Dual Tax Residence: International Law and Vienna Convention on the Law of Treaties (VCLT)

This was a case that went before the High Court of Australia, on appeal from the Federal Court of Australia. In both matters the respondent was the Commissioner of Taxation. In both matters, the appeal was dismissed with costs. However what is interesting is the analysis of historic case law including North Australian Pastoral [1946] HCA 17 and Waterloo Pastoral [1946] HCA 30 within the Northern Territory, to determine issues concerning dual tax residence.

In exploring this case, it is important to observe that the High Court affirmed the law as stated in De Beers [1906] AC 455 (hereafter ‘De Beers’) and also clarified Gibbs J’s judgment in Esquire Nominees [1973] HCA 67 (hereafter ‘Esquire’). The High Court also explored the principles of International law for the interpretation of double tax agreements.

The joint judgment was given by French CJ, Kiepel, Bell and Nettle JJ. The appellants sought to argue that ‘that the central management and control of each company was exercised abroad, and, therefore, that the appellants were not residents of Australia for income tax purposes.’ [2]

The legislation was based around the Income Tax Assessment Act 1936 (Cth), Income Tax Assessment Act 1997 (Cth) and International Tax Agreements Act 1953 (Cth).

More specifically at [4] the history of the litigation turned on the following interpretation of the legislation by the appellants:

‘that it was not resident in Australia within the meaning of s 6(1) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”). It followed, it was said, that a liability to tax in Australia, within the meaning of s 6-5, read with the relevant definitions in s 995-1, of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”), did not arise in respect of income derived from sources outside Australia …’

The matters also raised the issue of ‘double taxation agreements’ at [6].

Historically the majority looked at De Beers, and established at [37] that:

‘The correct approach was as laid down by Lord Loreburn LC in De Beers Consolidated Mines Ltd v Howe[58]. On that approach, a company’s central management and control is located at the place where the company’s “real business” is carried on, the real business of a company is carried on at the place from where its operations are controlled and directed …’

At the same time the majority at [37] confirmed Esquire Nominees and the reference of Gibbs J as not conflicting with the finding in De Beers, but rather asserting that:

‘real business [of a company] is carried on where the central management and control actually abides” and thus that “[t]he question where a company is resident is one of fact and degree’

However, the case made a significant emphasis on the interpretation of ‘corporate residence’ in North Australian Pastoral [1946] HCA 17. North Australian Pastoral was concerned with dual residence in two different places within Australia at [49]:

‘The company was incorporated in the Northern Territory and carried on a business of breeding, purchasing, depasturing and selling cattle on and from its cattle station, Alexandria, in the Territory. At relevant times its registered office was at Alexandria but, under a power in its articles, it had established a branch office in Brisbane.’

The High Court then went onto consider other aspects of the North Australian Pastoral case including the shifting of shareholder meetings from Brisbane to the Northern Territory so that the company could be considered a resident of the Northern Territory for taxation purposes at [50]:

‘in order to improve the company’s chances of qualifying for a then extant legislative exemption[92] from income tax on income derived from primary production or mining in the Northern Territory by a resident of the Territory, the company began holding meetings of directors and shareholders at Alexandria and appointed a new secretary, who resided and kept the seal and share register there’.

The High Court also considered the judgment of Dixon J at [51] linking the issue of dual tax residence to ‘degree’ and ‘fact’. This reference was also reiterated by Gordon J at [116].

On the issue of dual tax residence, the Majority then further considered Waterloo Pastoral Co Ltd v Federal Commissioner of Taxation [1946] HCA 30. In this historic case the question was again whether the taxpayer was a resident in the Northern Territory.

The majority made this interesting point at [56]:

‘The company in Waterloo Pastoral was incorporated in, and operated its business from, the Northern Territory. Its managing directors were resident in Sydney … Williams J found[104], however, that the company was resident in the Northern Territory … because the “ultimate operative decisions” were made during visits to the stations in the Northern Territory’

Subsequently, the rationale of William J in Waterloo Pastoral was linked back to that of Dixon J in Northern Australian Pastoral.

Double Tax Agreements
The issue of double tax agreements was explored primarily by Gordon J. The majority at [4] explained the relevance of the double tax agreement argument as it was raised by Bywaters as:

‘its central management and control was exercised in Switzerland and, as a result, that it was not resident in Australia within the meaning of s 6(1) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”). It followed, it was said, that a liability to tax in Australia … did not arise in respect of income derived from sources outside Australia, nor in respect of income derived from sources within Australia, either because of the operation of Australia’s double taxation agreement with Switzerland at the relevant time[1]’.

In the course of exploring the double taxation issue, Gordon J considered at [135], the Convention between the Government 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 on Capital Gains, and the Agreement between the Government of Australia and the Swiss Federal Council for the Avoidance of Double Taxation with respect to Taxes on Income, and the Protocol to that agreement.

Gordon J at [140] also considered the International Tax Agreements Act 1953 (Cth) which gave ‘the force of Law to certain Conventions and Agreements’. So the Convention and Agreements mentioned above were found to be set out in the schedules of the Commonwealth legislation: [143]-[144]. However following this, Gordon J then turned to the question of how the international agreements or conventions should be interpreted at [145]-[147].

To this end Gordon J applied the Vienna Convention on the Law of Treaties (VCLT) at [149] for the interpretation of double tax agreements. This approach was justified at [148] because:

‘If the terms of an instrument enacted into Australian law were interpreted strictly in accordance with domestic principles of statutory interpretation, there would be a risk that the treaty would be interpreted differently even though other countries had adopted the same instrument’

Further to this, the High Court considered the importance of arts 31 and 32 of the VCLT and the relationship to international customary law at [181]. After using this method of interpretation Bywater was found to be ‘only’ a resident of Australia and ‘taxable only in Australia’ at [185].

Conclusion
Although the appellant’s reliance on historic case law such as North Australian Pastoral and Waterloo Pastoral did not appear to be fruitful, the High Court’s reasoning in these matters did provide clarification on dual tax residence. Other arguments advanced by the appellants relating to the interpretation of double tax agreements provided insight into the application of the VCLT and customary international law.

Saramarie Younes
BSc (Med) LLB LLM (LP)
GDLP Dip Management
saramarie@email.com