Thiel v The Commissioner of Taxation

[1990] HCATrans 54

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No Pll of 1989

B e t w e e n -

GUNTER THIEL

Appellant

and

COMMISSIONER OF TAXATION

Respondent

MASON CJ
BRENNAN J
DAWSON J

GAUDRON J

McHUGH J

Thiel(2)

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 3 APRIL 1990, AT 10.15 AM

Copyright in the High Court of Australia

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:MR I.V. GZELL, QC:  If the Court pleases, I appear with my

learned friend, :MR P.F. FLETCHER, for the appellant.

(instructed by Solomon Brothers)

:MR B.J. SHAW, QC:  If the Court pleases, I appear with my

learned friend, :MR M.J. BUSS, for the respondent.

(instructed by the Australian Government Solicitor)

MASON CJ:	Mr Gzell.
:MR GZELL:	Thank you, Your Honour.  If the Court pleases, I

hand to Your Honours a copy of our outline of

argument.

MASON CJ:	Thank you.
:MR GZELL:	If the Court pleases, the respondent has provided

us with some material which I hand to the Court. It

is some of the material which is referred to by both

parties. If the Court pleases.

MASON CJ: Thank you.

:MR GZELL:  What the additional material contains is the

AGREEMENTS ACT with the Swiss Agreement, schedule 15

to that Act; the OECD model convention of 1977;

the commentaries on some of the articles; the Vienna

Convention Articles 31 and 32; and an article which

appeared in two issues of the British Tax Review by

John Avery Jones and others on the interpretation of

the the treaties. If Your Honours please, there are
other materials to which we will refer in addition
to that material, copies of which have been provided

to Your Honours.

The case that came before the Court essentially

involves the question whether or not the

interpretation of the phrase "enterprise of one
contracting State" imports a limitation such that an

enterprise for the purposes of our treaties sh:>uld be confined to the notion of activities of a repetitive

kind in the nature of business. Now, Your Honours,

the findings in respect of what occurred with

Mr Thiel are clear. The gentleman was a Swiss

resident; not resident in Australia; no permanent

establishment in Australia.

(Continued on page 3)

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MR GZELL (continuing):  He acted through a broker in Perth.

He bought a number of units in a unit trust.

Subsequently he bought further units in that unit

trust. Preparatory to the activity being listed

on the stock exchanges, those units of his were

acquired in consideration of the issue of shares

in the company to be listed. When the company

was listed he gave instructions to his broker

to sell and there were a series of sales set out

in an annexure to the agreed statement of facts,

which is before the Court,at pages 22 to 23 of

the appeal book. So that there were a number of

sales of shares over a period of time extending

from 7 February through to a date at least as

early as 6 March. At that stage the Commissioner
of Taxation issued an assessment and no further

sales took place.

In our submission, that amounted to an

adventure in the nature of trade. It was assessed

under section 26AAA but the majority of judges who

have cast their minds to this matter, both in the

Supreme Court of Western Australia and in the Full

Federal Court, have taken the view that the

taxability might arise under one or both of the

limbs of section 25A(l).

There were arguments advanced by the appellant that taxability also arose under section 25(1) of

the Act. Those arguments were unsuccessful and we

would not concern Your Honours with those arguments

in this Court. Suffice it to say, that the

appellant will argue that an adventure in the nature

of trade falls within the context of the profits of

an enterprise for the purpose of our treaty.

Might I take Your Honours to the Swiss Treaty

itself which is at page 30 to 42 of the supplementary

material that the Corrnnissioner has provided to us.

The Swiss Agreement contains three methods by which

double taxation between the two countries is to be
avoided.	The first method is by eliminating the

entitlement of the source country to tax and an

example of that method, or technique, is to be found

in Article 8(1) of the Treaty.

(Continued on page 4)

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MR GZELL (continuing):

Profits from the operation of ships or

aircraft derived by a resident of one of

the Contracting States shall be tabable

only in that State.

So that the country of source is denied the
ability to utilize its domestic laws to tax. That
is the general proposition. There are exceptions
to that proposition, where the activities of ships

or aircraft are confined within the confines of the

source country.

The second type of method which is used in the

Swiss Agreement to avoid double taxation is one where

there is not an elimination of the taxing power in

the source country, but a limitation of it. So that

there will be a duplication between the taxing of

the resident's country and the taxing of the source

country, but the taxing of the source country is

limited. An example of that is Article 10(2), dealing

with dividends. Article 10(1) provides:

Dividends paid by a company which is a resident

of one of the Contracting States for the

purposes of its tax, being dividends to which
a resident of the other Contracting State is

beneficially entitled, may be taxed in that

other State.

And then paragraph (2):

Such dividends may be taxed in the Contracting

State of which the company paying the

dividends is a resident -

the source country -

and according to the law of that State, but the

tax so charged shall not exceed 15 per cent

of the gross amount of the dividends.

And a similar approach is adopted in respect of

interest and royalties under the Swiss Agreement.

(Continued on page 5)

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MR' GZELL (continuing): The third method of eliminating

double taxation is to grant relief in the resident's

country for any tax which has been paid in the

source country; and that is provided in Article 22.

And in Article 22 there are two different methods

of relief that are granted: one method of relief

is to exempt the income which has borne tax in

the source country entirely from taxation in the resident's country; the other method of

relief is to grant a credit for tax in the resident's

country in respect of the amount of tax that

has been paid in the source country.

So Article 22:

(1) Subject to the prov1s1ons 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), Swiss

tax paid, whether directly or by deduction,

in respect of income derived by a resident
of Australia from sources in Switzerland

(not including, in the case of a dividend,

tax paid in respect of the profits out of
which the dividend is paid) shall be allowed

as a credit against Australian tax payable

in respect of that income.

So, so far as the Australian resident is concerned
his relief for tax paid in Switzerland is by

way of credit against his Australian tax.

(2) Where a resident of Switzerland derives

income dealt with in this Agreement and

which, in accordance with the provisions

of this Agreement, may be taxed in Australia,

Switzerland shall, subject to the provisions
of paragraph (3), exempt such income from

Swiss tax but may, in calculating tax on

the remaining income of that person, apply

applicable if the exempted income had not

been so exempted. Provided, however, that

the exemption shall apply to gains from
the alienation of property referred to in
paragraph (2) of Article 13 -

the rate of tax which would have been

MASON CJ:  Mr Gzell, do we need to go through all this?

This is by way of preliminary introduction, is

not it?

MR GZELL: It is, Your Honour.

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MASON CJ: Would it not be better to come more directly to the

grounds of- - -

MR GZELL:	Yes, and I have finished the preliminary introduction.
All I was at pains to do, Your Honour, was to set the scene of the methods by which double taxation
is eliminated in this agreement.

If I then can take Your Honours to Article 7 (1) :

The profits of an enterprise of one of the

Contracting States shall be taxable only in that

State unless the enterprise carries on business. in the other Contracting State through a

permanent establishment situated therein. If

the enterprise carries on business as aforesaid,
the profits of the enterprise may be taxed in
the other State, but only so much of them as is
attributable to that permanent establishment.

Now, the general principle set forth in that paragraph of Article~ in our submission, is that profits generally of an enterprise of one contracting State

are to be taxed only in the resident's country and it is only if the enterprise amounts to a business

carried on in the source State and a business carried

on through a permanent establishment in the source

State that the source State is entitled to utilize its

domestic laws.

BRENNAN J: That is common ground, is it not?

MR GZELL:	No, Your Honour, because the argument, as we understand it, is that one does not consider profits in a general
sense.  One goes to the definition of"enterprise of
one contracting State"and draws from that a limitation
upon what is meant by profits.  We start with the
proposition that there is nothing on the face of
Article 7(1) which would limit the concept of profits
and construing  it on its face. it has the meaning
that all the profits of an enterprise are to be taxed
only in the resident State and I will come to the
argument as we understand it in a moment, Your Honour.

(Continued on page 7)

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MR GZELL (continuing):  So that the propositions that we

would draw simply by looking at Article 7(1) itself

is, firstly that Article 7(1) adopts the technique

of avoiding double taxation by ·, eliminating the

power to utilize the domestic taxation laws in the source country when it operates. So, it is one of the techniques in the first category that I mentioned.

