Confidential and Commissioner of Taxation
[2014] AATA 961
•23 December 2014
[2014] AATA 961
Division TAXATION APPEALS DIVISION File Number
2014/1077
Re
Confidential
APPLICANT
And
Commissioner of Taxation
RESPONDENT
DECISION
Tribunal Deputy President F J Alpins
Date 23 December 2014 Place Melbourne The decision under review is affirmed.
[sgd]........................................................................
Deputy President F J Alpins
TAXATION – international taxation - double taxation treaties – Australia-Ireland Double Taxation Agreement – International Tax Agreements Act 1953 (Cth) s 11K – general principles of interpretation of double taxation treaties – Irish Pay Related Social Insurance employment contributions made by Australian employee – whether Pay Related Social Insurance a tax covered by Agreement – whether a “substantially similar tax” to Irish or Australian income tax
INCOME TAX – foreign income tax offsets – ‘foreign income tax’
TAXATION ADMINISTRATION – private rulings – consideration by Tribunal of additional information not considered when ruling made
Legislation
Income Tax Assessment Act 1997 (Cth), ss 770-10, 770-15, 770-70
International Tax Agreements Act 1953 (Cth), ss 3AAA, 4, 11K
Taxation Administration Act 1953 (Cth), s 14ZZK(b)(ii), Sch 1 Div 359Agreement between the Government of Australia and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, done at Canberra on 31 May 1983 ([1983] ATS 25), arts 2, 3, 25
Social Security Agreement between Australia and Ireland, done at Dublin on 9 June 2005 [2005] ATS 26
Vienna Convention on the Law of Treaties, done at Vienna on 23 May 1969 [1974] ATS 2, arts 31, 32 (Entered into force 27 January 1980)
Finance Act 2011 (Ireland), s 3
Social Welfare Consolidation Act 2005 (Ireland)
Social Welfare (Consolidated Contributions and Insurability) Regulations, 1996 (S.I. No. 312 of 1996) (Ireland)
Taxes Consolidation Act, 1997 (Ireland)
Cases
Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225
Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597
Commissioner of Taxation v Resource Capital Fund III LP [2014] FCAFC 37
Commissioner of Taxation v SNF (Australia) Pty Limited (2011) 193 FCR 149
Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management v Commissioner of Taxation (2013) 59 AAR 165; [2013] AATA 99
Cooperative Bulk Handling Ltd v Federal Commissioner of Taxation (2010) 79 ATR 582; [2010] FCA 508
Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409
Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496
Kinsella v Revenue Commissioners [2007] IEHC 250; (2007) 10 ITLR 63
McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134
Niemeijer v The Queen 2009 TCC 624
Russell v Federal Commissioner of Taxation (2011) 190 FCR 449
Shi v Migration Agents Registration Authority (2008) 235 CLR 286
Task Technology Pty Ltd v Commissioner of Taxation [2014] FCAFC 113
Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338
Undershaft (No 1) Limited v Commissioner of Taxation (2009) 175 FCR 150
Virgin HoldingsSA v Commissioner of Taxation (2008) 214 FCR 278Secondary Materials
1977 OECD Model Convention for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital
OECD (2012), “Commentary on Article 2: Concerning taxes covered by the convention” in Model Tax Convention on Income and Capital 2010 (Full Version), OECD Publishing, C(2)-1-3
Brandsetter P, Taxes Covered – A Study of Article 2 of the OECD Model Conventions (2011, IBFD) at 111-113)
Vogel et al, Klaus Vogel on Double Taxation Conventions (3rd., Kluwer Law International, 1997) at 147, [29]
REASONS FOR DECISION
Deputy President F J Alpins
23 December 2014
INTRODUCTION
This is an application for review of the Commissioner’s decision to disallow the applicant’s objection against a private ruling made under Division 359 in Schedule 1 to the Taxation Administration Act 1953 (Cth) (the “TAA”) with respect to the applicant for the years of income ending 2013, 2014 and 2015. The ruling concerns the consequences under Australian taxation law of the deduction of certain compulsory contributions referred to as “Pay Related Social Insurance” (“PRSI”) from the applicant’s salary earned during a period of employment in Ireland.
The ruling the subject of this proceeding set out the following facts as constituting the “scheme” for the purposes of Div 359:
“You are an Australian citizen who is an Australian resident for taxation purposes.
You have moved to the Republic of Ireland for 12 months and you are employed there on a salary.
From your Irish gross salary each fortnight a number of items are deducted including a Universal Social Charge (USC) and Pay Related Social Insurance (PRSI), in addition to income tax.
PRSI contributions go to the Social Insurance Fund which helps pay for Social Welfare benefits and pensions. Most employees pay PRSI through Ireland Revenue’s PAYE system.”
The ruling was unfavourable. It set out the following questions and answers:
“1.Is the Irish Government’s Pay Related Social Insurance a ‘substantially similar’ tax to the existing taxes in Ireland under Article 2(2) of the Irish Agreement?
