Bywater Investments Ltd v Federal Commissioner of Taxation

Case [2016] HCA 45

HIGH COURT OF AUSTRALIA

FRENCH CJ,
KIEFEL, BELL, NETTLE AND GORDON JJ

Matter No S134/2016

BYWATER INVESTMENTS LIMITED & ORS  APPELLANTS

AND

COMMISSIONER OF TAXATION  RESPONDENT

Matter No S135/2016

HUA WANG BANK BERHAD  APPELLANT

AND

COMMISSIONER OF TAXATION  RESPONDENT

Bywater Investments Limited v Commissioner of Taxation
Hua Wang Bank Berhad v Commissioner of Taxation

[2016] HCA 45

16 November 2016

S134/2016 & S135/2016

ORDER

Matter No S134/2016

Appeal dismissed with costs.

Matter No S135/2016

1.The respondent's summons filed on 2 June 2016 be dismissed.

2.Appeal dismissed with costs.

On appeal from the Federal Court of Australia

Representation

A J Myers QC and F D O'Loughlin with T L Bagley for the appellants in S134/2016 (instructed by Henry Davis York)

N C Hutley SC with T H J Hyde Page for the appellant in S135/2016 (instructed by Henry Davis York)

A H Slater QC with K A Stern SC and J E Jaques for the respondent in both matters (instructed by Australian Government Solicitor)

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Bywater Investments Limited v Commissioner of Taxation
Hua Wang Bank Berhad v Commissioner of Taxation

Taxation – Income tax – Residence of company – Income Tax Assessment Act 1936 (Cth), s 6(1) – Where directors of appellant companies resident abroad – Where meetings of directors of appellants ostensibly held abroad – Where directors acted at direction of Australian resident who controlled appellants and made decisions then implemented by directors – Whether appellants residents of Australia for income tax purposes – Whether "central management and control" of appellants located abroad in place where boards of directors met – Whether, as question of fact and degree, real business and operations of appellants controlled and directed from Australia – Whether functions of appellants' boards of directors usurped – Effect of Esquire Nominees Ltd v Federal Commissioner of Taxation (1972) 129 CLR 177.

Taxation – Income tax – Residence of company – Double taxation agreements – Tie-breaker provisions – Whether appellants entitled to protection from Australian income tax under relevant double taxation agreements – Whether "place of effective management" of appellant companies other than in Australia.

Words and phrases – "Australian resident", "central management and control", "company's constitutional organs", "corporate residence", "formal organs", "place of effective management", "real business", "residency", "rubber-stamp", "superior or directing authority", "usurp".

Income Tax Assessment Act 1936 (Cth), ss 6(1), 25A, Pt X.
Income Tax Assessment Act 1997 (Cth), ss 6-5, 995-1.
International Tax Agreements Act 1953 (Cth), Scheds 1, 15.

  1. FRENCH CJ, KIEFEL, BELL AND NETTLE JJ.   These are appeals from a judgment of the Full Court of the Federal Court of Australia (Robertson, Pagone and Davies JJ) upholding a decision of Perram J that the central management and control of each of the appellant companies ("Bywater", "Chemical Trustee", "Derrin" and "HWB") was exercised in Australia and, therefore, that they were each resident in Australia for income tax purposes.

  2. In…

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Details
AGLC
Bywater Investments Limited v Commissioner of Taxation [2016] HCA 45
Case
[2016] HCA 45
Decision Date

CaseChat Overview and Summary

The High Court of Australia considered appeals by Bywater Investments Ltd and Chemical Trustee Ltd (the appellants) against the Federal Commissioner of Taxation. The dispute concerned whether the appellant companies were residents of Australia for income tax purposes under section 6(1) of the *Income Tax Assessment Act 1936* (Cth). The appellants argued that their central management and control was located abroad, specifically in Switzerland, where their directors ostensibly held meetings. The Commissioner contended that despite these meetings, the real business and operations of the companies were controlled and directed from Australia by an Australian resident who effectively usurped the functions of the boards of directors.

The primary legal issue before the High Court was to determine the location of the "central management and control" of the appellant companies. This involved assessing whether the formal organs of the companies, namely the boards of directors, were the superior or directing authority, or if their functions were merely a rubber-stamp for decisions made elsewhere. A secondary issue, conceded by the appellants, was that if their central management and control were found to be in Australia, they would not be entitled to protection from Australian income tax under the relevant double taxation agreements, as their "place of effective management" would also be in Australia.

