Howard v Commissioner of Taxation of the Commonwealth of Australia

[2013] HCATrans 268

[2013] HCATrans 268

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne       No M115 of 2012

B e t w e e n -

STEPHEN JAMES HOWARD

Applicant

and

COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave to appeal

CRENNAN J
KIEFEL J
BELL J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 8 NOVEMBER 2013, AT 10.31 AM

Copyright in the High Court of Australia

MR A.H. SLATER, QC:   If the Court pleases, I appear with my friend, MR D.J. McINERNEY, for the applicant.  (instructed by Oakley Thompson & Co Solicitors)

MR J.W. DE WIJN, QC:   If the Court pleases, MR P.G. SEST, SC and I appear with MR P.R. BENDER for the Commissioner.  (instructed by Maddocks)

CRENNAN J:   Yes, Mr Slater.

MR SLATER:   Your Honour, the next matter is a little shorter.  Your Honours, what makes this application worthy of special leave is that it brings before the Court for consideration and determination a scope of deeming provisions in a Commonwealth statute.  Deeming provisions are a device frequently resorted to in the complex lattice, or some would say the complex morass of Commonwealth legislation. 

As legislation increasingly displaces common law principles and as the subject matter and expression of legislation becomes increasingly complex, the drafters of Commonwealth legislation are increasingly resorting to deeming provisions in an attempt to maintain some structure.  By my count, there are more than 60,000 provisions on the Commonwealth statute book which effect one or more kinds of deeming.  It is, in our submission, an issue of general significance.

It is increasingly the case that construing this increasingly complex legislation is the dominant field in which courts are required to venture to resolve appeals, and they are increasingly an issue confronting the court in resolution of appeals.  The question in this application in simple and symbolic terms is this.  Where a statutory provision imposes consequences where a thing is red, and the provision for that purpose deems what is blue to be red, so attracting the consequences, and where something is neither blue nor red so the provision is not attracted, but there is another provision somewhere else in the legislation for another purpose which deems what is white to be blue, but does not deem it to be red, can the two deemings in different places be concatenated so as to attract the consequence of the statutory provision ‑ ‑ ‑

CRENNAN J:   We are primarily concerned, are we not, with 99B(2)(a)?

MR SLATER:   We are primarily concerned with that, yes, your Honour.  For your Honours’ convenience, there is a bundle of materials which was handed up and 99B is set out perhaps more clearly than in the application book on page 11 of that.

KIEFEL J:   How does 99B(2)(a) operate as a deeming provision?

MR SLATER:   It takes something which, to take this case as an example, is a capital distribution and deems it to be an income distribution so as to be taxable to the beneficiary.  What happened in this case was that a company paid off part of its share capital.  It is clearly a capital transaction.  It paid it to the nominee shareholder, who received it in lieu of part of the value of the shares which it held.  The nominee distributed that money, which had come to it as capital and replaced part of the corpus of its trust estate to the Esparto Trust, which received the sum distributed to it as capital, and it made a capital distribution to Mr Howard, so that throughout, it was capital. 

Section 99B operates to displace that circumstance and deem it to be assessable income.  The difficulty is that 99B does not operate – if I can take your Honours to the words.  This is a little tedious, but in subsection (1), it says that:

Where . . . an amount, being property of a trust estate, is paid to, or applied for the benefit of, a beneficiary –

then dropping down to the end –

the assessable income . . . shall . . . include that amount –

Subsection (2) says that, in the first line –

The amount that . . . would be included –

and dropping down to the bottom line of the chapeau –

shall be reduced by so much (if any( of the amount, as represents:

(a)      corpus of the trust estate –

So we are within the exception there, it is corpus.  The section does not apply at this point.

KIEFEL J:   The deeming does not actually take place in 99B(2)(a) then, does it?  The deeming in relation to assessable income does not take place in the reduction provision.