The same, in our respectful submission, applies in

respect of Article 13(3), which was the alternative

article relied upon by the appellant in this case.

Article 13(3) provides:

Subject to the provisions of paragraphs (1)

and (2) -

which it is common ground do not apply

income from the alienation of capital

assets of an enterprise of one of the

Contracting States shall be taxable only

in that Contracting State, but, where

those assets form part of the business

property of a permanent establishment

situated in the other Contracting State, such

income may be taxed in that other State.

So, again, the general proposition is that any income

derived from the alienation of a capital asset of an

enterprize, is to be taxed only in the country of

residence unless the asset was part of a business and

the business was carried on through a permanent

establishment in the source country.

The other general propositions that we would draw from Article 7(1) is that the word "profits"

where used in the article, is of broad application.

It is of broad application because of the provision of Article 7(5): Paragraph (5) says:

Where profits include items of

income which are dealt with separately

in other Articles of this Agreement, then the

provisions of those Articles shall not be

affected by the provisions of this Article.

In our submission,that presupposes that the concept of profits is sufficiently broad to encompass items of

income which. are the subject of special provisions,

such at dividends, royalties, interest.

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MR GZELL (continuing):  So that we draw comfort from the

notion that the structure of the article is

suggestive of the proposition that "profits"

is a broad concept. We draw comfort from the

contrast between "profits" of the enterprise

at the beginning of the article and the exception

being limited to a business and submit that

the concept of "profits" is broader than

"business profits".

BRENNAN J:  But that exception is only half stated, is it not? Mr Gzell,

MR GZELL:	Yes, and I only need to half state it for this
purpose, Your Honour, because what I am simply seeking to do is to say that the notion "profits"
in Article 7 is broader than "business profits"
because the article provides the general proposition
that profits generally shall be taxed only in
the resident's country.

McHUGH J: What about the heading? What do you submit

about the heading "business profits"?

MR GZELL:	Your Honour, the heading relates to the notion
of that which is to be taxed in the source
country. It relates to the exception rather
than the concept of "profits" because profits
generally are taxable only in the resident's
countr½ the exception being that the source country may tax if those profits are firstly,
business profits and, secondly, are derived from
a permanent establishment so that we submit
that the heading is not indicative of a cutting
down of the notion of "profits". The heading
is indicative of the taxability in the source
country which is limited to "business profits"
and limited to "business profits" arising from
a permanent establishment.

Article 7 is complementary with Article 14.

Article 14(1) provides: 

Income derived by an individual who is

a resident of one of the contracting States

in respect of professional services or
other independent activites of a similar
character shall be taxable only in that

State unless he has a fixed base regularly

available to him in the other contracting
State for the purpose of performing his

activities. If he has such a fixed base,

the income may be taxed in the other State
but only so much of it as is attributable

to the activities exercised from that fixed
base.

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MR GZELL (continuing):  So that on the one hand one has

Article 14 dealing with income arising from

personal exertion in the source country which is
to be taxed only in the resident's country unless
there is a sufficient nexus with the source

country by the utilization of a fixed base. So

that we have Article 14 on the one hand dealing

with that sort of income and, in our submission,

you have Article 7 on the other hand dealing with

income arising from commercial activity.

McHUGH J:  How do you fit this in with the omission of

Article 21 of the OECD?

MR GZELL:  I will come to that, Your Honour, but the answer

to that, in our respectful submission, is that

Article 21 was meant to have a narrow ambit.
Article 21 was meant to catch items of income which

were not covered by the other provisions in the

treaty and that Articles 7 and 14 should be

interpreted broadly to capture commercial income

on the one hand and the income from personal

exertion on the other. The cases that have been

decided under Article 21, which we will come to

later, are basically cases dealing with such things

as the receipt of pensions, or payment out of

injury compensation. There are a couple of cases

of more substance which we will take Your Honours

to but they turned on peculiar provisions of the

treaties between the two countries.

So that our answer to the omission of Article 21

is to say, it makes no difference to the interpretation

of the central articles in the agreement, the

central articles being, so far as the contents that

we are concerned with, Article 7 and Article 7 should

be construed broadly in order that it captures

commercial activity. The word "business", as it is

used in some of the other a~ticles in other countries,

in our respectful submission, is a broad term

encompassing commercial activity including commercial

activity of the type of an adventure in the nature

of trade.

Were that not so one would expect there to have

been decisions under Article 21 which dealt with
situations such as that which is before the Court.

If Article 7 were confined to relate only to the profits of carrying on a business in the sense of the repetitive activities of business then one

would have expected that decisions would have emerged

before the courts under the equivalent of Article 21
dealing with the carrying on or the carrying out of
a profit-making venture on an isolated occasion which

was not held to amount to a business in the repetitive

sense and, as far as we are aware, there were no such

cases.

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MR GZELL (continuing):  The manner in which the majority

in the court below and the primary judge

approached the problem was to go back to the

definition in Article 3(l)(f) of:

the terms "enterprise of one of the

Contracting States" -

which is defined to mean -

an enterprise carried on by a resident of

Australia or an enterprise carried on by a resident of Switzerland -

and what Their Honours did was to say that the

words "carried on" have a peculiar meaning in

Australia because in Australia they are contrasted

with "carried out" and in the sense of that

dichotomy they are limited to the repetitive

activities of a business - the "business" being used

in that sense - and since that was not the case here,

Their Honours took the view that the profits to

which Article 7 referred were limited to profits of

a business.

BRENNAN J: 

Was any inquiry made into the German text?

of a difference between the German text and the

MR GZELL:  No, Your Honour. Certainly at one stage it was

raised in the notice of objection but any question level, either before the trial judge or on appeal

and we would not seek to advance any argument

here based upon any difference between the German

text and the Australian text.

MASON CJ:  Does the word "enterprise" have an established

meaning in civil law countries?

MR GZELL:  It is suggested that the word "enterprise" does

not have a meaning at all in common law countries.

MASON CJ:	My question was directed to the civil law countries.
MR GZELL:	I appreciate that, Your Honour.  As far as I am aware,

the answer to that is no. The OECD model itself

in the commentary says:the question of what an

enterprise is, that is, whether it should be regarded

as a structure or entity or whether it should be

regarded as an activity, is something which is left

to the domestic laws of the contracting States.

And, in our respectful submission, then the concept

of the word "enterprise" is something which is being

used in a neutral sense so that it does not involve

one having recourse to the domestic laws of any

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country. The notion behind it was that it should be

sufficiently broad to establish the rule

regardless of how the domestic law defined the

concept in its jurisdiction.

BRENNAN J:	The problem arises, of course, if the contracting parties are taken from two different legal systems,
which define the term in different ways, and yet the
text of each language is equally valid.
MR GZELL:	There is no treaty of which we are aware that

defines "enterprise" other than in a general sense.

BRENNAN J: What I was wondering about really was "enterprise

carried out" or "carried on".

MR GZELL:  The OECD model itself uses that phraseology so it

talks about "enterprise carried on" and a lot of
the treaties use that concept of enterprise carried on.

There are variations on that theme. Some talk about

industrial and commercial profits of an enterprise

and define "enterprise" as an industrial and

commercial enterprise carried on. But there is no

treaty of which we are aware that descends to a

more particular concept of what an enterprise is

and, indeed, in some of the treaties there is no

definition of "enterprise" at all. So that there is

no legal decision that would assist in defining the

general concept to a particular level.

(Continued on page 12)

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MR GZELL (continuing): And that probably is rightly so, in

our submission, because the notion behind the rticle

is that whatever the domestic law might regard as

an enterprise, its profits are to be taxed only in

the· '.country of residence, unless there is a sufficient

nexus with the source country associated with the

permanent establishment that should enable the source

country to tax.

BRENNAN J:  Mr Gzell, an agreement like this which, as you

point out has parallels in several other

international agreements Australia has made, ought

we to deal with the matter as a matter of construction

of the English text without consideration of the

text which have equal validity and without some

assistance being given to us as to the meaning that

would be ascribed to terms used in these

agreements in other countries?

