Chaudhri v Commissioner of Taxation

[2002] HCATrans 158

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M58 of 2001

B e t w e e n -

VIKRANT CHAUDHRI

Applicant

and

COMMISSIONER OF TAXATION

Respondent

Application for special leave to appeal

McHUGH J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 3 MAY 2002, AT 12.20 PM

Copyright in the High Court of Australia

MR T.P. MURPHY:   May it please the Court, I appear with my learned friend, MR A.P. YOUNG, for the applicant in that matter. (instructed by Freehills)

MR B.J. SULLIVAN, SC:   May it please the Court, I appear with my learned friend, MR J.H. MOMSEN, for the respondent. (instructed by the Australian Government Solicitor)

McHUGH J:   Yes, Mr Sullivan.  Yes, Mr Murphy.

MR MURPHY:   Your Honours, may I take you to tab 10 of the applicant’s materials, that is section 23AG.

HAYNE J:   It is going to be a long twenty minutes, is it not, Mr Murphy.

McHUGH J:   Yes.

MR MURPHY:   The question for the Court is a very short point and that is essentially whether the term “foreign country” in the definition of “foreign service”, which appears in section 23AG(7), means, in the context of section 23AG(1), any place outside Australia or must it be confined to a political entity whatever that may be?

HAYNE J:   Or the question might be put, are the high seas a foreign country.

MR MURPHY:   Precisely, your Honour.

HAYNE J:   Why should we conclude that they are?  I understand the context you rely on, but what is your best point, Mr Murphy, for saying that the high seas are a foreign country?

MR MURPHY:   We say there are two groups of so-called best points, your Honour:  the first is that, if one adopts the construction which the Full Court adopted, one comes up with, to say the least, very strange results, results which could not have been intended by Parliament.

HAYNE J:   You assume that the Tax Act gives effect to a single discernible, coherent, logical set of propositions; that is a premise that might take a little time to debate.

MR MURPHY:   Certainly more than 20 minutes, your Honour.

HAYNE J:   Yes.

MR MURPHY:   But what we do say is that there is a single discernible, logical proposition within section 23AG(1) and the court’s decision is one which contravenes our proposition.  Your Honour, section 23AG deals with the exemption from Australian tax of the employment income of residents in certain circumstances.  There are two critical subsections:  subsection (1) which deals with the “foreign service” and the foreign income.  Essentially what subsection (1) says, your Honour, is that income derived by a resident in the nature of wages and salaries, earnings from work, “from that foreign service is exempt from tax”.  It is a broad-based exemption.  That exemption is cut down by the effect of subsection (2).  Subsection (2) says that it is not exempt if, under a foreign tax law it is exempt, not generally, but for certain reasons.

If I could take your Honours to the application book and to the decision of the Full Court and, in particular, to page 49 paragraph 31.  What the Full Court has done is effectively to conflate subsection (2) with subsection (1), because you will see in the first sentence at the top of page 49 it says:

To the contrary, a policy of subjecting to Australian income tax the earnings of an Australian resident who is outside the jurisdiction of any country levying taxation would seem entirely rational.

Your Honour, if there is one thing that is clear, just from the sheer structure of section 23AG and, in particular, section 23AG(2), but also from the explanatory memorandum, also from the second reading speech, and also from the Commissioner, who has issued a class ruling to this effect, is that it is possible for income to be exempt from Australian tax and also to be exempt from foreign tax.  What is critical for the operation of section 23AG(2) is that the income not be exempt from foreign tax for any of those stated reasons.

What the Federal Court has done is to, by use of this term “a political entity” rather than, as the applicant would have it, that “foreign country” simply means any place outside Australia, is to give rise to the circumstance where there is discrimination against residents of Australia, such as people in Mr Chaudhri’s position, but he is only an example.  If I compare Mr Chaudhri, who is working on a ship on the high seas, with a person doing similar duties except that the ship stays in Victoria Harbour or in the territorial waters of say Hong Kong, there is no reason why, when one is looking at section 23AG(1), that that section ought to apply to the second person, but not to apply it to the first person.

McHUGH J:   Well, one short answer to that may be, that looking at the section it refers to:

“foreign service” means service in a foreign country –

It is very difficult to see how service on the high seas is “service in a foreign country”.

MR MURPHY:   Your Honour, if one takes the meaning of country as being a political entity, then ‑ ‑ ‑

McHUGH J:   Well the high seas is not a political entity.

MR MURPHY:   And the high seas is not a political entity, but, equally, it is not an area which is free of tax laws.

McHUGH J:   That is not the point; the point is whether or not this is foreign service.

MR MURPHY:   Yes, your Honour, and the point is then, whether or not the seas can be a foreign country.  Your Honour, if one adopts ‑ ‑ ‑

McHUGH J:   It is not merely whether it is a foreign country, but whether it amounts to “service in a foreign country”.