MR SLATER:   It takes place in a combination of places.  Under paragraph (a), we would be outside the operation of the charge for income tax.  It is the exception in the first line of paragraph (a) that is relied upon, except to the extent that it is attributable to amounts which would have been included as assessable income.

KIEFEL J:   But it operates in favour of the taxpayer, if you come within it.

MR SLATER:   The first five words operate in favour of the taxpayer, the parentheses operates against the taxpayer.  The parentheses take you out of the exception.  It is a triple negative.  It is very convoluted.

KIEFEL J:   We have come to appreciate in any tax legislation we should be lucky it is not quadruple or quintuple.

MR SLATER:   We get to that shortly, your Honour.  This is an amount which, as I said, came to it as the proceeds of realisation of assets of the trust estate, and it came to it by way of a capital distribution by the company.  None of that would make it assessable income.  There has to be reliance upon some deeming provision somewhere else, and the two deeming provisions which are relied upon, section 159GZZZP ‑ ‑ ‑

KIEFEL J:   This is the dividend paid out of profits provision?

MR SLATER:   Yes, on page 13.  Where there is a buy‑back, and I do not need to trouble your Honours with the conditions because they are satisfied, the amount of a buy‑back:

is taken to be a dividend paid . . . 

(c)     to the seller . . . 

(d)     out of profits derived by the company; and

(e)     on the day the buy‑back occurs.

That of itself does not make anything assessable income.  It just deems it to be a dividend paid to the shareholder out of profits.

KIEFEL J:   There was no dispute that this provision was engaged?

MR SLATER:   No, no dispute that the language of subsection (1) was satisfied.  To say it was engaged somewhat puts a colour on it.

KIEFEL J:   Yes, I know that might be ‑ ‑ ‑

MR SLATER:   But nothing in that section makes anything assessable income.  When one goes to section 44, which is the intervening step that is relied upon – section 44 is relevantly on page 4 of those materials.  It says:

The assessable income of a shareholder –

Then dropping down to paragraph (b) of subsection (1) –

if the shareholder is a non-resident:

(i)dividends . . . to the extent to which they are paid out of profits derived by it from sources in Australia –

But this profit came from sources in Jersey.  This was a transaction wholly in Jersey.  No part of it was in Australia.  The only connection with Australia is that Mr Howard is an Australian resident.  What the Full Court has done is to try to assemble a patchwork of all these provisions, and by concatenating different deeming provisions to say we can conclude that 99B is satisfied.  In our respectful submission, the point which ‑ ‑ ‑

KIEFEL J:   I am sorry, just to clarify from my point of view, are you saying that what the Full Court has done is apply the notion in 99B(2)(a) to overcome the words of the text of 44(1)?

MR SLATER:   Yes.  They have tried to assemble them in some sort of patchwork, as was put in part of their judgment – they are probably picking up something I had said, piling one on top of the other.  But it is a very rickety edifice.  A point which merits the attention of this Court, in our submission, is that these sort of deeming provisions are becoming increasingly common.  It is a lazy method of drafting, but it is one that has been adopted.

BELL J:   Whether it is lazy or not, the point, as I understand the Full Court, that was decisive against you is at application book 129, paragraph 47, that your argument:

depends for its efficacy upon ignoring the hypothesis –

in the parentheses altogether.  The effect of your argument is that the provision would have no operative effect with respect to the assessment of non‑resident trusts.

MR SLATER:   I would not go that far, your Honour, because non‑resident trusts can derive income from sources in Australia, but in this case ‑ ‑ ‑

BELL J:   No effect with respect to non‑resident trusts in relation to income from outside Australia?

MR SLATER:   If it came as corpus of the trust estate, yes.  I have to get within the first few words of paragraph (a) to get that.

BELL J:   Can you just explain what meaning the words in parentheses, which are not unimportant, have in the way you construe the provision?

MR SLATER:   I cannot at the moment give your Honour a fully rounded instance of the way in which they would work.

BELL J:   That is the difficulty, is it not?