MR GZELL:  Your Honour, we will take you to the texts of other

treaties that use the same concept. By that I mean

that common to all treaties in which we are aware,

is an a.rticle that attempts to deal with the profits

of an enterprise and the articles in some treaties

between different countries is slightly different.

For example, in some of the Unites States treaties to

which we will come in a moment, the phrase:_is_-"a_United

States::.:enterprise" and the "United States enterprise"

is defined to mean, an enterprise carried on in the

United States by a resident of the United States. Now

that has caused some problems, not because of the use

of the word "enterprise", because that is common to

mose treaties. It has caused some problems because

of the limitation that the enterprise has to be carried

on, not solely in the source country, but has to be

carried on in the resident's country as well, and the

consequence is, in that context, that unless a similar

business activity is being carried on in the United

States, as in the source country, the article has been

held not to apply.	And we will come to that in a moment
and there are similar articles in the treaties of a

number of countries that we refer to in the course of

our argument.

BRENNAN J: Let me just outline the difficulty that I am having

at the moment and if you wish to address it you may

and that is that,as I understand it, your submission

will be, the profits of an enterprise of one of the

contracting States should be understood as relating

to profits derived from the venture in the nature of

trade.

MR GZELL:	Yes, Your Honour.
BRENNAN J:	On the other side, there will be an argument, I assume, that that phrase should be interpreted in
a manner which is very similar to, if not identical with, the construction which an Australian court would

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place upon business being carried on. Now it is

between those two opposing views the result of

this case may turn. Now if we adopted a view which

would court no sympathy at all in the reciprocal

courts of Switzerland, it seems to me that we are

operating in what might be regarded as a legal

myopia here. We are looking at the English text

and applying our a priori notions of tax law in

interpreting it, whereas this is an international

agreement which is intended to have the same

operation in both countries.	Now, how do we go
about that task?

MR GZELL:  Your Honour, we attempt to assist you in that problem

by analysing the decisions that we have been able

to find in other countries which have a bearing on

this question. Now let me say at the outset that there

are very few cases that we have been able to discover

that bear directly upon this question. There are a

couple of decisions in other jurisdictions which,

in our submission, assist our argument, but we have

found nothing directly on point. We are limited, of

course, because our major source for that activity

has been a work by Edwardes-Ker, which is a service

which digests in the English language cases that have

been decided throughout the world. That is the best

effort that we have been able to bring to the problem

that Your Honour puts to me. By looking at the digests

of decisions throughout the world on treaties

throughout the world under the various a.rticles, we

are able to bring to Your Honours a number of decisions

that may assist; a number of decisions which discuss

problems similar to those faced in the court in the

context of a treaty between two totally different

countries.

(Continued on page 14)

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MASON CJ: But normally questions of this kind are resolved

by expert evidence, or assisted by the calling of

expert evidence.

MR GZELL: There was expert evidence called in this case, but

that expert evidence was limited to the question,

"What is the position of the appellant in Switzerland

in relation to the domestic law in Switzerland.

There are cases, Your Honour, in which the courts have

said, "We should have recourse to decisions of other

courts on agreements between other countries that are

similar to this and, indeed, in one of the cases that

we will cite to Your Honours, the service that we are

using, the Ech'iardes-Ker Service, was cited by the court

as its source for the knowledge of a decision in

another country, albeit that that decision may well

have been in a different language.

The problem is not, in our respectful submission, as

difficult as it would be had there not been a common

strand that runs through the treaty. In other words,

that common strand is the adoption of the framework of

Article 7 from the OECD model, that framework utilizing

the notion that the profits of an enterprise, or the
industrial or commercial profits of an enterprise, are
to be taxed only in the resident's country. That common

thread reduces, in our respectful submission, the

problem that Your Honour Justice Brennan has, because -

it is not simply a matter of looking at totally different

concepts in other countries. It is a question of how a similar broad proposition has been dealt with in our

countries and if I go back to the submission I made a

little earlier, the use of the word "enterprise"

enforces our argument, with respect, because the notion

is that one should use a concept which is sufficiently

broad to encompass the activities of any domestic

jurisdiction and that notion enforces our argument that

one should then construe Article 7 ~ in a broad manner,

such that it captures the income arising in any domestic

law situation from the conduct of commercial activity.

Whether that commercial activity is a business in the

Australian sense, if there is a perceived Australian sense

that carrying on business requires repetitive actively,

or whether it is a commercial activity, in the broader

sense, of a venture in the nature of trade.

Could I take Your Honours back to that defintion contracting States and fasten upon those words "carried on' 1	in paragraph 3(l)(f) of the enterprise of one of the
that Their Honours in the courts below fastened upon~ In our submission, one should look at the words "carried
on by" as merely linking the two elements that constitute
the term which is being defined. The words "carried on
by", it is not simply the words "carried on", the words
"carried on by" link the two requirements in the definition

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Those two requirements being: you have an enterprise on the one hand and it is the enterprise of a

resident of the other contracting State on the other and

in our submission all those words do, "carried on by", is

to link the two concepts and they mean no more than

"undertaken by" and the words "undertaken by" could as

easily have been substituted in the definition. An.

enterprise of one of contracting States means an

enterprise undertaken by a resident of Australia. So

that, in our submission, there is nothing on the face

of that definition which would compel Australia to

utilize a perceived dichotomy in its domestic law and

implant that dichotomy upon the construction of a general

concept which general concept is to have universal ·

application and ought not to be circumscribed by

technical concepts of the domestic law of any country.

GAUDRON J: But the dichotomy does not just come from the domstic

law~does it, it comes also from the language?

MR GZELL: Except, Your Honour, that the language, or the words

"Carrying on'\ "carrying out" are used in 25A(l) in

the same context. It is simply not that one carries on

a business and carries out a profit-making scheme or

undertaking, in the Australian context, it is the

carrying on or carrying out of the profit-making

scheme or undertaking and if one goes back to

CALIFORNIAN SYNDICATE V HARRIS, the two phrases

were used in seeking to define what should have been

regarded as business income and in that context the

words were "carried on" or "carried out".

(Continued on page 16)

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MR GZELL (continuing):  In a number of cases to which

we will come, judges in other countries seem

to have said, "Yes, it is a business because

the enterprise carried out a profit-making scheme."

But none the less it was profits of an enterprise

carried on so that the dichotomy, in our respectful

submission, is not clear either in Australia

and it is not clear that there is such a dichotomy

in other countries. And because the article

has to be construed by this Court as any other

court throughout the world to give it an

international application, we would say that

one does not fasten upon the words "carried on"

contrasting to "carried out" and limit the ambit

of operation of Article 7 on that basis.

Might I simply refer to some of the indicia

which indicate that it is preferable to interpret

enterprise as the activity rather than the structure

as Their Honours in the court below did.	The
AGREEMENTS ACT itself in section llE makes

Schedule 15 have the force of law - and I need

not take Your Honours to that provision. The

AGREEMENTS ACT contains section 3(2) which is

an indication what an enterprise is broader than

a mere structure and, indeed, broader than a

business. It says:

For the purposes of this Act and the

ASSESSMENT ACT, a reference in an agreement

to profits of an activity or business shall,
in relation to Australian tax, be read,

where the context so permits, as a reference to taxable income derived from that activity

or business.

There is a contrast between activity, on the

one hand, and business, on the other. That enforces

our submission that in Article 7, when "profits"

is used it is a general term relating to the

enterprise or activity and it is broader in concept

than profits of a business. Lastly, section 4 of the AGREEMENTS ACT incorporates

the INCCME TAX ASSESSMENT ACT save for a number of anti-
avoidance provisions. So:

Subject to sub-section (2L the Assessment Act is incorporated and shall be read as one with this Act.

In the ASSESSMENT ACT there is one reference

to enterprise. It is in section 128A(l) where
it is defined but I should say its definition
is of limited value because it is defined solely

for the purpose of that division. But the definition

is a broad concept including the notion of the

activity rather than the structure.

C2Tl 2/1 /ND	16	3/4/90
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In 128A(l) the term:

"enterprise" means a business or other

industrial or commercial undertaking -

and it, again, is an indication, in our submission,

of the breadth of the notion of the term "profits

of an enterprise" in Article 7(1), profits of

an enterprise being sufficiently broad to encompass

the adventuring in the nature of trade.