No.
2.Are you entitled to a foreign income tax offset for the amount of Pay Related Social Insurance deducted from your Irish salary?
No.”
The “Irish Agreement” referred to in the ruling is the double taxation treaty between Ireland and Australia, being the Agreement between the Government of Australia and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital Gains, done at Canberra on 31 May 1983 ([1983] ATS 25) (see s 3AAA of the International Tax Agreements Act 1953 (Cth) (the “ITAA 1953”).
A private ruling is “a written ruling on the way in which the Commissioner considers a relevant provision applies or would apply to” a taxpayer “in relation to a specified scheme” (s 359-5 in Sch 1 to the TAA). In this proceeding, the applicant has the burden of proving that the private ruling should have been made differently (s 14ZZK(b)(ii) of the TAA, s 359-60(2) in Sch 1 thereto).
As the Commissioner’s opinion expressed in a private ruling (see s 359-1 in Sch 1 to the TAA) concerns a particular question about the application of tax law to the facts identified in the ruling comprising the specified scheme, the Tribunal’s jurisdiction is therefore limited to a review of the Commissioner’s opinion on that same question. The question before the Tribunal is whether the Commissioner’s opinion was correct (see Cooper Bros Holdings Pty Ltd trading as Triple R Waste Management v Commissioner of Taxation [2013] AATA 99 at [6]-[8] and cases cited therein).
In deciding whether to allow the applicant’s objection, the Commissioner considered additional information provided by the applicant in his objection, being:
(a)That he had been in Ireland for only a short time (since 2 January 2013), had always intended to return to Australia after a year and would in fact be returning there on 16 January 2014;
(b)That his employment in Ireland was limited by contract to the period 14 January 2013 to 31 December 2013 and that he was only permitted by his visa to remain in Ireland for the period of his employment;
(c)That the Certificate of Registration card issued by the Irish Garda National Immigration Bureau was to expire on 6 January 2014, shortly after his work contract expired;
(d)That he had no plans to return to Ireland;
(e)That he was a national of Australia and no other country.
Accordingly, the applicant said that by virtue of the above matters he could not claim to have been habitually resident in Ireland. Furthermore, he said that he was not exempt from the “habitual residence condition” (not being an Irish national, UK national, EU national, EEA national or asylum seeker). He also provided information that he had not been the subject of any determination as to his “habitual residence” status. The applicant sought to rely upon all of this additional information in support of a ground of objection that he was not entitled to receive Irish social insurance benefits and so “in my situation the PRSI should be seen as a “substantially similar” tax to the existing taxes in Ireland under Article 2(2) of the Irish agreement [sic]” (emphasis in original).
Section 359-65(1) in Sch 1 to the TAA provides that, “[i]n deciding whether to allow ... or to disallow, an objection ... against a ... private ruling, the Commissioner may consider any additional information that the Commissioner did not consider when making the ruling”. For the reasons I expressed in Cooper Bros (at [22]-[41], espec. at [35]), in my view that provision only permits consideration of material that is informative about the facts comprising the scheme, as it has been described in the ruling; it does not permit the Commissioner in making his objection decision, nor the Tribunal in reviewing that decision, to redefine the scheme. As the Tribunal is confined by the scheme specified in the ruling, the Tribunal may only consider additional information pursuant to s 359-65(1) to the extent that it bears upon the correctness of the ruling in issue (ibid at [36], citing Hastie Group Ltd v Commissioner of Taxation (2008) 172 FCR 496 at [3] and Cooperative Bulk Handling Ltd v Federal Commissioner of Taxation [2010] FCA 508 at [16]).
In my view the additional information provided by the applicant in his objection falls within the terms of s 359-65(1), as it is informative about the facts comprising the scheme and does not require the redefinition of the scheme in order to take it into account. Accordingly, I have considered that information in reviewing the Commissioner’s objection decision. I note that, irrespective of whether that information falls within the terms of that provision, for the reasons that follow it does not affect my conclusion about the correctness of the Commissioner’s opinion expressed in his ruling in any event.
Although there was little focus on this point, the Commissioner objected to the Tribunal taking into account what he described in his written submissions as “further purported facts” the subject of the applicant’s Statement of Facts, Issues and Contentions (the “Statement”), apparently on the basis that they, unlike the additional information in the applicant’s objection, had not been considered by the Commissioner in making his objection decision. That does not of itself preclude the Tribunal from considering additional information in reviewing the objection decision. For the reasons I expressed in Cooper Bros at [33] (citing Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409; Shi v Migration Agents Registration Authority (2008) 235 CLR 286), in my view the Tribunal may consider additional information otherwise within the terms of s 359-65(1) irrespective of whether the Commissioner has in fact considered that material in making his objection decision.