MR SLATER:   It is the difficulty, yes, your Honour.  I am reluctant to endeavour to do it on my feet.

CRENNAN J:   What about, if I may, just going down, looking at the words in parentheses there is a reference there to the trust estate in relation to the corpus, the last three lines:

that, if they had been derived by a taxpayer being a resident, would have been included in the assessable income of that taxpayer ‑ ‑ ‑

MR SLATER:   I think that is the question that Justice Bell was putting to me.

CRENNAN J:   Well, what I was going to put to you does not seem in any way opaque or ambiguous.  Are you saying to us you would decline to proffer a construction?

MR SLATER:   No, but this is a case where the amount would not have become assessable income of this trust, except by virtue of putting together a string of deeming provisions.  This trust received a corpus distribution from another trust which received a corpus distribution from a company.  It is only by assembling a melange of other deeming provisions at higher stages in the chain of events that you can get to an assessable amount at the bottom of the event, at the point of the Esparto Trust. 

In our submission, that is stretching what can be asked of a deeming provision too far.  That is the essence of our submission, your Honours.  I can put that in a variety of different ways, but that is the point of this application.  The deeming provisions are increasingly significant in Commonwealth legislation, and their scope where they are joined together in the way that the Full Court sought to do and the way our friends contend for is a matter which merits the attention of this Court.  If your Honours please.

CRENNAN J:   Yes, Mr De Wijn.

MR DE WIJN:   If your Honours please. The applicant’s case quite simply avoids the plain words of the statute. Its point about section 99B being a deeming provision is really misconceived. In essence, section 99B is no different to any other section of the Income Tax Assessment Act which sets out the specific circumstances in which an amount will form part of assessable income. 

The Income Tax Assessment Act has a whole lot of provisions that say if certain tests are satisfied an amount will be included in assessable income and it is of course, if your Honours look at the section in the booklet, 99B, it is section 99B(1) which would include an amount in the assessable income of, in this case, Mr Howard. Clearly, that has been satisfied. He is a resident. There was a distribution to him. The Act clearly says that the amount is to be included in his assessable income.

There are then certain reductions, and there is a reduction if the amount is corpus.  But there is an exception to that reduction, so the Act proceeds on the basis that certain corpus amounts will be included in assessable income, and the exception to the exception, or the exception to the reduction is to the extent that the amount:

is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident –

So what one does is assume that the Esparto Trust, the Jersey trust, was a resident.  If one stops there and if one assumes that the Esparto Trust, which was what I might call the main Jersey trust, if it had owned the shares in Esparto Ltd, the company in which the shares were bought back in, if it had owned the shares directly, Mr Howard clearly would have fitted within or the exception would have applied because ‑ ‑ ‑

KIEFEL J: Mr De Wijn, when you come to apply – and this is the point I am interested in – section 44(1), do you also apply what I will loosely call the deeming part, that part of section 99B(2)(a) which is in parentheses, to require Juris to be treated as a resident taxpayer?

MR DE WIJN:   Yes, of course you do, because what the words in parentheses say – you look at the Act, you assume that the trustee is a resident, you assume it for all purposes of the Act, you assume that the trustee is a resident ‑ ‑ ‑

KIEFEL J:   Well, that is the question, is it not, whether it is assumed for all the purposes in the Act?

MR DE WIJN:   Well, that is what it says, with respect.  You assume it is a resident.  You have got to work out whether it is assessable income, and to work out whether it is assessable income, you have to look at the other provisions of the Act.  That is the whole purpose of this exception.  You look at the trustee, you see whether if it is corpus, it is excluded, unless it would have been corpus which would have been brought to account as assessable income on the assumption that the trustee was a resident.  You then look at the other provisions of the Act because that is what it directs you to, to the other provisions of the Act, and the answer is on the assumption that it is a resident, you go to section 44 and you are in 44(1)(a), “if the shareholder is a resident” ‑ ‑ ‑

KIEFEL J:   But do you read section 44(1)(a) to say “if the shareholder is a resident in fact” or you do you read it to say “if the shareholder is a resident as assumed” under the operation of other provisions?