The High Court applied the principles established in *Esquire Nominees Ltd v Federal Commissioner of Taxation*, which holds that the residence of a company for tax purposes is determined by the place where its central management and control are located. This is a question of fact and degree, requiring an examination of where the real business of the company is carried on and where the ultimate decisions are made. The Court found that, despite the directors' meetings being held in Switzerland, the evidence demonstrated that the decisions concerning the companies' operations were in fact made by an Australian resident. Consequently, the central management and control of the appellant companies were located in Australia.

The appeals were dismissed with costs. The respondent's summons filed on 2 June 2016 was also dismissed.

Orders

Orders of the court

Matter No S134/2016

Appeal dismissed with costs.

Matter No S135/2016

1. The respondent's summons filed on 2 June 2016 be dismissed.

2. Appeal dismissed with costs.

Background

Background to the litigation

In the course of argument, it was accepted that, if, in the circumstances of this case, an appellant did have its central management and control in Australia within the meaning of s 6(1) of the 1936 Act, Australia would also be the appellant's "place of effective management" within the meaning of the applicable double taxation agreement[3], and, therefore, that the appellant would not be entitled to protection from Australian taxation under that agreement. As will become apparent, in view of that concession, which was properly made in the circumstances of this case, it is unnecessary to deal with any issue other than the question of whether each company had its central management and control in Australia within the meaning of s 6(1) of the 1936 Act.[3]Agreement between Australia and Switzerland for the Avoidance of Double Taxation with respect to Taxes on Income, and Protocol [1981] ATS 5, Art 4(3); 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 [2003] ATS 22, Art 4(4).The facts and findings at first instance The facts emerge from the judgment of Perram J. As there appears, the positions of the appellants were not in all respects identical and to some extent require separate consideration.Chemical Trustee Limited Chemical Trustee was incorporated in the United Kingdom and adopted its present name in 1996[4]. During the relevant years of income (2001, 2003‑2004, 2006‑2007), all of the issued shares in the capital of Chemical Trustee were held by Guardheath Securities Ltd ("Guardheath"). Guardheath was a nominee company owned by the partners of a London firm of accountants, Lubbock Fine. Guardheath held the shares in Chemical Trustee as nominee for JA Investments Ltd ("JA Investments"), a company incorporated in the Cayman Islands. JA Investments was described in Chemical Trustee's abbreviated accounts as Chemical Trustee's ultimate parent[5]. The sole recorded director and shareholder of JA Investments was Mr Peter Martin Borgas ("Borgas") and, at material times, the only recorded directors of Chemical Trustee were Borgas, his wife, Mrs Winny Borgas, and their son, Mr Timothy Borgas. Between 2001 and 2007, the minutes of the meetings of directors of Chemical Trustee recorded that such meetings as there were were held in Neuchâtel, Switzerland and were attended by Borgas and Mrs Borgas[6].[4]Hua Wang Bank Berhad v Federal Commissioner of Taxation 2014 ATC ¶20-480 at 16,443 [9].[5]Hua Wang Bank 2014 ATC ¶20-480 at 16,443 [9]-[10].[6]Hua Wang Bank 2014 ATC ¶20-480 at 16,443-16,444 [11]. Chemical Trustee claimed that, because Borgas resided and operated in Switzerland, Chemical Trustee's central management and control was situated in Switzerland and, therefore, that Chemical Trustee was not resident in Australia for income tax purposes[7]. Consequently, Chemical Trustee did not file an Australian income tax return for any of the relevant years of income. Nevertheless, on 12 August 2010, the respondent ("the Commissioner") issued assessments (and in one case, subsequently, an amended assessment) in which he assessed Chemical Trustee as liable to tax and penalties in respect of its share trading profits[8]. Chemical Trustee objected to the assessments and the objections were disallowed. Chemical Trustee appealed to the Federal Court. [7]See Income Tax Assessment Act 1936 (Cth), s 6(1) definition of "resident or resident of Australia".[8]Hua Wang Bank 2014 ATC ¶20-480 at 16,444 [16]-[17].

Evidence

Evidence Before The Court

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Decision

Reasons for decision

FRENCH CJ, KIEFEL, BELL AND NETTLE JJ

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Ratio Decidendi

Legal Principle Established

Established by: FRENCH CJ, KIEFEL, BELL AND NETTLE JJ

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