However, that begs the question of whether the material in question contains any further additional information within the terms of that provision which the Tribunal is disposed to take into account. I say “further” because in certain respects it merely repeated information contained in the applicant’s objection referred to above or stated facts forming part of the scheme in any event. For the sake of completeness I have addressed this question, although I note that nothing turns on the conclusions I have reached in that regard.
I have taken into account the additional information contained in the applicant’s Statement to the effect that his PRSI contributions in issue were compulsory. I note that that arises from the terms of the legislation in question, was not in dispute and was acknowledged in the reasons accompanying the ruling. I have also taken into account that the other items deducted from the applicant’s Irish fortnightly gross salary referred to in the scheme were a pension and pension levy, although as I have indicated nothing ultimately turns on that information. I have also taken into account information concerning the nature of the applicant’s employment in Ireland, being in the medical field, and the identity of his employer, although nothing turns on that information either.
To the extent that the facts stated in the applicant’s Statement concern procedural matters relating to the making of the ruling and the application for review to the Tribunal, the basis upon which he lodged his income tax return for the 2013 year and the quantum of the PRSI in question, in my view that material does not fall within the compass of s 359‑65(1), as it is not informative about the facts comprising the scheme; alternatively, I am not disposed to consider it as it is irrelevant to the correctness of the ruling. The same can be said of a statement made about the definition of the term “substantially similar”.
In my view, that fact that the Commissioner does not dispute the applicant’s entitlement to a foreign income tax offset with respect to another amount deducted from his Irish salary referred to in the scheme, being the Universal Social Charge, does not constitute additional information within the compass of s 359-65(1), as is not informative about the facts comprising the scheme; alternatively, I am not disposed to consider it for the purposes of that provision as it does not bear upon the correctness of the ruling in issue. I have nevertheless addressed the comparative taxation treatment by the Commissioner of PRSI and the Universal Social Charge as a general matter in the context of the applicant’s submissions in that regard.
LEGISLATION
Foreign income tax offsets
Division 770 of Part 4-5 of the Income Tax Assessment Act 1997 (the “ITAA 1997”) contains provisions governing foreign income tax offsets. Section 770-10(1) of that Act provides that a taxpayer is entitled to a tax offset for an income year for “foreign income tax” and that an amount of foreign income tax counts towards the tax offset for the year if a taxpayer paid it in respect of an amount that is all or part of an amount included in their assessable income for the year. The amount of the tax offset for the year is the sum of the foreign income tax the taxpayer paid that counts towards the offset for the year (s 770-70).
The expression “foreign income tax” is defined in s 770-15(1) to mean tax that:
“(a) is imposed by a law other than an Australian law; and
(b)is:
(i)tax on income; or
(ii)tax on profits or gains, whether or an income or capital nature; or
(iii)any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953.” [Emphasis added.]
The Irish Agreement
The provisions of the Irish Agreement, so far as those provisions affect Australian tax, have the force of law by operation of s 11K of the ITAA 1953. The provisions of the ITAA 1997 (amongst others) are incorporated and to be read as one with the ITAA 1953, the provisions of which have effect notwithstanding anything inconsistent with those provisions contained in that Act or, relevantly, in an Act imposing Australian tax (s 4 of the ITAA 1953).
Article 25 of the Irish Agreement prescribes methods of elimination of double taxation. Article 25(1)(a) provides:
“Subject to the provisions of the law of Australia from time to time in force which relate to the allowance of a credit against Australian tax of tax paid in a country outside Australia (which shall not affect the general principle hereof), Irish tax paid under the law of Ireland and in accordance with this Agreement, whether directly or by deduction, in respect of income derived by a person who is a resident of Australia from sources in Ireland ... shall be allowed as a credit against Australian tax payable in respect of that income.” [Emphasis added]
The term “Irish tax” is defined in Article 3(1)(i) to mean tax imposed by Ireland, being tax to which that Agreement applies by virtue of Article 2. The existing taxes are specified in Article 2(1) of the Irish Agreement to be “the income tax”, “the corporation tax” and “the capital gains tax” (Article 2(1)). Furthermore, Article 2(2) provides that:
“This Agreement shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of this Agreement in addition to, or in place of, the existing taxes. As soon as possible after the end of each calendar year, the competent authority of each Contracting State shall notify the competent authority of the other Contracting State of any substantial changes which have been made in the laws of the State relating to the taxes to which this Agreement applies”. [Emphasis added.]
Pay Related Social Insurance
The PRSI contributions the subject of the ruling are provided for in Part 2 of Ireland’s Social Welfare Consolidation Act 2005 (the “SWCA 2005”), which governs “Social Insurance”. Chapter 1 of that Part concerns the “Social Insurance Fund”. Section 9(1) provides that the “Social Insurance Fund ... established under the Social Welfare Act 1952 and continued in being under section 7 of the Social Welfare (Consolidation) Act 1993, shall continue in being and to [sic] comprise a current account and an investment account”. While the Social Insurance Fund (the “Fund”) was established under that 1952 Act, it appears from the material before the Tribunal that PRSI contributions were first introduced in 1979.
