Decision impact statement
Virgin Holdings SA v Commissioner of Taxation; Undershaft (No. 1) Limited and Undershaft (No. 2) BV v Commissioner of Taxation
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Virgin Holdings SA v Commissioner of Taxation
 FCA 1503
2008 ATC 20-051
70 ATR 478
Undershaft (No. 1) Ltd (formerly CGNU Holdings (Aust.) Ltd) and Undershaft (No. 2) BV (formerly Norwich Union Overseas Holdings BV) v Commissioner of Taxation
 FCA 41
(2009) 2009 ATC 20-091
175 FCR 150
253 ALR 280
74 ATR 888
Venue: Federal Court of Australia
Venue Reference No: NSD 1149 of 2007, NSD 57 of 2008; NSD 1283 of 2006 and NSD 1282 of 2006
Judge Name: Edmonds J; Lindgren J
Judgment date: 10 October 2008; 3 February 2009
Appeals on foot:
No, Commissioner's appeal to Full Federal Court withdrawn.
Impacted AdviceRelevant Rulings/Determinations:
- TR 2001/12
- TR 2001/13
International tax agreements
Double tax agreements (DTAs)
Taxation of capital tax in respect of DTAs entered into before introduction of capital gains tax (CGT) in Australia
Business profits and alienation of property articles
Comity in judicial decision-making
Outlines the Tax Office's response to two cases which raised the issue of whether Double Tax Agreements entered into prior to the CGT regime in Australia, denied the Commissioner the right to tax capital gains derived in Australia by foreign residents
Brief Summary of Facts
In each of the matters, the applicants were foreign resident companies. Virgin Holdings SA was incorporated in Switzerland, Undershaft (No. 1) Limited was incorporated in the United Kingdom and Undershaft (No 2) BV was incorporated in the Netherlands. It was accepted in each case that none of the applicants carried on business through a permanent establishment in Australia.
The Commissioner takes the view in TR 2001/12 that DTAs entered into by Australia prior to the introduction of the comprehensive CGT regime into the Australian income tax legislation in 1985 ("pre-CGT DTAs") do not limit Australia's right to tax capital gains derived by entities that are residents of pre-CGT DTA treaty partners under the comprehensive capital gains tax regime.
The comprehensive capital gains tax regime was introduced into the Australian income tax legislation in 1985, by way of Part IIIA of the Income Tax Assessment Act 1936, and continues in Part 3-1 of the Income Tax Assessment Act 1997.
The DTAs between Australia and Switzerland, Australia and the UK, and Australia and the Netherlands came into force in 1981, 1967 and 1976 respectively and each of those DTAs remained in force at the time of the relevant transactions in each of the matters in the 2004 and 2001 tax years.
Virgin Holdings SA
Virgin Holdings SA was a company resident in Switzerland which was a shareholder in Virgin Blue Holdings Ltd, an Australian resident company. Due to a company group restructure and through a series of transactions including a 1:120 share split, on 4 November, 8 and 12 December 2003 Virgin Holdings disposed of 21,721,626, 7,031,176 and 123,196,853 respectively of its shares in Virgin Blue Holdings Ltd. The Commissioner allowed roll-over relief in respect of the 4 November share disposal. The 8 December disposal was an off-market share buy-back and the Commissioner allowed share buy-back capital losses of $4,208,737 pursuant to Division 16K of the ITAA 97. Inclusive of the amount rolled over from another member of the company group, a capital gain of $196,954,809 for the accounting period in lieu of the year ended 30 June 2004 arose for Virgin Holdings SA as a result of the 12 December 2003 sale.
The Federal Court (Edmonds J) handed down a decision in the Applicant's favour on 10 October 2008. On 31 October 2008 the Commissioner appealed that decision to the Full Federal Court. The appeal has now been withdrawn by the Commissioner.
Undershaft (No 1) was a company resident in the UK and Undershaft (No 2) was a company resident in the Netherlands. As a result of an earlier merger, on 20 December 2000, Undershaft (No 1) disposed of its shares in CGU Insurance Australia Ltd, an Australian resident company, and Undershaft (No 2) disposed of its shares in Norwich Union Australia Ltd, also an Australian resident company. The parties agreed that the sales fell within CGT Event A1 under s104-10 of the ITAA 97 and that a capital gain arose to each of Undershaft (No 1) and (No 2) as a result of those sales. In the year ended 30 June 2001 Undershaft (No 1) made a gain of $273,000,000 and Undershaft (No 2) made a gain of $108,585,000.
The Federal Court (Lindgren J) handed down a decision in the Applicants' favour on 3 February 2009.
Issues decided by the court
- CGT amounts are included in "taxes covered" for the purposes of Article 2 of the Swiss DTA where the Swiss DTA was a pre CGT treaty, both as part of "the Australian income tax" in Article 2(1)(a) and alternatively as a "substantially similar tax" for the purposes of Article 2(2);
- The CGT amounts are included in "profits of an enterprise" for the purposes of Article 7 of the Swiss DTA; or
- The CGT amounts are included in "income from the alienation of capital assets of an enterprise" for the purposes of Article 13(3) of the Swiss DTA;
- Accordingly, the CGT amounts are precluded from liability to tax in Australia.
