Brewing Investments Ltd v Federal Commissioner of Tax

[2001] HCATrans 21

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M78 of 2000

B e t w e e n -

BREWING INVESTMENTS LTD

Applicant

and

THE FEDERAL COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

GLEESON CJ
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 16 FEBRUARY 2001, AT 10.38 AM

Copyright in the High Court of Australia

MR B.J. SHAW, QC:   If the Court pleases, I appear with my learned friend, MS H.M. SYMON, SC, for the applicant, Brewing Investments.  (instructed by Corrs Chambers Westgarth)

MR C.M. MAXWELL, QC:   May it please the Court, I appear with my learned friend, MR M.N. CONNOCK, for the respondent.  (instructed by the Australian Government Solicitor)

GLEESON CJ:   Mr Maxwell.  Yes, Mr Shaw.

MR SHAW:   If the Court pleases, the question in this case concerns the proper view of section 47 of the old Income Tax Assessment Act.  Its terms are set out in both of the judgments below.  It is submitted that the question which arises here which is in relation to its effect in respect of liquidation distributions by non‑resident companies to another non‑resident company when that second non‑resident company makes a distribution to a resident company.  It raises, practically, important questions, especially in circumstances in which more and more Australians are getting overseas investments.

It is submitted, too, that it raises questions of general jurisprudential importance because it raises how one construes or applies a deeming provision like section 47, especially in circumstances where the relevant deeming is said to operate extraterritorially and it also raises the question of how the two cases of Gibb and Harrowell, both of them High Court decisions, should be regarded, whether they can be reconciled, whether one or other of them is wrong or how one treats the statements in those cases which, since they were made, have generally been regarded as difficult to reconcile.

GLEESON CJ:   What do you see is the problem about a deeming provision operating extraterritorially?

MR SHAW:   The deeming provision here is said to operate for the purposes of the Act.  There are two possibilities.  One might say that the deeming provision operates on every company liquidation which takes place in the world.

GLEESON CJ:   If it has some other relevance to the Act.

MR SHAW:   I assume for present purposes, it has no relevance otherwise to the Act, and it is submitted that that would be a very unlikely construction that any company liquidation is affected in the world.  The other possibility is if that is not how it operates then it may operate when it has some other relevance to the Act, as your Honour said, but if it is to do that - and here it might be suggested it did not apply when the original liquidations took place but it did apply when the last of the liquidations took place - to re‑characterise, as it were, the earlier liquidation distributions but it is submitted that it is difficult to see why it should do that if the fact is it did not do it in the first place and how one makes the words apply to something which has already happened and was not re-characterised at that time.

The view of the meaning of section 47 for which we contend has been adopted by the Parliament and that is referred to by the primary judge in the application book at page 15.  It is the passage which starts right at the very bottom of page 15 and goes over to the top of page 16 where the terms of the explanatory memorandum which accompanied the introduction of section 47(1A) are set out, and as her Honour says, if that view of the section is adopted “then the Commissioner would fail”.

Another view is expressed by his Honour Justice Windeyer in Gibb.  That passage is set out in our outline of argument at page 67 of the application book at line 21.  Justice Windeyer was a member of the Court in Gibb and a member of the Curt in Harrowell and he says that:

“Even if one assumes . . . that word “income” in s.47 is to be given a meaning which would comprehend anything which under any provision of the Act is brought to charge as part of the assessable income, I am unable to agree that something which is both not income in the strict sense, and not by the Act made part of the assessable income of the company, can be “income derived by the company” within the meaning of s.74.”