MR DE WIJN:   You read it “as assumed”, but that is not a reading of 44.  You do not necessarily read 44 in that way.  You start with the taxing provision, which is 99B.  That is satisfied, it is corpus, and then you look at the exception:

to the extent to which it is attributable to amounts derived by the trust estate that, if they had been derived by a taxpayer being a resident, would have been included –

So you then assume for the purposes of applying the exception in 99B(2)(a) ‑ ‑ ‑

CRENNAN J:   Well, you read “taxpayer” there as “foreign trust”.

MR DE WIJN:   Yes, it is derived by a foreign trust being a resident.  So you assume that the Esparto Trust or the interposed trust was a resident.  When you make that assumption, and the words are plain with respect, and that is why the Full Court was so clear in its decision, you read the words as they are.  You then go to the other provisions of the Act – in this case, it is 44, but it could be any other provision that deals with the circumstances in which an amount is taxable – and you say “if the shareholder is a resident”.  The other provisions have already made – the buy‑back provisions have reapplied, so the answer is you make the assumption that it is a resident and the answer is it is taxable.

Now, the only confusion – with respect, that is simple in this case, we would say and the Full Court said.  The only issue in this case of course is that there were two nominees imposed in between and the question really is whether the position of the two nominees makes a difference.  Logically, it should not, but of course it does not make a difference because in working out the assessable income of Esparto, in working out whether the main trust, the Esparto Trust would have derived assessable income of course you treat

it as a resident and then you simply go to 99B and look at the distribution it received from the two nominee trusts, and it received a distribution that fits squarely within the exception because you have assumed then that the two nominee trusts are residents and they have derived the proceeds under the buy‑back and then you apply 44 and, with respect, I was going to say it is simple. 

Conceptually, it is simple. You have to go to a couple of sections, but that is just the way in which the Act works. We would say it is a plain reading of section 99B. You just make the assumption that each of the trusts overseas in turn is a resident, because you have to do that. You start with the Esparto Trust, then you make the assumption that it is a resident and you apply 99B again and on that assumption the amount derived by the two nominee trusts would have been assessable.

With respect, your Honours, we say it is – I will not say simple in the sense of having to put together the points, but conceptually, it is straightforward.  The Full Court was correct.  If your Honours please.

CRENNAN J:   Yes, Mr Slater.

MR SLATER:   Your Honours, my friend uses assumptions rather than deeming provisions, but really his analysis rests on a string of assumptions and to a degree on a string of assumptions which have to be self‑supporting.  My friend says the whole purpose of these things is to impose tax.  The question really is whether that purpose is achieved or whether the string of assumptions is stretched too far. 

That is illustrated by what my friend said towards the end of his submissions when asked about the relationship between section 44 and section 99B. He said you assume it means by a foreign trust being a resident, but those two concepts are mutually contradictory. A foreign trust is a trust which is not a resident, and the question for consideration by the Court, in our submission, is whether a string of deeming provisions can do that, or should be accepted to do that.

My friend says that the operation of these assumptions is the way in which the Act works.  That assumes, as a premise for the argument that the Act does work.  The question, in our submission, for consideration by the Court is whether it does work and, in our submission, that is a question which merits the attention of the Court.  If your Honours please.

CRENNAN J: In this matter it was not in dispute that the applicant received amounts totalling some $6,339,733 from a trust. Unless s 99B(2)(a) of the Income Tax Assessment Act 1936 (Cth) applied to reduce that amount as being corpus of the trust estate, it was assessable as income of the applicant. No novel question of the application of the Income Tax Assessment Act 1936 (Cth) is involved in this application. The applicant has insufficient prospects of success to warrant the grant of special leave. Special leave is refused with costs.

MR SLATER:   If your Honours please.

AT 10.53 AM THE MATTER WAS CONCLUDED