Benefits are to be paid or provided for out of the Fund (s 7). Such payments and any other payments to be made out of the Fund are to be funded by contributions paid into Fund, including “employment contributions” in respect of employed contributors, which each comprise a contribution by the employed contributor and a contribution by their employer; they are also funded by contributions in respect of self-employed contributors, optional contributors and voluntary contributors and by payments out of moneys provided by the Oireachtas (Ireland’s National Parliament) (s 6). The last source of funding is residual in nature, serving to meet shortfalls – the amount by which the income of the Fund for any financial year is less than its expenditure is to be paid into the Fund out of moneys provided by the Oireachtas (s 9(9)(a)).
The Fund comprises a current account and an investment account (s 9(1)). The former is managed and controlled by the Minister for Social and Family Affairs while the latter is managed and controlled by the Minister for Finance (ss 2, 9(2), 9(3)). Moneys are to be transferred between the Fund’s investment account and current account according to requirements in terms of current expenditure and liabilities (ss 9(5), 9(6)).
Section 10 provides for actuarial reviews to be made of the financial condition of the Fund “for the purpose of determining the extent to which the Fund may be expected, in the longer term, to meet the demands in respect of payments of benefits and other payments, having regard, in particular, to the adequacy or otherwise of the contributions to support benefits and other payments and any other matters the Minister considers to be relevant as affecting the current and future financial condition of the Fund”.
Chapter 2 of Part 2 governs employed contributors and employment contributions, the latter being what is described in the ruling as PRSI contributions. The payment of employment contributions is compulsory for most employees and their employers.
Section 12 defines “employed contributors” (being persons of specified ages and in specified employments) and provides that “every person becoming for the first time an employed contributor shall thereby become insured under this Act and shall thereafter continue throughout his or her life to be so insured” (s 12(1)(c)).
Section 13 provides for the payment of employment contributions by employed contributors and their employers, subject to the employed contributor receiving payments (including notional payments) over threshold limits applicable to them. The amount of employment contributions varies according to complex factors including the “reckonable earnings” of an employed contributor (s 13; see also s 2, as amended).
Relevant employers are liable in the first instance to pay both the employer’s contributions and also contributions payable by the employed contributors, the latter generally being recoverable from those contributors (ss 13(4) and (5)).
On making any payment of earnings to an employed contributor in receipt of reckonable earnings, employers are required to deduct from those earnings the appropriate amount of any contribution due by that contributor. Employment contributions are to be remitted by the employer to the Collector-General. They are to be collected and are recoverable by the Collector-General and are to be accounted for by him and paid into the Fund (Regulations 6, 7 and 8 of the Social Welfare (Consolidated Contributions and Insurability) Regulations, 1996 (S.I. No. 312 of 1996)).
A wide range of benefits are payable out of the Fund, including an “illness benefit” (formerly the “disability benefit”), “maternity benefit”, “health and safety benefit”, “adoptive benefit”, “jobseeker’s benefit” (formerly the “unemployment benefit”), “occupational injuries benefit”, “carer’s benefit”, “State pension (contributory)” (formerly the “old age (contributory) pension”), “State pension (transition)” (formerly the “retirement pension”), “invalidity pension”, “widow’s (contributory) pension and widower’s (contributory) pension”, “guardian’s payment (contributory)” (formerly the “orphan’s (contributory) allowance”), “bereavement grant” and “widowed parent grant” (ss 7, 39(1) of the SWCA 2005; see Chs 8-21). The SCWA 2005 also provides for certain other benefits to be made and for certain other payments to be made out of the Fund for specified purposes (see ss 6(1), 7(2) and 39(2)).
Entitlement to benefits from the Fund depends, amongst other things, on specified “qualifying contributions” having been made by the recipient or another specified person, save for the occupational injuries benefits, which relate to insurance provided to those “employed in insurable (occupational injuries) employment ... against injury caused by accident arising out of and in the course of that employment” (s 70). The widowed parent grant within the terms of Pt 2 is ancillary in nature, being paid by virtue of receipt of another benefit under Part 2 (s 39(1)(n)). The term “qualifying contribution” is relevantly defined in s 2 to mean the appropriate employment contribution which was paid in respect of any person insured under Part 2.
Social Security Agreement between Australia and Ireland
The SWCA 2005 is, to the extent that it provides for and applies to certain benefits within the terms of Pt 2 and “the liability for the payment of employment and self‑employment contributions”, a subject of the Social Security Agreement between Australia and Ireland done at Dublin on 9 June 2005, which operates so as to eliminate double coverage under the social security legislation of each country (see espec. Article 2(1)(b)).