If Your Honours please, point 3 in our argument

I do not wish to labour over. The passage from FOTHERGILL V MONARCH is set out in the judgment

of Mr Justice Sheppard at page 126 and 127 of

the appeal book, indicating that the convention,

the agreement in this case, like any international
treaty, should be broadly interpreted to give

it effect in an international context, citing

the earlier words of Lord Wilberforce in JAMES

BUCHANAN:

'unconstrained by technical rules of English

law, or by English legal precedent, but

on broad principles of general acceptation.'

We have set out the other references that are

referred to.	We do not need to take Your Honours
to those.	They are set out in the text in the
appeal book: the Vienna Convention;	Articles 31

and 32 are set out in the supplementary material

at page 127 to 128.

BRENNAN J:  Does the Vienna Convention have anything to

say about the instruction of the text in one

language by reference to the text in another?

(Continued on page 18)

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MR GZELL: .. Not that I am aware, Your Honour. There is a discussion -

I am told that it does. Article 32, I will refer Your Honours

to it in a moment. Article 33 has not been - - -

MASON CJ: It seems to have been conveniently omitted from

our materials.

MR GZELL:  Yes. Perhaps if I just read to Your Honours

Article 33:

When a treaty has been authenticated in two

or more languages, the text is equally

authoritative in each language, unless the

treaty provides, or the parties agree that

in case of divergence, a particular text shall

prevail. A version of the treaty in a language

other than one of those in which the text was

authenticated should be considered as authentic

text only if the treaty so provides and the

parties so agree. The terms of the treaty are

presumed to have the same meaning in each

authentic text, except where ·a particular text

prevails in accordance with paragraph (1).

When a comparison of the authentic text

discloses a difference of meaning which the

application of Articles 31 and 32 does not remove

the meaning which best reconciles the text

having regard to the object and purpose of the

treaty should be adopted.

McHUGH J:  Switzerland is not a party to the Vienna Convention

on Treaties, is it?

MR GZELL: As I understand it, that is so, Your Honour. It

does not matter, so far as this Court's approach to

the interpretation is concerned, if Articles 31 and 32

are regarded as a codification of the manner in which

treaties ought to have been approached so far as the

question of construction is concerned. We simply rely

on the Vienna Convention as indicating that the

approach that the Court should take is one of a

broad approach to the interpretative problem, bearing

in mind that it is a treaty which has universal

application.

BRENNAN J:  Does not the question of law then come down to

this, in the light of Article 33: does the German

text of the English words "enterprise carried on by

a resident" import in any way the notion of

repetitious activity? If it does, then you lose. If

it does not, then you win.

MR GZELL: Well, Your Honours, I would be heartened if that

were the case. It is, with respect, unlikely that

the German text would use words which suggested
that "enterprise" was either limited to, or not limited

to repetitive activity because of the very nature of

C2Tl3/1/FK	18	3/4/90
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the choice of a term by those responsible for

drawing up the OECD model convention, to utilize

a term that then left it to the domestic laws to determine precisely what was or what was not to be

regarded as an enterprise for the taxing purpose

there in question.

BRENNAN J: That is an argumentative assertion which could be

cured ever so easily, could it not, by looking at the

German text and telling us what it means?

MR GZELL: Well, Your Honours, I am told that we, indeed,

attempted to introduce the German text in evidence,

but it was rejected. It was in the course, I

understand, of evidence by the expert as to what the

German word in the text meant, and there was a ruling

that it should be inadmissible. Now, those are my

instructions, Your Honour. Certainly - - -

DAWSON J:  So, we are destined never to know.

MR GZELL: Well, Your Honours, it may be that, as a matter of

agreement between the parties, we will obtain a

translation of the German text and put it before

Your Honours. We certainly would not wish to deny

the Court access to a matter that is regarded as
being important, and I would certainly invite our

learned friends to indicate whether they would concur

in that course.

(Continued on page 20)

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MR SHAW:	Then we have a fight about what the translation says.
I might say, if the Court pleases, that our
instructions are that the German text does not
advance the matter one way or the other. I made
inquiries myself and I received an unhelpful answer.
Unhelpful in the sense that on the information we
were able to get it did not advance one argument or the other, the German text. What Your Honour the Chief Justice observed would, I imagine, be the case
that if there were a German text presumably if one
wanted to rely on it one should have had an expert who said, "Here is this German text and this is what it means".

MASON CJ: Well, I think the suggestion has been that the

appellant, at first instance, endeavoured to explore

the possibility of producing evidence of that kind;

took the initial steps perhaps.

MR SHAW: Well, I am not sure what the position is about that,

Your Honour.

MASON CJ:  But it may be of some assistance if the parties

were able to offer us a translation of the German text and then, perhaps, we may be able to form as

confident an impression as you have that it assists

neither party one way or the other.

MR SHAW:  I will endeavour to obtain some instructions if the
Court would like that but - - -

MASON CJ: Very well, yes. Yes, Mr Gzell.

MR GZELL:  I was referring to Articles 31 and 32 in the

Vienna Convention. They are set out at page 128.

I do not wish to draw the Court's attention to any

particular portion of it. Suffice it to say that

it confirms the submission that we make that the

approach to.the problem of interpretation is to

broadly construe to give universal application to

the text. At the top of page 3 of our written

outline we have indicated a couple of cases in which

the OECD conm1entary or decisions of other courts on

similar agreements have been utilized. His Honour

Mr Justice Sheppard referred to the SUN LIFE

ASSURANCE CO OF CANADA case in his judgment as being

indicative of the fact that the OECD model convention

ought to be used.

It is true that it was used in that case but

it was used in the case as a matter of concession by

both sides. It was used by the Swiss Federal Court,

as I understand that word to be translated, in a

decision in 1977 which is digested by Edwardes-Ker

in his International Tax Treaties Service under

Article 5 at page 63.5 which is an English translation

of presumably a decision given by the Swiss Federal

Court. We have been unable to obtain for

C2Tl4/l/DR	20	3/4/90
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Your Honours the report in that citation there

mentioned but we invite Your Honours to utilize

the summary digested by Edwardes-Ker in his

work.

The question in that case was whether a

Spanish bank, which had set up a representative

office to generate business for the Spanish bank

but without actually doing any banking business

in Switzerland, amounted to a permanent establishment

and it was held that it did not. The Federal Court -

down towards the bottom of that first page:

also held that the activities of the

representative office did not constitute

a permanent establishment of the Spanish

bank. It held that the treaty provision

should be liberally interpreted in

favour of the taxpayer. Although an

office existed, its activities were of a

kind protected by Article 5(3)(e). This
Article was based on the OECD 1963 Draft and accordingly its provisions should be

interpreted in accordance with the 1963

Commentary (which is being further

clarified in the 1977 Model) which ran in

part

and I do not think it is necessary to take
Your Honours further into the text. Suffice it
to say that the Federal Court in Switzerland was of
the view that it was appropriate in construing the
article of the Swiss/Spanish treaty to have recourse

to the OECD draft commentary, in that case the

1963 commentary.

(Continued on page 22)

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MR GZELL (continuing):  The other decision that is indicative

of an approach to looking at cases in different

jurisdictions is the decision of an Indian High Court

in 1983, digested by Edwardes-Ker at pages 48 to 52

under the heading Article 5.

This was a case in which a German company - - -

MASON CJ:	Now, I am having great difficulty in identifying page 48 in the materials we have.
MR GZELL:	I am sorry. It is difficult because the pages
are - - -

BRENNAN J: It has to be looked at under a - - -

MR GZELL: Article 5.

MASON CJ:	Yes, I have it now.
MR GZELL:	Because he continues to number from page 1 when
he gets to a new article, unfortunately.
MASON CJ:	Yes.
MR GZELL:	This was an an Indian port trust which wanted to
get a bucket wheel reclaimer so that it could
load more more easily and entered into a contract
with a German company to provide the bucket wheel
and the terms of payment were spread over a period
of time. The question was whether or not there
was a requirement to withhold tax and the first
argument that was raised was that the High Court
should not look at the question because there was
a mutual agreement proceedure similar to Article 25
in the OECD model and it was not a matter for
the courts to look at at all. It was a matter for the individual taxpayers in the countries
if they thought that the domestic taxing authority of one country was not entitled to raise the
charge to utilize the mutual agreement procedure and the court said, "No, that was not right" the court was perfectly entitled to construe
the treaty and determine for itself whether
there was a taxability in the country of source.