Now, his Honour Justice Hill in the Full Court referred to what was said by Justice Windeyer in Gibb and what his Honour says appears at page 43 of the application book commencing at line 37 and going over to line 14 or 15 on the next page but his Honour does not there explain the words which I have just referred to where Justice Windeyer says in Gibb that he does not:

agree that something which is both not income in the strict sense, and not by the Act made part of the assessable income of the company, can be “income derived by the company” –

and, further, in Gibb in a passage which is set out in our outline, again, at page 67 and the relevant passage is at the top of page 68, the majority judgment which consisted of Chief Justice Barwick and Justices McTiernan and Taylor said:

The “statutory fiction” introduced by s.47 merely provides a basis for the operation of s.44 which is concerned exclusively with what dividends shall or shall not form part of a taxpayer’s assessable income.  It would, in our view, be anomalous to hold that distributions which constitute “dividends” because they are comprehended by the definition of that term thereby, necessarily achieve the character of income whilst distributions of a character which are not comprehended by the definition but which are deemed by s.47 to be “dividends”, do not by force of that provision achieve that character.

His Honour Justice Hill in the Full Court in a passage at page 48 and 49 says that the only part of what their Honours said in that judgment which afforded any assistance to us was the presence of the word “merely” in the first two or three sentences which I read out but it is submitted that that overlooks what their Honours say at the end of the passage on page 68 which is underlined.  It is submitted that his Honour simply does not explain that passage at all.

GLEESON CJ:   What do you say about the passage at the bottom of page 49 in paragraph numbered 50?

MR SHAW:   Your Honour, that was something that I was just about to come to.  It is submitted that the examples which his Honour gives after saying that the result would be strange if it was different from what he said -  the examples which he gives suffer from two defects.  The first of them is that there is an unjustified assumption made and that assumption is that the results in the two cases should be the same when the fact of the matter is that the Act deals differently with residents and non‑residents and not only does it deal differently with residents and non‑residents so far as tax…..was concerned, it deals with residents differently in respect of some of the income they receive from overseas, from income – some at least – which they receive locally.

So, once you introduce a non‑resident into the chain it is not necessarily to be assumed that the tax outcome will be the same because the precedence of a non‑resident either as receiving or paying may produce a different tax outcome and that is intentional.  The second thing we would say about it is that his Honour does not really do anything which applies the Act in the way it would apply in the circumstances, and by that I mean he adopts too simple an approach. 

If one looks at the question of what the position is in relation to the last distribution in his Honour’s example, in the case of a wholly resident chain the position would be the same on whatever view is adopted of section 47.  The position would be that the last distribution would be treated as a dividend but tax would not be payable in respect of it because it would be rebateable at least, presently, if the dividend was franked.  If one looks at the position of the chain when there is a non-resident in the middle one has to take into account, when looking at the tax outcomes, the effect of withholding tax, if there is any, the effect of attribution in the chain when there is a CFC, one has to take into account the effect of the provisions which give a different tax outcome if the dividend is paid from a listed country or from an unlisted country.

So, if our view of section 47 is right, when one comes to the last distribution there would be no tax imposed on the dividend because there would not be a dividend.  If one adopts the view which his Honour adopted in the Full Court then at least if the dividend is franked there would again be no tax payable because – not because there was not any income but because it was an exempt dividend pursuant to the provisions of section 23AJ.  That analysis may not be complete but what one can say is that if in the example when applying all the provisions of the Act the same tax outcome occurs in either case, that is to say on either view of section 47, in the case both of a resident and a non‑resident company in the chain, that will be because of the application of different provisions of the Act in each case because the introduction of a non‑resident into the chain instead of a resident makes a difference to the way in which the Act applies and is intended to do so.

It is submitted that his Honour’s simple statement of the case does not really analyse the way in which the Act applies sufficiently to justify any conclusion, or the conclusion of the kind which his Honour implies because the analysis is too simple.  We would say before that the important point is it is not to be assumed and the Act tells you not to assume that if a non‑resident is introduced into the chain either as a receiver or as a payer of dividend amounts, that the Act applies in the same way as it would if that non‑resident were a resident and making the same payment or receiving the same payment.