MR MURPHY:   Well, if your Honour takes the word “in”, which is I think what your Honour is stressing, we would say that the word “in” goes no more than to say at that place; it does not say one must be within a political boundary.  I mean, if I am working somewhere, anywhere in the world, I am working at a place; if I am on the high sea, I am at a place, if I am in the harbour at Hong Kong, I am at a place.

HAYNE J:   But does not all this also avoid regard for the premise that needs to be recognised, namely that, the premise is that we are dealing with a resident; a resident of Australia who derives income prima facie, is liable under the Act to pay tax on that income.  Is that right?

MR MURPHY:   Yes, your Honour, that is correct, your Honour.

HAYNE J:   And there is an exemption in certain circumstances; the exemption may be broad or narrow, but why should we extend it beyond its ordinary meaning to give it some enlarged operation?

MR MURPHY:   Because not to do so would be to discriminate between a class of residents; that is, those residents who happen to be working on the high seas, notwithstanding that it is clear from the explanatory memorandum and the second reading speech ‑ ‑ ‑

HAYNE J:   Section 23AG is itself a discrimination between residents; the question of what is the measure of discrimination is not answered by saying, there is a discrimination.

MR MURPHY:   Your Honour, section 23AG in itself does constitute a discrimination and it is a discrimination, which has existed in our system long before the foreign tax credit system, on the basis of income which is derived from – I was going to say – sources outside Australia, but, at least, outside Australia.  That is what Parliament has legislated.  But having legislated that, we say that Parliament could not have intended to cut off a group of people, such as Mr Chaudhri, who may be doing exactly the same sorts of things as other people overseas, but who happen to be on the high seas rather than in the harbour.

We say that such an approach gives rise to an impossible situation in many cases.  Let us take again our Mr Chaudhri.  What if his boat is in the Straits of Malacca, or out in the Indian Ocean where you have borders between the high sea, Australia and Indonesia or in the Malacca Straits, Malaysia, Singapore, high seas and Indonesia.  He is in a foreign country, he is out of a foreign country, as his ship travels around.  Often he will not know whether he is in a foreign country or not if one takes territorial limits, because he will not know when he comes in and when he goes out, and yet there is a clear requirement that he must spend 91 days continuously – I do depose the continuously; there are de minimis provisions and what not – in the foreign country.  So if one adopts the approach of the Full Court, one has the problem that we have, in many cases, not only discriminatory legislation, but unworkable legislation.

If I go back to the person who happens to be working in the harbour, the seamen working in the harbour at Victoria Harbour ‑ ‑ ‑

McHUGH J:   It is not unworkable.  I mean, it prima facie was taxable under section 25 and you have to argue that it was exempt income, and you just do not bring yourself within the exemption.

MR MURPHY:   But, your Honour, a construction which makes it virtually impossible for a taxpayer, such as Mr Chaudhri, to bring himself or to argue that he is within the exemption, cannot have been intended by Parliament.

McHUGH J:   Why?

HAYNE J:   I regret to tell you section 23AG is not going to have much application to me either, is it?

MR MURPHY:   How do you mean, your Honour?

HAYNE J:   I cannot earn income in overseas employment either.

MR MURPHY:   Well, your Honour, if you were to be seconded to the International Court of Justice.

HAYNE J:   I would be exceedingly surprised.

McHUGH J:   But you see, even the sort of person that you were talking about, who is in Hong Kong for two or three days and then is out and then back in, may well not be within this section, because the foreign earnings are not derived from foreign service in terms of “service in a foreign country”; there has to be 91 continuous days.  It all looks to me like it is land based for the 91 days.

MR MURPHY:   If I could just pursue that, your Honour, that is on the basis of the word “in”?

McHUGH J:   Well, in part, but subsection (2) also seems to throw some light on it, what the section is driving at.

MR MURPHY:   Your Honour, we say two things to that:  the first is that subsection (2) can be read consistently with subsection (1) if one adopts the meaning of “foreign country” as being a foreign place - a place outside Australia.  If one looks at subsection (2), one sees that ‑ ‑ ‑

McHUGH J:   Well, unless you are going to use foreign place in the sense of a foreign political entity, it does not make much sense, does it, because you do not have a foreign place likely to have a double tax agreement, unless it is some sort of a political entity.

MR MURPHY:   But we would say, your Honour, that is the context of subsection (2); subsection (2), by referring to earnings derived in a foreign country, brings back the old source cases Mitchum’s Case, French’s Case and all those sorts of cases.  The words “derived in a foreign country” necessarily cut down the meaning of “foreign country” because the words “derived in” assume that there is some sort of legal system to which might be attached the label, a political entity.  Section 23AG (2) also cuts it down in the sense that it says, not that it is not subject to tax in the foreign country, but it says, if it is exempt for a number of very specified reasons.  Now, specifying those reasons, we say, also cuts down the meaning of “country” in subsection (2), because it assumes that there is some sort of a tax law.