That bilateral treaty applies to Australian laws including the Social Security Act 1991 (Cth) insofar as they apply to or affect certain pensions and, in certain respects, the Superannuation Guarantee (Administration) Act 1992 (Cth) (and its related regulations) and the Superannuation Guarantee Charge Act 1992 (Cth). Amongst other things, the treaty serves “to ensure that employers and employees who are subject to the legislation of Ireland or Australia do not have a double liability under the legislation of Ireland and Australia, in respect of the same work of an employee” (Article 5).
Irish income tax
Irish income tax is charged under Chapter 1 of Part 2 of the Taxes Consolidation Act 1997 (the “TCA 1997”). Corporation tax and capital gains tax are also charged under that Act. Section 12 of the TCA 1997 provides that “[i]ncome tax shall, subject to the Income Tax Acts, be charged in respect of all property, profits or gains respectively described or comprised in” Schedules contained in enumerated sections of the Act, which deal with various subject matter. (The term “Income Tax Acts” is defined to mean “the enactments relating to income tax in this Act and in any other enactment” (s 1).) Irish income tax is charged for each year of assessment and is calculated by applying the relevant rate to a taxpayer’s taxable income (s 15). The TCA 1997 provides for personal allowances and reliefs (Part 15). Irish income tax is collected through its PAYE system (Chapter 4 of Part 42 of the TCA 1997).
CONSIDERATION
Issues before Tribunal
The essential issue before the Tribunal is therefore whether the provision for the making of employment contributions by employed contributors pursuant to the SWCA 2005 constitutes a tax within the terms of Article 2(2) of the Irish Agreement. It was common ground between the parties that the particular issue is whether it is a “substantially similar tax” for the purpose of that provision. The parties confined their attention to the question of whether it is substantially similar to Irish income tax for the purposes of Article 2, on the basis that that was the sole relevant existing tax in Article 2(1) which arises for consideration.
Contrary to the respondent’s submission, Article 2(2) also raises the question of whether PRSI constitutes a “substantially similar tax” to Australian income tax, being another existing tax the subject of Article 2(1) – the “new tax has to be identical or substantially identical to an existing tax, whether that existing tax” is Irish or Australian, such an approach being “consistent with the reciprocal nature” of the Irish Agreement (see Kinsella v Revenue Commissioners [2007] IEHC 250; (2007) 10 ITLR 63; see also Undershaft (No 1) Limited v Commissioner of Taxation (2009) 175 FCR 150 at [133]‑[135]).
Although in Virgin HoldingsSA v Commissioner of Taxation (2008) 214 FCR 278 Edmonds J confined his attention to similarity between Australian taxes, given his conclusion that the tax in question was covered by the relevant double tax treaty on that basis (see at [54]-[58]), it should not be assumed from his reasoning that the inquiry is always so confined. In any event, given the reasons that follow, ultimately nothing turns in this case on that further requisite inquiry.
Principles governing interpretation of double tax treaties
Given that the provisions of the Irish Agreement, so far as they affect Australian tax, have been given the force of law (by operation of s 11K of the ITAA 1953), that is a legislative instruction to treat the Irish Agreement “as a domestic law in relation to income tax” (Commissioner of Taxation v SNF (Australia) Pty Limited (2011) 193 FCR 149 at [112]).
Furthermore, it is appropriate to construe its provisions in accordance with the ordinary principles governing the interpretation of treaties (Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597 at 604, citing with approval Thiel v Federal Commissioner of Taxation (1990) 171 CLR 338 at 349, 356; SNF at [119]-[120]; cf Russell v Federal Commissioner of Taxation (2011) 190 FCR 449 at [25]-[30]). Such an interpretative approach serves to promote the intention of double taxation treaties (being, unsurprisingly, the prevention of double taxation), which would be frustrated by “conflicting outcomes between the two States in question” (SNF at [120]).
Accordingly, the Irish Agreement is to be interpreted in accordance with the requirements of the Vienna Convention on the Law of Treaties (done at Vienna on 23 May 1969) [1974] ATS 2 (the “Vienna Convention”) (McDermott Industries (Aust) Pty Ltd v Commissioner of Taxation (2005) 142 FCR 134 at [37]; SNF at [113], citing with approval Thiel at 349, 356).
Article 31 of the Vienna Convention, which has been described as the “leading general rule of interpretation of treaties” (Applicant A v Minister for Immigration and Ethnic Affairs (1997) 190 CLR 225 at 252, quoting Koowarta v Bjelke-Petersen (1982) 153 CLR 168 at 265 per Brennan J), relevantly provides:
“1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2.The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a)Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;
(b)Any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.”
It follows that a holistic approach is to be taken to the interpretation of the Irish Agreement, including Article 2. The text of its provisions is to be given primacy – “the ordinary meaning of the words of the treaty are presumed to be the authentic representation of the parties’ intentions” (Applicant A at 252-3). However, the context, object and purpose of Article 2 must also be taken into account (ibid at 231, 251-6; McDermott Industries at [38]; Task Technology Pty Ltd v Commissioner of Taxation [2014] FCAFC 113 at [12]). One must bear in mind that treaties, being negotiated instruments, often lack precision and accordingly are not suited to precision in their application (Applicant A at 255-256; McDermott Industries at [38]).