Our submissions is that his Honour’s example really does not justify his conclusion at all and it does that for the reasons which I have stated, so that if that is so then one goes back to, it is submitted, what her Honour Justice Kenny said and it is submitted that her analysis of the various provisions in the various cases is one which should, or at least could reasonably, be referred to his Honour’s analysis because his Honour does not really give reasons sufficient to justify the conclusions to which he came.

It is submitted, accordingly, that the application does raise general questions of importance and that we have reasonable prospect of success and indeed should succeed.  If your Honours please.

GLEESON CJ:   Yes, Mr Maxwell.

MR MAXWELL:   If the Court pleases.  Your Honours, there is no special leave question raised by this application for the ‑ ‑ ‑

GUMMOW J:   What do you say about paragraph 50 of the Full Court judgment, the matter that Mr Shaw has just been dealing with and…..he directs to it, bound up with the injection, as it were, of the non‑resident in the chain.

MR MAXWELL:   Yes, your Honour.  With respect, it is submitted - and I will deal directly with what my learned friend said.  It would be an error, in my respectful submission, to regard the discussion at the end of his Honour’s judgment as anything other than a postscript.  What his Honour says about the testing by examples, In my submission, is inessential to his Honour’s analysis of the authorities.  The question before your Honours, in my respectful submission, turns on whether we are right in saying that the result was entailed – not open, entailed – by the propositions which we have set out in our summary of argument, each of which is drawn from a unanimous decision of this Court.

If we are right about that and, in our respectful submission, his Honour’s analysis proceeds carefully, coherently and correctly through those cases, then even if your Honours thought his examples were either wrong or overly simplistic, your Honours would not be of any different view about the fact that there is no question of fundamental principle.  On the contrary, two separate decisions - and I will take your Honours, if necessary, to both Glenville  and Harrowell – entail, when read with Parke Davis, the result that the Court unanimously came to.

As regards the examples, it is, in our respectful submission, if it matters - and for the reasons I have just advanced it does not – a correct proposition that would expect an interpretation of section 47(1) to produce the result, other things being equal, that whether the intermediate company, company B in his Honour’s example, was a resident or a non‑resident, the same result would occur.  Why?  Because section 44(1)(a) deals with residence or non‑residency, not section 47.  That is the fundamental point, it is respectfully submitted, which is made in Parke Davis.  There is no territorial limitation in section 47(1).

Section 44(1), so the Court there said in the judgment given by Chief Justice Dixon, supplies the territorial criteria.  So, it is immaterial whether company B, in his Honour’s example, is a resident or a non‑resident, provided, as is the case here and in his Honour’s examples, that the recipient of the final distribution is a resident because under 44(1)(a) a resident taxpayer is assessable on income from whatever source. 

Secondly, for my learned friend to raise what are undoubtedly correct or defensible propositions about franking, withholding tax and the application of Part X is really to produce a red herring.

GLEESON CJ:   Your submission, as I understand it, amounts to the proposition that section 47(1) is simply a deeming provision for the purposes of the Act and what consequences it produces will always necessarily turn upon other provisions of the Act.

MR MAXWELL:   Just so, and as the Full Court, in our submission, correctly said - and I will endeavour to find the passage – section 47 does not of itself - and we put this in our outline, paragraph 15.  Section 47(1) cannot operate by itself to make a distribution assessable income.  That is the work that 44 must do.  What 47(1) does is to confer for the purposes of the Act the character of income.  Income.  If I might, to the extent that your Honours require it, develop that submission a little further.  As we have said in our outline, section 47(1) is concerned with the character of a distribution by a liquidator.

GLEESON CJ:   What do you say about the proposition on the top of page 16 of the application book quoted by the primary judge?

MR MAXWELL:   The explanatory memorandum?  Your Honour, we say that her Honour was wrong – we say that with all due respect – in the inference which her Honour drew from the statement in the explanatory memorandum. 