The question turned upon what was a permanent

establishment and it was held in the end that

it was part of the industrial and commercial

profits with no permanent establishment. The
part to which I want to refer Your Honours is

at the bottom of page 49 and over on to page 50

where the digest suggests that the court took the

view that:

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Article 18 "underlines a procedure which

is in additiion to and not in substitution

of the remedies before the domestic courts

or the tribunals. Hence the assessee was

entitled to rely on the agreement ... ".

The libability under s.9(1)(i) of

the Indian INCOME TAX ACT is, under s.4

and s.5, "subject to the provisions of

the Act" including double tax agreements ..

"A similar view was taken by the House

of Lords in OSTIME (INSPECTOR OF TAXES) V

AUSTRALIAN MUTUAL PROVIDENT SOCIETY .....

Therefore, even assuming for a moment that

all the profits of the German company are

to be deemed to have accrued or arisen

in India by virtue of s.9 of the Act, the

terms of Art.III of the Agreement prevail

over s.9 of the Act.

Section 9 was a deeming provision deeming certain

payments to have accrued in India and the point

was that that domestic deeming provision was

subject to the treaty and therefore was overridden

by Article 3.

In effect, the industrial or commercial

profits of the German company are not liable

to tax under s.9 of the Act except to the

extent permitted by Art. III ..... Was the

German company having a "permanent establishment"

in India? The word "permanent establishment"

is one of those technical expressions which

is invariably used in all international

Double Taxation Avoidance Agreements as

these are based on standard OECD models.

In.view of the standard OECD models which are being used in various countries,

a new area of genuine "international tax

law" is now in the process of developing.

Any person interpreting a tax treaty must
now consider decisions and rulings worldwide

relating to similar treaties ..... The maintenance

of uniformity in the interpretation of

a rule after its international adaption

is just as important as the initial removal

of divergencies ..... Therefore, the judgments

rendered by courts in other countries or

rulings given by other tax auth~rities

would be relevant."

Then they went on to cite from the Edwardes-Ker

Servic~ a decision in Belgium in aid of their

interpretative process and it is not necessary for

me to refer Your Honours to any more of that decision.

C2Tl5/2/SH	23	3/4/90
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MR GZELL (continuing): If one then goes to the supplementary

materials that the Court is entitled to look at in aid of the inte:rpretative process, in our submission that suppl mentary material confirms the interpretation

that we urge upon the Court and that is that "the

profits of an enterprise" in Article 7(1) or

alternatively "the assets of an enterprise" in

Article 13(3), are sufficiently broad to include

this case.

If I could take Your Honours first to Article 7(1)

in the OECD model which connnences at page 43 in the

supplementary material, Article 7(1) being at page 50

of that supple.mentary material:

The profits of an enterprise of a Contracting

State shall be taxable only in that State unless

the enterprise carries on business in the other

Contracting State through a permanent

establishment situated therein.

Similar words to the particular article in the Swiss

Agreement. Article 3(1)(c), the definition provision,

at page 47:

the terms "enterprise of a Contracting State"

and "enterprise of the other Contracting State"

mean respectively an enterprise carried on by

a resident of a Contracting State and an

enterprise carried on by a resident of the

other Contracting State;

Again, a similar definition to the particular

definition in the Swiss Agreement with which we are

concerned.

DAWSON J: But what is the exact status of the OECD model?

MR GZELL:  It is a model convention that has been agreed to

by the member nations, including Australia, as a

basis upon which they ought to enter into bilateral

agreements with other countries.

DAWSON J: To a preparatory working.

MR GZELL:  Yes, well it is not so much a preparatory working in

that sense, Your Honour, and·indeed one might think

it has more weight in the interpretative process than

the preparatory works, because this after all was

an agreed model. It was something more than the

papers leading up to the treaty. This was the result

of agreement between the member nations as a model

upon which they should act in drawing up their

individual agreements. True it is that the countries

raised derogations from and reservations to various

articles and Australia made reservations to some articles.

C2Tl6/l/CM	24	3/4/90
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For example, under Article 7 it reserved the right

to exclude insurance business, if I can take

Your Honours to the connnentary on Article 7 at page 94:

Australia would wish that -

Article 7 in the model OECD -

there be provision that will permit resort

to domestic law in relation to the taxation

of the profit of an insurance enterprise.

So Australia was saying, "We do not want to enter

into an Article 7 where an insurance enterprise is

involved"and indeed there is such a reservation in

the Swiss Agreement itself by way of protocol. If

one looks at page 41 of that supplementary material,

the protocol between Swizerland and Australia in

paragraph (2)(c):

Article 7 of the Agreement shall not apply to

profits of an enterprise from carrying on a

business of any form of insurance, other than

life insurance.

So that, in our submission, the use of the OECD model and the commentaries in interpreting is at a much

higher level than preparatory works, for the reason

that it is an agreement that one should follow the

model unless one has indicated a reservation or

derogation. So that Article 7 (1) ap.d the definition of

"enterprise of a Contracting State" in Article 3, are

to the same effect in the OECD model convention and

in the Swiss Agreement. We have indicated to

Your Honours the situation in relation to the other

treaties that Australia has. If that is a matter that

Your Honours regard as being relevant we will provide
Your Honours with the copies for each of the other

Australian treaties.

(Continued on page 26)

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MR GZELL (continuing):  We have summarized the position on

page 3 of our written submission and what one

sees is that most of the Australian agreements,

and certainly the later Australian agreements,

follow the OECD form of Article 7(1) and the

definition in 3(l)(c). There are some variations

in the earlier treaties and some slight textual

variations. There are two treaties which have a

significant difference. They are New Zealand and

the United States. In New Zealand the treaty

refers to "industrial or corrnnercial profits of

an enterprise" but then it goes on to define

industrial or corrnnercial profits as being

derived by an enterprise from the conduct of a

trade or business. So that the words used in our

New Zealand agreement would suggest that the

article is limited to business profits.

The United States agreement - that is, the

new United States agreement - refers to "business

profits of an enterprise". Now it may be that

there is no difference because it may be that one

should interpret "business profits" in a broad

way that would encompass corrnnercial activity in
an adventure in the nature of trade and the

answer may be that the same decision would flow

from the decision in this case whether it arose

under the Swiss agreement or the US agreement.

That is not necessarily a matter for the Court

to determine but we simply indicate that it should

not be assumed,in our submission,that the fact that

the words "business profits" or "a trade or business

carried on" are used in those two treaties, that

they are more limited in their scope of operation.

And to give an indication that that may be so,

there is a ruling that was made by the United States

and the United Kingdom in relation to their treaty.-

their treaty used the words "active conduct of a

trade or business" - which takes the view that

interest and dividends fall within that concept and

are not to be treated under a separate limited

article. And that is the revised - - -

BRENNAN J:	How is that going to help us?
MR GZELL:	Your Honour, it is merely indicative of the

proposition that I was advancing that one ought not

to regard the New Zealand and US treaties as being more

limited if Your Honours were of the view that that

is relevant to your determination. The reason that

we have raised it is that because concepts under

the treaties are of universal application, Your Honours

may think it relevant to know whether there are any

differences of phraseology and terminology in any of

C2Tl7/l/LW	26	3/4/90
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the other Australian agreements. There are:

New Zealand and the US, on their face, would seem

to be different from the Swiss agreement.

What we are saying to Your Honours is that you

need not decide that issue in this case, that it

ought not to be assumed that the difference of

phraseology or terminology is necessarily a

difference that limits the type of situation
covered by those treaties because it may be that

the proper approach is to regard the word "business"

in those treaties very broadly indeed. And I was

simply indicating to Your Honours that there is

an indication that the words "from the conduct of

a trade or business" in the US/UK treaty has been

construed sufficiently widely to encompass

dividends and interest.