Undershaft (No 1)
- Article 5 (Industrial or Commercial Profits Article) of the UK DTA applies to capital gains which are included in assessable income under the ITAA 1997;
- The term "Commonwealth income tax" in Article 1(1)(b) (Taxes Covered Article) of the UK DTA includes capital gains;
- Although not necessary to decide, in relation to Article 1(2) of the UK DTA, the tax on capital gains, as introduced by Part IIIA of the ITAA 1936, constitutes a "substantially similar tax" to the taxes covered in Article 1(1).
Undershaft (No 2)
- Article 7 (Business Profits Article) of the Netherlands DTA applies to capital gains which are included in assessable income under Part 3-1 of the ITAA 1997;
- The term "Australian income tax" in Article 2(1)(a) (Taxes Covered Article) of the Netherlands DTA includes capital gains;
- Although not necessary to decide, in relation to Article 2(2) of the Netherlands DTA, the tax on capital gains, as introduced by Part IIIA of the ITAA 1936, constitutes a substantially similar tax to the taxes covered in Article 2(1).
- Capital gains tax would be covered by the Netherlands Agreement regardless of whether Australia had informed the Netherlands of its introduction (as required by Article 2(2)).
Judicial comity (Undershaft)
This was relevant due to the decision in Virgin Holdings having been handed down in the same court 17 days prior to the hearing in Undershaft.
- The principle of judicial comity requires, assuming the case to be indistinguishable, (particularly in this matter concerning interpretation of Commonwealth legislation) that the court follow an earlier decision unless it considers it clearly wrong or plainly wrong.
Tax Office view of Decisions
The Commissioner accepts that with two separate decisions at first instance reaching a common conclusion in relation to substantially common issues, there has now been sufficient clarification of the law.
Accordingly, the Commissioner withdrew his appeal to the Full Federal Court in the Virgin Holdings matter. The appeal period in the Undershaft matters expired on 3 March 2009 and the Commissioner did not appeal the decision of Lindgren J in those matters.
The Commissioner will, where appropriate, apply the decisions in respect of similar matters involving entities making taxable capital gains under Part 3-1 of the ITAA 1997 which are residents of countries where a similarly worded DTA signed prior to the introduction of a comprehensive capital gains tax regime in 1985 applies. It means that, under the DTA, the Commissioner is denied the right to include capital gains in the assessable income of residents of these countries that make capital gains in Australia from the sale of similar assets in circumstances covered by the two cases.
It is noted, however, that as Australia has renegotiated a number of the DTAs that were in force in 1985, including those with many of our significant trading partners (e.g. the United States of America, the UK, New Zealand, Canada) these decisions will have a somewhat limited application. As further DTAs are renegotiated, the potential impact of this decision will lessen. Further, the ongoing significance of this issue with respect to the disposal of shares is reduced due to the narrowing of the range of assets held by foreign residents that are subject to CGT following legislative changes enacted by the Tax Laws Amendment (2006 Measures No 4) Act 2006 with effect from 12 December 2006. The direct and indirect interests in real property (including certain options and rights) held by foreign residents, and business assets of a foreign resident's permanent establishment in Australia are subject to the CGT provisions. It is noted that both the remaining pre-CGT tax treaties and those subsequently negotiated generally allocate the right to tax capital profits from the alienation of these types of assets.
In the Undershaft decision, Lindgren J commented, in obiter, at paragraph 46, that "A DTA does not give a Contracting State power to tax ..." However, the Commissioner takes the view that, in certain circumstances - for example a transfer pricing matter in respect of the Associated Enterprises Article - a DTA may apply (refer to the discussion at paragraphs 29-33 of TR 2001/13).
Implications on current Public Rulings & Determinations
On 13 October 2010, the Commissioner withdrew Taxation Ruling TR 2001/12 without replacement. Taxation Ruling TR 2001/13 was amended on 14 September 2016 to make changes consequential to the withdrawal of TR 2001/12.
|Date of amendment||Part||Comment|
|16 September 2016||Tax Office view of Decision||Updated 2nd paragraph|
|Administrative treatment||Updated to reflect the withdrawal of TR 2001/12 and amendment of TR 2001/13|
Income Tax Assessment Act 1915 (Cth)
Income Tax Assessment Act 1922 (Cth)
Income Tax Assessment Act 1936 (Cth)
International Tax Agreements Act 1953 (Cth)
Income Tax Assessment Act 1997 (Cth)
Virgin Holdings and Undershaft
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R v Dyson
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R v Franklin
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(unreported, Federal Court of Australia, 16 April 1996)
Tillman v Attorney-General for the State of New South Wales
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TSL v Secretary to the Department of Justice
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Unisys Corporation Inc v Commissioner of Taxation
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Vienna Convention on the Law of Treaties
'Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to Taxes of Income' entered into force on 13 February 1981
'Agreement between the Government of the Commonwealth of Australia and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains' signed on 7 December 1967
'Agreement between Australia and the Kingdom of the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income' signed on 17 March 1976