Article 32 of the Vienna Convention provides:
“Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
(a)Leave the meaning ambiguous or obscure; or
(b)Leads to a result which is manifestly absurd or unreasonable.”
Whether by operation of Article 31(2) or Art 32, it is therefore permissible to have regard to the 1977 OECD Model Convention for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital (the “Model Convention”) and its associated Commentary (the “Model Commentary”) (Thiel at 344, 348-350, 356-357; SNF at [114]; Commissioner of Taxation v Resource Capital Fund III LP [2014] FCAFC 37 at [25]).
“Substantially similar taxes” – Article 2(2) of Irish Agreement
Given the principles of interpretation applicable to the Irish Agreement, what does the expression “substantially similar taxes” mean for the purposes of Article 2? It is relevant to note at this point that Article 3(3) of the Irish Agreement provides that, “[i]n the application of this Agreement by a Contracting State, any term not defined in the Agreement shall, unless the context otherwise requires, have the meaning which it has under the laws of that State relating to the taxes to which this Agreement applies”. That provision “effectively replicates” Article 3(2) of the Model Convention (see Virgin Holdings at [28]).
Although the term “substantially identical taxes” is undefined, in my view Article 3(3) of the Irish Agreement does not affect the application of the ordinary principles governing the interpretation of treaties to which I have referred in construing the meaning of that term. The term’s meaning is to be ascertained according to those principles because it has “no particular or established meaning under the laws relating to Australian income tax which is relevant to the outcome of the question for decision” (Thiel at 343; see also at 349, 356). Alternatively, it might perhaps be said that the meaning of the term under Australian law is that which it bears according to the principles governing the interpretation of treaties, given that the whole text of the Irish Agreement has been given domestic effect (SNF at [112], [119]-[120]).
Characterisation of an impost so as to determine whether it constitutes a “substantially similar tax” for the purposes of Article 2(2) of the Irish Agreement requires that an exercise of comparison be undertaken, comparing that impost with the existing taxes covered by the Agreement (under Article 2(1)) (see Kinsella, Virgin Holdings, Undershaft). The mechanisms of imposition used are relevant but not determinative (Virgin Holdings at [55]), as are the methods of calculation (Kinsella). Whether and how the impost in question is reflected in tax legislation is also relevant (ibid). The fact that the impost and an existing tax are collected together is not determinative (Niemeijer v The Queen 2009 TCC 624 at [21]-[22]).
Does Pay Related Social Insurance constitute a “substantially similar tax”?
Is Pay Related Social Insurance a “substantially similar tax” to the Irish income tax for the purposes of Article 2 of the Irish Agreement?
The respondent’s first contention in this regard was that the answer to that question is “no” because the requirement to make PRSI contributions existed prior to the signing of the Irish Agreement, so that the impost in question could not be said to have been imposed by Ireland after the date of the signature of the Irish Agreement for the purposes of Article 2(2), the SWCA 2005 merely being consolidating legislation. The respondent submitted that it was significant in that regard that Pay Related Social Insurance had not included in the existing taxes the subject of Article 2(1). Given the reasons that follow, it is not necessary for me to address this contention.
Contrary to the applicant’s submission, it is clear from the Model Commentary concerning Article 2 of the Model Convention, upon which Article 2 of the Irish Agreement is based, that social security charges and any other charges paid where there is a direct connection between the levy and the individual benefits to be received are not intended to fall within the ambit of taxes covered by the Model Convention.
In the Commentary it is noted, as is the case with respect to the Irish Agreement, that some countries, rather than defining the kinds of existing taxes to be covered by their double tax agreement, “prefer simply to list exhaustively the taxes in each country to which the Convention will apply, and clarify that the Convention will also apply to subsequent taxes that are similar to those listed”. The Commentary then suggests wording reflected in Article 2 of the Irish Agreement and states that “social security charges and similar charges should be excluded from the list of taxes covered”, referring to text of the Model Commentary concerning paragraphs of the Model Convention which define, rather than list, the taxes covered, including in terms of “taxes on the total amount of wages”.
In that paragraph, the Model Commentary states:
“Social security charges or any other charges paid where there is a direct connection between the levy and the individual benefits to be received, shall not be regarded as ‘taxes on the total amount of wages’.” [Emphasis added]
As Klaus Vogel said with respect to Article 2 of the Model Convention (Vogel et al, Klaus Vogel on Double Taxation Conventions (3rd., Kluwer Law International, 1997) at 147, [29]):
“Nor do social security charges qualify as taxes. They are directly connected with the benefit of enjoying the protection afforded by the social security system .... There may be problems whenever a contracting State collects social insurance charges as ‘taxes’ and when in such cases there is no direct connection between those charges and the benefits claimable under the social insurance system. Even where the term ‘taxes’ is used, it will, however, as a rule arise from the context of the treaty that the social insurance charges shall not be included ... .” [Emphasis in original.]