BRENNAN J: Well, I take it a bilateral agreement has

been made at an administrative level that that is

the way it should be administered?

MR GZELL:  Except that there are provisions in the OECD model

that countries may agree upon an interpretation of

their treaty. That was done between the United

States and the United Kingdom. That having been

done, that the fact that those two governments

took that view in the interpretation of their

treaty, is a relevant circumstance, in any other

country, construing its treaty, because treaties

are of universal application and one ought to be

aware of the fact that an interpretation has been

placed upon another treaty.

(Continued on page 28)

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MR GZELL (continuing): And the fact that it is at an

administrative level does not matter, in our

respectful submission, for example, in France

BRENNAN J:  Do not let me delay you, you go ahead.

MR GZELL: Perhaps if I just finish this,Your Honour, in France,

for example, the courts do not construe treaties. It

is the minister of - one of the ministers, I will

tell Your Honour precisely who it is, the Minister of

Foreign Affairs or some such minister, who has the

jurisdiction to interpret a treaty and his construction

of the treaty is binding on the courts and the courts
are entitled to construe nnly where the matter is clear,
albeit that the courts ifi France have tended to -assUIIE a clarity
in circumstances and thereby to espouse an interpretation

of the treaty when one might not have thought it was so

clear. But, simply to go back to my point, Your Honour,

the mere fact that there is an administrative determination
between two countries as to the interpretation of the

treaty does not, in our respectful submission, mean that it is any less authoritative in the process of

determining what ought to be the universal application

of a treaty in similar terms and that revised ruling,

we have given Your Honours a copy of it, it is at

Article 7 of Edwardes-Ker, 26 to 27, I will not read it.

I have simply given it to Your Honours if Your Honours

are of the view that one should look at the terminology

in other treaties that Australia has entered into.

If I ·:could take. Your Honours to the connnen tary

itself and to draw Your Honours attention to some of

the observations that have been made in the corrnnentary

in aid of our submission that those observations in

the commentary confirm the interpretation that we urge

upon the Court The first portion of the commentary

that we think is material is at page 70 in the

supplementary material and it is the connnentary in

respect of the definition of the term "enterprise", I

have referred to it previously, but it says:

The question whether an activity is performed

within the framework of an enterprise or is

deemed to constitute in itself an

enterprise has always been interpreted according

to the provisions of the domestic laws of the

Contracting States. No definition, properly

speaking, of the term "enterprise" has therefore

been attempted in this Article.

OSTIME indicates that so far as the Connnonwealth

countries - - -

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DAWSON J: What does that mean, does it mean different things

for different contracting States?

MR GZELL:	What it means, Your Honour, is that what might be an enterprise in one country might not be regarded
as an enterprise in another.

DAWSON J: For the purposes of the same provision?

MR GZELL:	For the purposes of the domestic taxing provisions
of the two countries.
MASON· CJ:	So, in relation to this very treaty you might find
that"enterprise'might mean one thing in Australia
and a different thing in Switzerland?

MR GZELL: It might. Let me give Your Honours an example, let

us suppose that the appellant, in this case, was

acting in partnership with others in the venture that

he entered into. In Australia he would be taxed

on his individual share from the partnership, so that

Australia would regard him as the enterprise, in

our respectful submission. In another country, for

example, the - it does not matter - in another country

it might be that the partnership is the body to be

taxed, the partnership would be regarded as the

enterprise for the purpose of the operation of the

model convention, and it does not matter that there is

that difference in what is to be regarded as the

enterprise for the purpose of the operation of the

treaty on the domestic law, the same result will flow,

because in Australia, if what the appellant did in

partnership with his co-venturers amounted to an

enterprise -

MASON CJ: Now, to what extent does this particular proposition,

in paragraph 4 of the commentary, depend on the

application ·of Article 3(2)?

MR GZELL:  I am sorry.

MASON CJ:	To what extent does it depend on Article 3(2), or
subparag~aph (2)?

(Continued on page 30)

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MR GZELL:	Not at all, we would have said, because the term itself, the term "enterprise", is not a term which is defined in Australian law and is
not likely to be a term - we cannot put it any
higher than that - defined in the domestic law
of other countries. But at least we have seen
no case in which Article 3 has been used to say
"Enterprise is a term not defined in the treaty,
we have a definition in our domestic law".
MASON CJ:	So you are looking at 3(2) as speaking to a

situation in which the relevant term is the subject

of a statutory definition or a judicial decision

giving it a fixed meaning?

MR GZELL:  Yes, in a particular country. And what we say

about the failure to define enterprise in this

treaty is that it does not matter. The purpose

was to ensure that a general proposition would

fit all the facts so that the general proposition

was that regardless of what the domestic law

of Australia or Switzerland regards as the

enterprise, whether it is the activity carried

on by an individual, whether he is in partnership

with another or not or whether it is the entity

that is carrying on the activity, if Switzerland

taxes the partnership and Australia taxes the

individual partners, the concept of enterprise

and Article 7 will override those provisions

of the domestic law by requiring that the source

country forego its taxing ability in favour of

the resident's country unless there is the high

nexus of business and permanent establishment.

But, Your Honours, we certainly do not say

that the term "enterprise" is going to have different

meanings in different jurisdictions because it

is not defined in Australia, it is not defined

according to English law and we know of no authority

that suggests it has a defined meaning in any

of the civil law countries, nor are there any

cases digested by Edwardes-Ker under Article 3(2)

in relation to the concept enterprise.

MASON CJ:  I just have some difficulty in grasping the

notion that where there is no provision in the

treaty that dictates a proposition in the form

of the first sentence to paragraph 4 that somehow

or other that can be, as it were, conjured up

out of mid-air. Now, I could understand it if

it were, in fact, based on a particular provision

such as 3(2) or if it were a reflection of 3(2)

or if 3(2) was designed to give effect to that

proposition but in the absence of some such

proposition, what is the basis for that statement?

MR GZELL:  The question whether an activity is performed

within the framework of an enterprise or is deemed

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to constitute in itself an enterprise is left.

What it is saying, with respect, is given that enterprise is a term that does not require a definition in the domestic States, we leave it

to the individual States to determine whether,

in the application of its law, its law is going

to be applied to an activity or to a framework.

The question whether an activity is performed

within the framework of an enterprise or is deemed

to constitute in itself the enterprise is left

to domestic law.

So that the analogy that I gave Your Honour

is, with respect, the type of situation which

is addressed in those comments,that it is for

to tax: is it going to bring to tax the activity itself or is it going to bring to tax the profits of theactivity itself or is going to bring to tax the structure that generated those profits?	the domestic law to determine what it is going the framework of the taxing legislation in the
contracting States, the supervening concept that
whatever framework is used it shall give way
prevails.

DAWSON J: That is one difference. Another difference

is that an enterprise may be an ongoing thing

or it may be a single undertaking. Does this

paragraph 4 mean that that is determined according

to the' domestic laws of the contracting States?

MR GZELL:	We would submit not, Your Honour.
DAWSON J:	Why the difference?
MR GZELL:	Because we would submit that one goes to

Article 7 and one says of Article 7, it is to

be interpreted broadly to require the source

State to forego its taxing, whether it taxes

an adventure in the nature of trade or only repetitive

business activities is beside the point. Whatever

it taxes, if it is the profits from an enterprise,
it is to forego its domestic exigibility to tax

in favour of the country of residence.

(Continued on page 32)

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DAWSON J:  In other words, it must be given a wide enough

interpretation to achieve the objects of the

agreement.

MR GZELL:  Quite. My attention has been drawn to part of the

commentary in respect of Article 7, to which I

suspect I was coming shortly, which bears upon this

point, and it is at page 84, and perhaps if I jump to

page 84 to deal with it.- It addresses the notion

that commerce can activate itself in many different

ways, and there is no attempt to be exhaustive

in relation to the rules. Perhaps if I read

paragraph 1 and 2:

This Article is in many respects a continuation

of, and a corollary to Article 5 -

pausing there, Article 5 is the article which

defines the concept of "permanent establishment".