It is not suggested that the word “income” in section 47(1), as it stands relevantly for this case, has any meaning other than its ordinary meaning.  We are not seeking an expanded definition of “income”.  But what the unanimous Court in Glenville and in Harrowell said was the – and in Harrowell the word “inescapable conclusion” was used – inescapable conclusion of the application of section 47(1) to a distribution from the liquidator to the shareholder is that in the hands of the shareholder it is deemed to be a dividend paid out of profits, and as his Honour the presiding judge in the Full Court said, “a dividend paid of profits is income, according to ordinary concepts.”  That is the whole ratio, in our respectful submission – it is the only explanation for the decisions in Harrowell and Glenville.  If I might remind your Honours, those are two cases arising out of the same successive distributions.

Killens is the company at the top of the chain in liquidation, distribution to Glenville, a private company.  Glenville goes into liquidation and makes a distribution.  So, successive liquidator’s distributions, which is the present case.  The first distribution – there was no argument – was representing income, so section 47(1) applied to it.  That had the consequence that in the hands of the recipient, Glenville, it was a deemed dividend and therefore assessable income of that company.

The Glenville Case arose because there was an assessment to undistributed profits tax and Glenville wanted to say, “Well, we on distributed that to our shareholders and we paid a dividend.”  It was said, “No, you have to show that 47(1) applies” and the Court said, “Well, the effect of 47(1) applying to the first distribution is that in the hands of the recipient it’s income, it’s a dividend out of profits.”  Accordingly, what is then paid by Glenville to its shareholder is a dividend and that is an answer to the Division 7 claim.

In Harrowell, the shareholder, Harrowell, said, “All right, it was a section 47(1) distribution from Killens to Glenville but that doesn’t make it income in the hands of Glenville so that section 47(1) will catch it the second time.”  And their Honours rejected that submission squarely, saying – and I will read the passage to your Honours:

Accordingly, the sub-section, for the purposes of the Act, deems the distribution, to the extent to which the distribution is made out of income derived by the company, as dividends paid to the shareholders –

in this instance, Glenville in the middle –

out of profits.  The distribution by the liquidator of Killens, representing, as it did, income derived by Killens, the conclusion is inescapable that the effect of the sub-section was to invest the distribution with the character of a dividend paid to Glenville out of, and only out of, profits derived by Killens on revenue account and, therefore, income in Glenville’s hands. 

Accordingly, when it was distributed by the liquidator of Glenville to Harrowell, it represented income of Glenville.  Section 47(1) applied for the second time, and Harrowell was assessable on the deemed dividend received by her.

Now, our learned friends would say that is odd.  Section 47 was not previously applied.  In fact, it was in a Division 7 context.  But that is nothing to the point.  The question is when one looks to the source of the receipt by the Australian resident – in that case, Mrs Harrowell; in this case Brewing Investments – one looks to the character of the payment as it comes down the chain.  What is happening in this case is, in our respectful submission, nothing but, no more than, a straightforward application of what was clearly, unequivocally said in Glenville and then in Harrowell about section 47(1); when it applies, stamping in the hands of the recipient the distribution with a character of income so that the successive distribution, by definition, satisfies the threshold requirement in 47(1).

Now, if we are right about that – and as we point out in the argument, none of these principles has been challenged – then their Honours in the Full Court did no more than to apply settled principle.  On the test that your Honours have laid down in Rowe’s Case about special leave in tax cases, the Full Federal Court is the final Court of Appeal in tax matters, subject to an exceptional case where a matter of quite “fundamental principle” arises.

GLEESON CJ:   Or where the Commissioner is the applicant.

MR MAXWELL:   Yes, your Honour.

GLEESON CJ:   We have noticed that.

MR MAXWELL:   My instructors were good enough to provide me with a transcript of a discussion between your Honour and my learned friend, Mr Bloom, on the same point.  I sought express instructions that I was to make this argument and the Commissioner recognises that sauce for the goose is sauce for the gander.  This, in our respectful submission, is nowhere near the borderline and it is just such a case where your Honours should say the Full Court has correctly addressed the principles, no error shown – no error shown, and I must come back, finally, to Gibb to point out the fallacy in the argument there.  No error shown, and your Honours would accordingly not be satisfied that this was in that rare category where a tax case should go on appeal.