In Niemeijer at [21]-[22], the Tax Court of Canada gave similar reasons, adopting Counsel’s submissions:
“[d]irect taxation and social security contributions belong to fundamentally difference categories of levy, which are not in any way directly related. The payment of social security contributions forms part of an insurance scheme: it bestows entitlement to specific benefits. The payment of taxes, however, which is unconnected with any insurance transaction, does not give rise to any benefits as such”.
The applicant relied upon commentary by Patricia Brandstetter (Brandsetter P, Taxes Covered – A Study of Article 2 of the OECD Model Conventions (2011, IBFD) at 111‑113), particularly a statement that “[w]here social security payments are income related rather than risk related, they could be seen as a regular income tax”. However, read in the context of the balance of the relevant commentary, that statement cannot properly be taken as support for the submission that Pay Related Social Insurance constitutes a tax for the purpose of Article 2(2) of the Irish Agreement, leaving aside the fact that the Model Commentary has greater force in interpreting that Article.
The statement is made on a general conceptual basis and in the context of OECD Revenue Statistics which include social security contributions in total tax revenue for particular statistical purposes, yet while it is acknowledged that they are in fact different in nature. As the respondent pointed out, later in that commentary (at 118) it is acknowledged that the existence of a “conceptional element of benefit in the nature of a ‘social contract’” precludes a contribution to a social security fund being a tax according to the Model Commentary.
In my view, Pay Related Social Insurance does not constitute a “substantially identical tax” for the purposes of Article 2(2) of the Irish Agreement, upon a proper interpretation of that expression according to its ordinary meaning, context, object and purpose.
First, PRSI does not constitute a “tax” for such purposes. Rather, it is a species of charge within the contemplation of the Model Commentary as being intended to be excluded from taxes covered under the Model Convention. It answers the description of being a “social security charge” or else a charge “paid where there is a direct connection between the levy and the individual benefits to be received”.
Such a direct connection exists between PRSI and benefits to be paid or provided out of the Fund pursuant to the SWCA 2005. Save for in the case of the occupational injuries benefits, which relate to insurance provided in respect of those who must nevertheless be in relevant employment, entitlement to benefits out of the Fund depends upon PRSI contributions having been made by the recipient. Benefits are funded by such contributions and, as the respondent submitted, government funding is merely residual in nature. Non-contributory benefits are dealt with in other Parts of the SWCA 2005 (see, for example, Part 3, which concerns “Social Assistance”), but, contrary to the applicant’s suggestion, that does not mean that they may be paid out of the Fund. Only the benefits enumerated in s 7 may be paid or provided for out of the Fund (see also s 39).
Contrary to the applicant’s submissions, the requisite “direct connection” exists despite the fact that contributors might not receive benefits proportional to their contributions or might not receive benefits at all. As the respondent submitted, the connection lies in the protection afforded by the entitlement to receive benefits from the Fund in the future if relevant circumstances arise, in accordance with the relevant provisions of the SWCA 2005. That entitlement arises by virtue of making the requisite contributions.
Neither the general characterisation of an impost for the purpose of the Model Convention, nor the specific characterisation of Pay Related Social Insurance for the purposes of the Irish Agreement, could properly turn upon the nature and extent of benefits a particular contributor (whether the applicant or some other person) has received or whether they happen to be entitled to receive benefits at all at a particular time or in the future.
As the respondent submitted, nor can such characterisations depend upon a perception of particular taxpayers such as the applicant that the double tax agreement in question operates unfairly in their own circumstances – the gravamen of the applicant’s complaint is that he, not being habitually resident in Ireland, is entitled to few, if any, benefits from the Fund. However, the Pay Related Social Insurance cannot be characterised differently for him than for other contributors. Nor could it be characterised differently for him according to what his own circumstances happen to be.
As the respondent submitted, it is not enough to say, as the applicant contended, that social security charges and taxes are indistinguishable because any impost used by government to fund public services must necessarily be a tax. The dichotomy for the purposes of interpreting double tax treaties is clear. To disregard that dichotomy would involve the impermissible expansion of the reciprocal arrangement existing under the Irish Agreement, contrary to the intention evinced by its terms and the Model Commentary.
As the respondent also submitted, conceptual differences between taxation and insurance referred to by the applicant are not to the point. Neither is the applicant’s submission that is “in effect” a tax on income and that “[i]t is well known that” governments use alternative nomenclature for “financial imposts” so as to make them more politically palatable. The true question is whether the impost in question falls within the terms of Article 2 of the Irish Agreement according to the applicable principles of interpretation.
Furthermore, I accept the respondent’s submission that the question of whether Pay Related Social Insurance constitutes a tax for the purposes of Article 2 of the Irish Agreement is not to be answered according to authorities concerning the question of whether a law imposes taxation for the purposes of s 55 of the Commonwealth Constitution, as the applicant sought to do. Those authorities are to be understood in their own context.