The permanent establishment criterion is

commonly used in international double

taxation conventions to determine whether a

particular kind of income shall or shall not

be taxed in the country from which it originates
but the criterion does not of itself provide a

complete solution to the problem of the double

taxation of business profits; in order to prevent

such double taxation it is necessary to

supplement the definition of permanent establishmen~
by adding to it an agreed set of rules of

reference to which the profits made by the

permanent establishment, or by an enterprise

trading with a foreign member of the same group

of enterprises, are to be calculated. To put

the matter in a slightly different way, when an

enterprise of a Contracting State carries on

business in the other Contracting State the

authorities of that second State have to ask

themselves two questions before they levy tax

on the profits of the enterprise: the first

permanent establishment in their country; if the question is whether the enterprise has a	answer is in the affirmative the second question
is what, if any, are the profits on which that permanent establishment should pay tax. It is
with the rules to be used in determining the answer to the second question that Article 7 is
concerned. Rules for ascertaining the profits
of an enterprise of a Contracting State which is
trading with an enterprise of the other Contracting
State when both enterprises are members of the same group of enterprises or are under the same
effective control are dealt with in Article 9.

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It should perhaps be said at this point

that neither Article is ~rikingly novel

or particularly detained. The question of what

criteria should be used in attributing profits

to a permanent establishment, and of how to

allocate profits from transactions between
enterprises under common control, has had to be
dealt with in a large number of double taxation

conventions and it is fair to say that the

solutions adopted have generally conformed to a

standard pattern. It is generally recognised

that the essential principles on which this standard

pattern is based are well founded, and it has been

thought sufficient to restate them with some

slight amendments and modifications primarily

aimed at producing greater clarity. The two

Articles incorporate a number of directives.

They do not, nor in the nature of things could

they be expected to, lay down a series of

precise rules for dealing with every kind of
problem that may arise when an enterprise of one

State makes profits in another. Modern commerce

organises itself in an infinite. variety of ways,

and it would be quite impossible within the

fairly narrow limits of an Article in a double

taxation convention to specify an exhaustive

set of rules for dealing with every kind of

problem that may arise.

(Continued on page 34)

C2T20/2/FK	33	3/4/90
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MR GZELL (continuing): Just pausing there, the similar

sort of notion, in our respectful submission,

has been adopted in using the concept "profits

of an enterprise" so that one does not in

creating the model restrict oneself to a set

or a more detailed concept because modern commerce

does organize itself in a variety of ways and

one would not expect a general provision to

do more than indicate "the policy" that regardless

of how commerce organizes itself and regardless

of how the taxing country raises its tax, the

general proposition is to prevail.

MASON CJ:	You find the same statement over on the next
page, under paragraph 1, in particular, the
sentence commencing "First".
MR GZELL:	Yes.

That an enterprise of one State shall not

be taxed in the other State unless it carries

on business in that other State through

a permanent establishment situated therein.

The fact that it is couched in that negative

form supports the argument that we advanced

as a matter of interpretation, that is, it is

only if the nexus to the country of source is

sufficiently fixed, the country of source should

be entitled to tax.

The same proposition is contained at page 73

of that material in the first paragraph under

Article 5:

The main use of the concept of a

permanent establishment is to determine

the right of a Contracting State to tax
the profits of an enterprise of the other

Contracting State.	Under Article 7 a
Contracting State cannot tax the profits
of an enterprise of the other Contracting
State unless it carries on its business
through a permanent establishment situated
therein.

And we draw comfort from the manner in which

that is couched. It is couched in that form.

The decision of the majority in the court below

would say that you tax an enterprise unless

it carries on repetitive activities in the nature

of business but does not have a permanent establishment.

In our respectful submission, that limited interpretation

runs counter to the general propositions that

the country of source does not tax unlessthere

is that nexus with it which is regarded ·as a

C2T21/l/SH	34	3/4/90
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sufficient affectation upon its economy to

entitle it to tax. Mr Justice Northrop, in

his dissenting judgment, in our respectful

submission, adopted that sort of approach at
pages 99 to 100 of the appeal book and we would

submit rightly so.

His Honour said:

The policy behind the Agreement

is to avoid the imposition of double

taxation with respect to taxes on income.

That is a stated purpose of the Agreement.

If possible, the proper construction of

the Agreement should be consistent with

that policy or purpose. The Agreement

is based on the major premise that the

country of residence of the taxpayer,

whether an individual, a company or a

group of persons, should have the right

to tax the taxable income of that person,

not the country of source of that income.

There are a number of exceptions to that

major premise. Some of these exceptions

have been referred to already. They include

the case where the enterprise carries on

business through a permanent establishment
in the country of source and where the

income derives from real property or related

interests in the country of source. Special

provisions apply with respect to entertainers
where the country of source has the power
to tax. Special provisions apply with
respect to dividends; Article 10. The
general principle, as was said earlier in

these reasons, appears to be that where there

is a sufficient nexus between the income

on the one hand and the country of source

on the other, the country of source has the

right to tax that income.

(Continued on page 36)

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MR GZELL (continuing):

The agreement specifies matters which

determine sufficient nexus. In this context,

it is interesting to compare the results

flowing from the application of the Agreement

depending upon the meaning to be given to
the word enterprise. This, if an enterprise
is construed to mean a structure or an

entity attached to a business being carried

on in say, Switzerland, and that enterprise

receives income from activities within Australia

but where it does not have a permanent

establishment in Australia, it would be
entitled to the benefit of the Agreement.

Hence, if the appellant had established the

facts to justify a finding that his activities

in Australia had been connected with his

business in Switzerland, he would not have

been liable to Australian tax. On the other

hand if a person, being an individual resident

in Switzerland, purchased in Australia shares

in an Australian company, dividends received

would come within Article 10 and he would

receive some benefit. If that person then sold

the shares within 12 months of purchase and in

so doing made a large profit, that person would

be liable to Australian tax unless Article 13(3)

applied. It is difficult to see any rationale why that person should not have the benefit of the avoidance of double taxation to the same

extent as the business being an enterprise but

not having a permanent establishment in

Australia.

The majority, or the effect of the majority view,

was the converse and that was that it is only if the

activities that you are conducting in Australia are

sufficient to amount to a business carried on in

the Australian sense that you obtain the benefit of

the treaty.	So that if one imagined a Swiss
resident coming into Australia, purchasing a block of

land, constructing a high-rise office building in

a city and then selling it, the effect of the majority

decision would be:  if that does not amount to the

repetitive conduct of a business you do not get the

benefit of the treaty regardless of the size of the

profit made and regardless of the nature of the

activity being carried out and it would seem - - -

McHUGH J:  But may not the approach of the majority be open

to criticism, but it does not help you. I must say,

speaking for myself at the moment, you have not

persuaded me that Article 7 extends beyond business

profits. You do not seem to have any argument that

this was a business profit in any event.

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MR GZELL:	Well, Your Honour, we do and I will come to that.
McHUGH J:	What I was going to say about the majority: it

may be that Article 7 does deal with one-off

transactions but it has got to be a business profit.

MR GZELL:	We would go further than that, Your Honour, and
say, regardless of whether you give it the tag

"business- profit" if it is a profit that arises from

carrying out a connnercial activity - an activity

in the nature of a business deal - that is sufficient

because one would not imagine that the OECD model

wouid limit its operation to business profits in

the sense of repetitive activities and leave it to

some other article to pick up the elimination of

double taxation in relation to the lesser activites.

..

The suggestion that Article 21 does that is,

with respect, in our submission, wrong. Article 21

is merely there as a catch-all provision for

anything that is left over. So, we would submit

to Your Honour that there are two ways in which one

approaches Article 7(1), in our submission. The

first one is to highlight the difference between

profits and business and say profits is broader

than business. The second one, which I have not

got to yet, is to say, "Well, the other alternative

approach is that'busines~ is to be interpreted in

the treaty in a broad fashion and 'business' will

encompass the activites of an adventure in the

nature of trade because - "

McHUGH J:  When Mr Justice Northrop said that the policy

behind the agreement was to avoid the imposition of

double taxation with respect to taxes on income,

I am not sure that that is right, is it, because

in the articles you have income from real

property; you have business profits; you have interest;

you have dividends; you have royalties and you

have income from personal services, it does not

seem to me to be exhaustive of income but rather to

select particular classes of income as being ..... (Continued on page 38)

or am I wrong about that?

