, s 102-5(1), it is only the net capital gain which is, in each instance, included in Mr Burton ' s assessable income. Regard to ss 6-5, 6-10 and 102-5 highlights that the phraseology " included in your assessable income " is pervasive in the 1997 Act. There is no contextual warrant for construing " included in " as extending to an amount which is used for computation of an amount that is included in assessable income. The learned primary judge (at [113] - [114]) reached just such a conclusion. That conclusion was correct, for the reasons given by his Honour.

87. Contrary to Mr Burton ' s submission but adopting a submission made by the Commissioner, as a matter of ordinary language, all that s 770-10 " counts towards " the tax offset is, in the circumstances of this case, the amount of US tax paid by Mr Burton in this instance " in respect of " the net capital gain as calculated in accordance with the 1997 Act. Again as a matter of language, flowing from the text of s 770-10, the relevant connection, is with, materially, each net capital gain, as it is that amount which is included in Mr Burton ' s assessable income, not with the integers which the 1997 Act prescribes for the calculation of that net capital gain. True it is that the capital gain is one such integer but that is not the connecting point.

88. That is not to say that the gains derived from sources in the US are not " brought to tax in Australia " . Mr Burton ' s submission that they are is correct. That is why his Convention-based grounds have merit. Australian tax is indeed payable " in respect of " those " gains " . But the text employed in s 770-10 is " all or part of an amount included in your assessable income for the year " , not " brought to tax in Australia " . That text is not happenstance. It is congruent with other provisions in the 1997 Act; notably for present purposes, the definition of " assessable income " in the 1997 Act, ss


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6-10 and 102-5(1). The Commissioner ' s submission that s 770-10 should be construed accordingly is correct.

89. The statement in the " Guide " , found in s 770-1, " You may get a non-refundable tax offset for foreign income tax paid on your assessable income " offers only limited assistance, in my view. In the 1997 Act, a " Guide " forms part of that Act but not an operative part, although s 950-150(2) of that Act permits it to be consulted for the purpose of construing an operative provision. As to the word " on " , the above discussion of the New Zealand case, Lin , is pertinent. The better view is that, in s 770-1, it means " in respect of " . Read literally, s 770-1 evidences a confusion of concepts in that foreign income tax is never paid on " assessable income " , the latter being an Australian, not a foreign, taxation law concept. But it is evidently cast at a high level of generality. When this and the meaning of " on " are appreciated, the use of the term " assessable income " looks to be a shorthand way of describing all amounts included in assessable income. So read, the Guide rather tends to confirm the construction of s 770-10 for which the Commissioner contended and which the learned primary judge adopted.

90. Within the statutory object provision, s 770-5, the text of s 770-5(1)(a) is much closer than that in s 770-1 to s 770-10. Again, the word " on " in both s 770-5(1)(a) and s 770-5(1)(b) looks to mean " in respect of " . Once again, the phraseology " amounts included in your assessable income " , found in s 770-5(1)(a) is not happenstance. The " same amounts " in s 770-5(1)(b) is, necessarily, a reference to the " amounts included in your assessable income " and, in context, means the net capital gain which is included, nothing more. It is true, as Mr Burton submitted, that s 770-5(1)(b) uses " the same " , whereas s 770-10 does not. But that is the sense in which the clause, " that is all or part of an amount included in your assessable income for the year " . governing " an amount " in the second sentence of s 770-10(1) is employed. The amount in respect of which foreign tax is paid has to be the same as all or part of an " amount included in your assessable income " . The object section is, in my view, congruent with s 770-10 but regard to it does not otherwise assist in the construction of s 770-10.

91. Mr Burton submitted that the construction of s 770-10 adopted by the primary judge, which I regard as correct, cannot be made to work sensibly in relation to capital losses. In support of this Mr Burton referred to the position, itself incontrovertible, that " Step 2 " in the calculation of net capital gain ordained by s 102-5 of the 1997 Act requires that prior year capital losses be subtracted. This, he submitted, was incongruous, given that ordinary income and other forms of statutory income are just included in assessable income without deduction at that stage of prior year losses. But that, as the Commissioner submitted (correctly in my view), is just the result of the way in which the Australian Parliament has chosen to permit a dedication of prior year capital losses in a process that leads ultimately to an assessment of taxable income. It is to be remembered that the expressed object of Div 770 is not to relieve from double taxation in the abstract but rather " where " the circumstances stated in s 770-5 exist. According to that object, there is nothing about the construction of s 770-10 adopted by the primary judge which does not work sensibly. The inadequacy in Div 770 may well be in its object, especially when one has regard to broader statements such as that of the OECD as to the object of providing relief from double taxation. Viewed by reference to those broader objectives, it does seem incongruous that a prior year ' s losses might reduce or even eliminate for foreign tax offset purposes any amount on ( " in respect of " ) which foreign tax has been paid. But the removal of any such incongruity is a matter for Parliament. As it happens, in the circumstances of the present case, prior year losses have no effect on the allowance of foreign tax credits, via Art 22(2) of the Convention, so the asserted incongruity is, in any event, academic.

92. Mr Burton also reiterated a submission made before but rejected by the primary judge that there was a tension between the construction of s 770-10 ultimately adopted by his Honour and s 121EG(3A) of the 1936 Act, which provides:

(3A) Subject to section 121EH, this Act applies to an OBU as if only the eligible


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fraction of each amount of foreign income tax (within the meaning of the Income Tax Assessment Act 1997 ) the OBU paid in respect of an amount of assessable OB income had been paid in respect of that income.

93. " OBU " is a reference to Offshore Banking Unit. This particular provision would, so the submission went, be redundant if his Honour ' s construction of s 770-10 were correct. The answer to this is that given by his Honour (at [86] and [87]). Division 9A of Part III of the 1936 Act is a discrete code directed to Offshore Banking Units as defined and of different origins to Div 770 of the 1997 Act. Such resultant redundancy, if any, as there may be to s 121EG(3A) of the 1936 Act is no reason at all not to afford the text of s 770-10 a meaning which, in my view, is plain.

94. For completeness, I add the following. Although notes to sections in the 1997 Act do not have operative effect, the construction of s 770-10 promoted by the Commissioner and adopted by the primary judge is consistent with Note 2 to that section. That does provide additional support for why that construction is correct. Though I have consulted the same, I have not found the Explanatory Memorandum to be of any particular assistance.

Summary and Disposition

95. For the above reasons, Mr Burton has succeeded in demonstrating error on the part of the learned primary judge insofar as he has relied upon Art 22(2) of the Convention, as applied by the International Agreements Act. He has failed insofar as he further or alternatively alleged error in the construction and application of s 770-10 of the 1997 Act. The orders should therefore be as indicated by me at the conclusion of discussing the case based on Art 22(2).


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