Even if PRSI did constitute a tax for the purposes of Article 2(2) of the Irish Agreement, it remains the case that it does not constitute a “substantially identical tax” for such purposes, that being the composite phrase in issue. It is not “substantially identical” to Irish income tax (that comparison being, as I have indicated, the object of the parties’ focus), nor indeed is to “substantially identical” to Australian income tax.
As the Commissioner submitted, there are significant differences between PRSI and Irish income tax which, considered together, lead to the proper conclusion that the former does not resemble the latter to the extent necessary to constitute a “substantially similar tax”, including the following:
(a)Pay Related Social Insurance is not imposed by the TCA 1997 and is not referred to in the SWCA 2005 or apparently in any other legislation as a “tax”;
(b)Irish income tax covers an expansive field of taxpayers, both individuals and entities not subject to the corporation tax, while Pay Related Social Insurance is mandated with respect to particular classes of persons, being employed contributors (and also relevant employers of those employed contributors) and self-employed contributors;
(c)Liability to make PRSI contributions arises in connection with a contributor’s employment status, while income tax is imposed in respect of property, profits or gains arising in respect of an expansive range of economic activities, extending well beyond the earning of salary and wages;
(d)PRSI contributions are calculated by reference to complex factors including the “reckonable earnings” of an employed contributor, the rates varying according to the nature of the employed contributor’s employment, while Irish income tax is calculated by applying the relevant rate to a taxpayer’s taxable income;
(e)while PRSI, like Irish income tax, is collected through the PAYE system, the former is paid into the Fund for its purposes as specified under Part 2 of the SWCA 2005, while the latter flows into general revenue – what matters in that regard is not the conduit used, but rather the destination of the funds and the purposes for which they may be used.
Contrary to the applicant’s submission, the fact that the imposition of PRSI and Irish income tax are both mandated by law does not assist in demonstrating that the former is a “substantially similar tax” to the latter. Nor is the fact that both are controlled and disbursed by the Irish government. Neither of those factors indicates substantial similarity between the two imposts.
For consonant reasons, in my view Pay Related Social Insurance does not constitute a “substantially similar tax” to Australian income tax for the purposes of Article 2 of the Irish Agreement, there being no distinctive feature of the latter warranting a different conclusion as to whether the former is covered by the double tax agreement.
The Social Security Agreement between Australia and Ireland to which I have referred, which treats relevant provisions of the SWCA 2005 as being equivalent to Australian social security law and superannuation guarantee legislation, was not entered into until 2005, being well after the Irish Agreement was executed. Nevertheless, it indicates that, at least at the time that the SWCA 2005 was enacted, the parties to the Irish Agreement did not understand that treaty as applying to Pay Related Social Insurance.
Given the conclusions I have reached, it is not necessary for me to consider the question of the import of that social security treaty in the construction of Article 2(2), although as the respondent submitted, it does serve in the case of the superannuation guarantee scheme to counter the applicant’s argument to the extent that it is founded on the assertion that Australia has no impost for social insurance comparable to Pay Related Social Insurance for present purposes.
The applicant also contended that Pay Related Social Insurance ought to be characterised as a “substantially similar tax” to Irish income tax given that it is similar to another impost which has been treated in that way by the respondent, being the “Universal Social Charge” (the “USC”) (see ATO Interpretative Decision 2012/2). It is neither appropriate nor necessary for me to consider whether the respondent’s characterisation for such purposes is correct. As the respondent submitted, the requisite comparison to be made in this application for review is between PRSI and existing taxes covered by Article 2(1) of the Irish Agreement.
In any event, I note in passing by way of contradistinction that, like Irish income tax, the USC is imposed under the TCA 1997 (having been introduced by s 3 of the Finance Act 2011. It is described therein as a “tax”, is calculated according to an individual’s income and is not allocated to a separate fund to be applied for the purpose of the provision of specified social insurance benefits.
CONCLUSION
Accordingly, the applicant is not entitled to a foreign income tax offset under s 770-10(1) of the ITAA 1997 for the amount of Pay Related Social Insurance deducted from his Irish salary, as PRSI does not constitute “foreign income tax” within the terms of s 770-15(1). Relevantly, it does not constitute “any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953” (s 770-15(1)(b)(iii)).
For the above reasons, it follows from the answers given to both questions asked in the notice of ruling that the ruling is correct. The Tribunal will therefore affirm the decision under review.
I certify that the preceding [75] (seventy‑five) paragraphs are a true copy of the reasons for the decision herein of F J Alpins, Deputy President. [sgd]........................................................................
Administrative Assistant
Dated 23 December 2014
Date of hearing 23 July 2014 Applicant In person Counsel for the Respondent Ms Melanie Baker Solicitors for the Respondent Tanya Saw, ATO Legal Services Branch
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