If we were wrong on that, we would just go back to the Acts Interpretation Act section 22, which is in our materials, your Honour, at tab 14.

McHUGH J:   Well it means, “any country” “outside Australia”, does it not, “and the external Territories”.  It is section 22(1)(f), is it not?

MR MURPHY:   But the keys words, your Honour, we say are “In any Act”, the opening words, “unless the contrary intention appears:”  Then it goes on:

Foreign country means any country (whether or not an independent sovereign state) –

so it does not need to be a political entity –

outside Australia and the external Territories;

We say that the context of subsection (2) of section 23AG does indicate, in that case, it must be a State – this is the purpose of that subsection – which is capable of imposing tax laws.  So that the context of subject (2) is different from the context of subject (1), subsection (1).

McHUGH J:   Well, it may be a colony of some other country, for instance.  Antarctica might well be regarded as a “foreign country” for the purpose of the definition.

MR MURPHY:   It may well be in certain context, your Honour, but we say what is critical in subsection (2) is the use of the terms “derived in” and the reference to various forms of exemption, and we say that the context of those necessarily limits a foreign country, in the context of that section, that is, to a country which is capable of imposing some sort of an income tax.  I mean, in this regard, your Honour, it is not the case that income is only exempt from Australia if it is subject to tax in other countries.  Income, as the Commissioner’s ruling itself shows, can be exempt from tax in Australia and can be exempt from tax elsewhere, in that case the other jurisdiction was United States of America.

So we say that when you are looking at context, the context of subsection (2) is necessarily different from the context of subsection (1) and we say, in relation to subsection (1), there is no reason to explain why Parliament would have discriminated against people who happen to be on the high seas, doing exactly the same jobs, for the same periods of time, as people who happen to be in ports, if you like.  There are two different contexts, but even with two different contexts, we can still have a construction of “foreign country” to mean, foreign place, and that construction is not a construction which gives rise to all sorts of anomalous results that the far more limited construction that the court has adopted it does.

One can see that, your Honour, if one goes back to the example where we have got Mr Chaudhri, who we will assume was subject to Hong Kong tax and we have the person in Hong Kong harbour, he is subject to Hong Kong tax.  Only one of them gets the exemption in Australia.  In that regard, your Honour, the point one would make about 23AG(2) is that it does not discriminate between foreign tax regimes, other than in the basis of the exemptions.  What section 23AG(2) does is to take the foreign tax regimes as it finds them.  Whether people are taxed at one cent in the dollar or whether they are taxed at 50 cents in the dollar, it does not make any difference.

We say, your Honour, a construction of “foreign country” as being a place outside Australia is, as I said, consistent with the Acts Interpretation Act.  It is consistent with section 23AG(2) and it is consistent with the evolution of section 23AG from section 23(q) and section 23(qa).  Whilst there have been changes to the exemption, such as the imposition of qualifying periods and the narrowing down, there has not been one change, and there is not one mention in any of the memoranda, that a person is to be denied of the exemption simply because where he performs his work happens to be on the high seas as distinct from within the borders of a recognised country.  That is a common thread which has gone through.  And one can see that, even in the definition of “foreign earnings”, because it talks about “wages” and “salary”.  The qualifier appears later on.  As I said, your Honour, why should there be discrimination between wages and salary paid to a person like Mr Chaudhri and wages and salary paid to a person in Hong Kong harbour?

When one looks at the explanatory memoranda and the second reading speech, which are at tabs 6 and 7, of our materials, one sees that – and it is explanatory memorandum page 22, about two-thirds of the way down:

Clause 8 proposes the insertion of a new section section 23AG into the Principal Act, the purpose of which is to provide an exemption from Australian tax for salary or wages earned overseas by an Australian resident during a continuous period of service of at least 12 months.

If one looks at the explanatory memorandum at tab 7 at page 3800 second column and it is the second paragraph, second sentence there:

Salary and wages earned overseas by an Australian resident and liable to tax in the country of source are to be fully exempt from Australian income tax where derived in performing service overseas for a continuous period of at least 12 months.

If one looks at tab 11, which is the explanatory memorandum dealing with the 1991 amendments, in paragraph 1 ‑ ‑ ‑

McHUGH J:   I think your time is up, Mr Murphy.

MR MURPHY:   Thank you, your Honour.

McHUGH J:   The Court need not hear you, Mr Sullivan.

We are of the view that the decision of the Full Court is not attended by sufficient doubt to warrant the grant of special leave to appeal.  The application is dismissed with costs.

AT 12.43 PM THE MATTER WAS CONCLUDED