Now, my learned friend says an important question about the difference – how you reconcile Gibb and Harrowell.  There is no such question.  The cases do not conflict.  In Harrowell – and, again, I am not troubling to take your Honours to the passages but I am happy to do so if necessary - the High Court said the reasoning in Gibb’s Case can have no application.  The same Justices were sitting in the two cases and judgments were given almost simultaneously.  Why?  If your Honours will forgive a second rhetorical question:  because in Gibb there was a question, as there had been in Fuller, about whether the definition of “dividend” in section 6 of the Act could be made to work so as to confer the character of income on a distribution of bonus shares.  Held:  it does not do that.  In our respectful submission, that is correct, it does not.  That is a definitional provision.

His Honour, in the case below, in our respectful submission, correctly pointed out that the submission for the applicant failed to make that distinction.  That is about whether a definition can be bootstrapped up

into a deeming provision and, as his Honour the Chief Justice in dissent in Fuller held, it could not, and in Gibb they agreed with that.

Section 47 is a deeming and it has the effect that for all the purposes of the Act the distribution is a dividend out of profits in the hands of the recipient.  That re-enlivens section 47(1) if that recipient is, in turn, in liquidation and distributes those funds.  If your Honours accept our submission that this is covered by settled principle, the only factual difference is – and this is not in dispute – that whereas in Harrowell the companies in the chain, the two liquidations, were of Australian resident companies.  In this case neither of the companies in liquidation was a resident though the taxpayer recipient was.  In our respectful submission, that is not a special leave point for the reason we have given, because as the High Court said in Parke Davis – and as I have already submitted – territoriality does not arise in 47(1).  As your Honour the Chief Justice put to me, you apply section 47(1) in accordance with its terms, in accordance with the character of the transaction in question, wherever occurring. 

If, as in this case, the ultimate recipient is an Australian resident, then the question of tax liability arises under the assessing provision which, in this case, is 44(1)(a), and as I submitted earlier, accordingly, it is expressly a matter of indifference whether the source of the income to a resident is onshore or offshore.  So, it is consistent with the taxing policy of 44(1)(a) that 47(1) has an operation of the kind which the Full Court in this case says it does have.  If your Honours please.

GLEESON CJ:   Thank you.  Yes, Mr Shaw.

MR SHAW:   If the Court pleases, first as to Gibb and Harrowell, it is submitted that ever since those two cases were decided, commentary on them has proceeded on the basis that it is, in fact, very difficult to reconcile them and it is submitted that it is. 

Secondly, as to Gibb, my learned friend gave no explanation of the two passages that I referred to in Gibb; specifically, the statement by Justice Windeyer and the statement at the end of the passage I referred to in the majority judgment.  It is submitted that he gave no explanation and neither did Justice Hill. 

My learned friend says this case is simply a case of the application of settled principle; the settled principle being that settled by Glenville and Harrowell.  It is submitted that is simply not so because those cases were concerned with the chain of resident companies.  This case is concerned with a case of distribution from one non‑resident company to another non‑resident company, and finally, from that non‑resident company to the resident, and it is submitted that section 47 simply cannot operate except in

co‑operation with some other provision of the Act.  In relation to the distributions in question, there was no provision of the Act with which section 47 could co‑operate and it is submitted that this does raise a question of principle; there is a conflict between what was said in Harrowell and Gibb and this is an appropriate opportunity for the Court to settle the matter.  If the Court pleases.

GLEESON CJ:   This case turned upon the application of principles established by long‑standing authority of this Court.  The case does not raise an issue appropriate for a grant of special leave to appeal and the application is refused with costs.

AT 11.12 AM THE MATTER WAS CONCLUDED