Commissioner of Taxation of the Commonwealth v McDermott Industries (Aust) Pty Ltd

[2005] HCATrans 1043

[2005] HCATrans 1043

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Perth  No P24 of 2005

B e t w e e n -

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Applicant

and

McDERMOTT INDUSTRIES (AUST) PTY LTD

Respondent

Application for special leave to appeal

HAYNE J
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 16 DECEMBER 2005, AT 10.38 AM

Copyright in the High Court of Australia

MR A.H. SLATER, QC:   May it please the Court, I appear with my learned friend, MR R.L. HAMILTON, for the applicant Commissioner.  (instructed by Australian Government Solicitor)

MR B.J. SHAW, QC:   If the Court pleases, I appear with my learned friend, MR W.A. HARRIS, for the respondent.  (instructed by Freehills)

HAYNE J:   Yes, Mr Slater.

MR SLATER:   Your Honours, I would like to be able to start as
Justice Heydon started with my friend, Mr Hardingham, in the last matter by saying that the matter was important because this Court had never looked at it and it was a significant point and there was division below but I cannot because the courts below have never looked at the point.  We, nonetheless, say that it is an important one and it is a novel one. 

Your Honours, the application concerns the scope of a deeming provision which appears in the definition of a central concept and appears in the majority of Australia’s Double Tax Conventions with other countries.  It is our respectful submission that the centrality of the issue to the operation of a majority of Australia’s treaties on businesses operating in Australia and in Australia’s treaty parties is in itself sufficient to make the appeal one worthy of the attention of this Court.

But we do go further.  We say there is no existing authority on the dispute and the decision of the court below produces a result which is at least odd and, in our respectful submission, aberrant and if left uncorrected that decision will stand not only as authority in Australia but also as a misleading guidepost in other international jurisdictions.

HAYNE J:   What is the particular text that you say the Full Court gets wrong?

MR SLATER:   The particular text, your Honour, is the definition of “permanent establishment” in Article 4(b) which appears conveniently on page 9 of the application book.  If I could take your Honours to that, your Honours will see that – I should perhaps begin by just reminding your Honours that the treaties, in a very broad sense, divide the taxation of income between business income, income arising from business operations on the one side, and property income, on the other.  The discrimen between those is whether the income is sufficiently connected with the maintenance of a permanent establishment in Australia or in the other treaty state.  Article 4 in this treaty is the article which defines “permanent establishment” for that purpose.

HAYNE J:   And it is 3(b) that is said to be engaged, is it not, 4(3)(b)?

MR SLATER:   It is, your Honour, yes.  It is (3)(b), on which this particular dispute turns.

HAYNE J:   And what is wrong with what the Full Court did?

MR SLATER:   What the Full Court did, your Honour, was this – if I can answer it by directing your Honours’ attention very briefly to the background of the issue.  The question being whether a foreign taxpayer had a pertinent establishment in Australia, the Full Court treated as sufficient to comprise a “permanent establishment” the presence of a floating barge in Australian waters under no more than a bare boat charter yielding only rental income with no employees, no fixed place of business and no other business activity on the part of the owner for periods down to as little as less than a week.

In our submission, that is not a sufficient use to attract the operation of paragraph (3)(b).  When that paragraph is read, as in our submission it should be, in the context of the treaty as a whole, taking the context as the starting point, and to build on that could I take your Honours back up to the initial text of the definition, the initial subarticle, your Honours will see at about line 10 on page 9 that:

For the purposes of this Agreement, the term “permanent establishment”, in relation to an enterprise, means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

The article then goes on to provide a number of specifications of things which are included:

(a)      a place of management;
(b)      a branch;
(c)      an office –

and the like, “a mine”, “a building site”.  And then subarticle (3) goes on to say:

An enterprise of a Contracting State shall be deemed to have a permanent establishment and to carry on trade or business through that permanent establishment ‑ ‑ ‑

HAYNE J:   We have read that and we understand that.  What I still do not understand is what you say is wrong in what the Full Court did that generates a point of principle as distinct from a point of fact. 

MR SLATER:   It is a point of principle in the sense of interpretation but we say that when one directs attention to the deeming provision:

substantial equipment is being used in that other State –

that what is required, as the proper interpretation of that clause, is that the use is something more than merely the receipt of property income from the equipment with no other activity on the part of the enterprise.  We say that when the paragraph was read in ‑ ‑ ‑

HAYNE J:   What meaning do you give to the words, “under contract with”?

MR SLATER:   We say, your Honour, that the phrase “by, for or under contract with” is a composite phrase, in the first place, and that it requires some activity on the part of the enterprise engaging the use of the equipment and that mere receipt of rent in respect of the equipment is not sufficient for that purpose.  But as to the words, “under contract with”, we say that they comprehend that type of activity which might be involved where substantial equipment is being used by a subcontractor in contract with the enterprise to perform some activity for the benefit of the enterprise and that it is not enough merely that there be use in the broadest sense, the sort of sense which was found sufficient in a quite different context in Ryde Council and the mere presence of a contract.

It is our respectful submission that the subarticle has to be read in the first place in the context of the purpose for which Article 4 is in the treaty.  If one starts there, one sees that the role of Article 4 is to establish something in the nature of an establishment, a place where a business activity is carried on of something of a permanent character.  What the Full Court has done, in our respectful submission, is to go to the words in isolation of paragraph (b) in the first place, look at those words, and say, “Is there anything that can be brought within the widest meaning of them?” and then say, “Is there something else in the treaty which compels us to depart from that meaning?” and, in our respectful submission, that is not the way in which the treaty should be interpreted.

Are your Honours assisted in any way by my taking your Honours to the way in which the issue actually came to be debated in the court ‑ ‑ ‑

HAYNE J:   It is a matter, I think, for you, Mr Slater, how you feel we would best be assisted.  It seems to me, for my part at least, that the critical question you must confront is whether this is more than a decision on a point of fact or why it should be regarded as a decision generating some

point of generally applicable principle under the double tax treaties which is, I understand it, central to the application you make. 

MR SLATER:   Your Honours, as to the point of principle, the only point of principle we can point to is the manner in which the interpretation of these treaties should be adopted and the interpretation of this article but that, in our respectful submission, goes beyond being merely a question of fact.  The approach to the interpretation of the treaty should begin by looking at the context of the treaty and begin by appreciating whether something is sufficient to comprise a “permanent establishment”, and treating subarticle (3)(b) as declaratory of what is within the concept of “permanent establishment” for the purposes of the treaty and that applies not merely to this case but to any case involving substantial equipment which is simply leased to a local taxpayer.  So from that sense, it goes further.  Beyond that, as a matter of public importance, this is a provision which appears in more than 30 of Australia’s 40-odd treaties so it is not just a technicality in relation to this particular treaty.

What we do say, your Honours, is that the result in this case and the result in any similar case is fundamentally very odd that the mere presence of something in Australia for a very short period should be treated as being a permanent establishment when there is nothing else beyond that.  We also say that, so far as this Court is concerned, the point is a very short one.  It is, for the reasons we have given, an important one and it produces a very strange result and for those reasons, in our respectful submission, it is one which warrants the attention of the Court.  I could repeat myself in a variety of ways, your Honours, but that is the essence of what we say.

HAYNE J:   Thank you, Mr Slater.  We will not trouble you, Mr Shaw.

In our opinion there are insufficient prospects of success of an appeal to warrant a grant of special leave to appeal in this matter.  Accordingly, special leave is refused and is refused with costs.

AT 10.50 AM THE MATTER WAS CONCLUDED