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MR GZELL:  We would submit to the contrary of that proposition,

Your Honour. We would submit that the intention

of the treaty is to cover the field to eliminate

double taxation and it achieves that intention by

taking two general concepts, the Article 7 concept

in relation to income or profits of commercial

activity and Article 14 in relation to income or

profits from conducting personal exertion activities.

When I say income or profits, our AGREE:HENTS ACT

says, "Where in a treaty you have protits,read income",

and then the general planks, in our submission, are

Article 7 and Article 14, and then there are a series of more specific activities that are dealt with like

artists visiting another country and the like from

the point of view of the personal exertion side.

From the point of view of the commercial activities

side there are then specific instances like dividends,

interest, royalties, alienation of real property or
profits or income arising from real property, but we

would say that in order to achieve its purpose and its purpose is to eliminate double taxation, one must read

the articles broadly, otherwise that purpose fails.

DAWSON J: And then there is the general catch-all, is there not?

MR GZELL:  There is a general catch-all, but the general

catch-all does not suggest that one should read down

Article 7 or Article 13. On the contrary, the

general catch-all is not meant to pick up some

fragmented part of commercial activity or personal

exertion activity, they being addressed by the general

Article 7 and 14. What the general catch-all

provision is meant to pick up are the odd sorts of

situations that have not been covered. There is some

discussion of lottery winnings, for example, in some

cases. Some of the treaties specifically exclude

lottery winnings. There are the cases dealing with

pensions arising from activity in one country and the

like, but in our respectful submission, there is no

suggestion that Article 21 was meant to have a wide

ambit. It was meant to have a narrow ambit to catch

up anything that had been overlooked and one should

approach the problem of interpretation on the

supposition that the general articles in the model

cover the field.

McHUGH J:  But what about somebody who is on workers'

compensation payments,gets it .every week, goes back to

Switzerland, what happens to him?

MR GZELL:  There is a particular article in some of the treaties,

I am not sure whether the Swiss Agreement has a

particular article dealing with pensions -

McHUGH J: Well it is not really a pension though, is it?

C2T23/l/CM	38	3/4/90
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:MR GZELL: Article 18:

Article 19, pensions and other similar	Subject to the provisions of paragraph 2 of
remuneration paid to a resident of u Contracting State in consideration of
past employment shall be taxable only
in that State.

That does not answer Your Honour's question of the

workers' compensation type of payment.	I will have
a look at that.

McHUGH J: However you say - I suppose you would say the

worst from your point of view the existing categories

seem to go very close to covering the field anyway.

MR GZELL:  We will have a look at that, Your Honour, because we

will have a look at the discussion under the article

in the OECD model that deals with that sort of

situation. In some of the earlier ones there was not

an article that dealt with pensions and the like and

the consequence was that that was regarded as

falling under Article 21, but the process sincel963 to 1977

seems to have been to include some more particular

areas that would cover specific problems that have

arisen in the interim. The commentary on Article 18,

the pension article, says this:

Some States consider pensions paid out under

a public pension scheme which is part of their

social security system similar to Government

pensions. Such States argue on that basis that

the State of source, i.e. the State from which

the pension is paid, should have a right to

tax such pensions. Many conventions concluded

by these States contain provisions to that

effect, sometimes including also other payments

made under the social security legislation of

the State of source. Such payments are for

and benefits on account of industrial injury.

Contracting States having that view may agree

bilaterally on an additional paragraph to the

Article giving the State of source a right to

tax payments made under its social security
legislation. A paragraph of that kind could
be drafted along the following lines:

instance sickness benefits, unemployment benefits

And then it goes on. So that the intention was that payments similar to those that Your Honour mentions

should come within the compass of the OECD Article 18.

MASON CJ:  Now do you have any decisions from courts of other

countries indicating that a profit of this kind is

a business profit?

C2T23/2/CM	39	3/4/90
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MR GZELL:  Your Honour, I hesitate to say directly yes to that.

As a matter of interpretation of the decisions we

say they assist us and if I take Your Honours firstly

to the MINISTER OF NATIONAL REVENUE V TARA

EXPLORATION. We have provided Your Honours with the

decision in the Supreme Court of Canade and also
the decision in the court below, the Exchequer Court

of Canada. It is necessary for me to refer

Your Honours to the court below in a number of respects,

but if I take Your Honours first to the report of

the decision in the Supreme Court of Canada, one will

see that what happened in this case was very similar

to the facts of the decision which is before this

Court.

(Continued on page 41)

C2T23/3/CM	40	3/4/90
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MR GZELL (continuing): If one looks at page 136 in the judgment

of Mr Justice Abbott, he says:

The respondent was incorporated in 1953 .....

its principal business was that of exploring

for minerals in Ireland. At all material

times, the management and control of the

respondent ..... was in Ireland where all

the directors were resident. The learned

trial Judge found as a fact that the

respondent was not a resident of Canada and

counsel for the Minister did not challenge

that finding.

Respondent raised capital in Canada for mining

development in Ireland and, in 1964, used some

of the momey not immediately required for such

purposes to buy shares of Gortdrum Mines Limited,

another closely related company that had just

been incorporated in Ontario to develop mining
properties in Ireland adjacent to those of

respondent.

Save as set out below, the respondent has not

purchased any shares, stocks or bonds or

other securities. In 1964, the respondent

purchased -

and the purchases are then set out -

The decisions to purchase all these shares

were made in Ireland.

In 1965 and 1966, respondent sold the shares

of Gortdrum Mines Ltd. at a substantial profit

which was assessed for income tax by the

Minister. On appeal to the Exchequer Court the respondent's appeal was allowed and the

assessments for 1965 and 1966 taxation years

referred back for reassessment -

et cetera. Then, His Honour, says: 

There are only two points in issue on this

appeal (1) whether the profits realized by

respondent were taxable profits under s.2(2) -

Now, it is necessary for me to go back to the

Exchequer division report of the case, to indicate to

Your Honours the significance of what 2(2) was all

about. I take Your Honours, firstly, to page 6371

in the report in the lower court. One will see in

the judgment of the president that he sets out, in

the second colunm of page 6371, he sets out a

definition in the domestic law of Canada of the

meaning of the word "business":

C2T24/l/JL	41	3/4/90
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"business" includes a profession,

calling, trade, manufacture or undertaking

of any kind whatsoever and includes an
adventure or concern in the nature of

trade but does not include an office or

employment.

And then, if I take Your Honours over to page 6372, down at the bottom of the second column of 6372,

the Canadian INCOME TAX ACT provided, in section 2(1):

An income tax shall be paid as hereinafter required upon the taxable income for each

taxation year of every person resident in

Canada at any time in the year.

And then 2(2), which is the provision referred to in the

supreme court:

Where a person who is not taxable under

subsection (1) for a taxation year .....

(b) carried on business in Canada at any

time in the year,

an income tax shall be paid -

and the question was whether this adventure, in

the nature of trade in the purchase and sale of
the shares was to be regarded as carrying on business
in Canada for the purpose of section 2(2)(b), by

reason of the definition in section 139(l)(e) and

His Honour at first instance reluctantly came to

the view that it was not. At least that is the way

we read it.

At page 6376, in the first column about half-way

down the page:

With great doubt as to the correctness of

my conclusion, I am of opinion that

section 139(l)'('e) does not operate to make

a non-resident person subject to Canadian

income tax in respect of a profit from an

adventure that otherwise does not amount

to, and is not part of, a "business". With

considerable hesitation, I have concluded

that the better view is that the words
"carried on" are not words that can aptly be

used with the word "adventure". To carry on
something involves continuity of time or
operations such as is involved in the ordinary

sense of a "business". An adventure is an

isolated happening. One has an adventure as

opposed to carrying on a business.

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MR GZELL (continuing):  I pause there to say His Honour

is saying that in the context of the domestic

law of Canada as to whether or not a non-resident

is carrying on business in Canada.

His Honour goes on then to consider - perhaps

if I just pause there and take Your Honours back

to the supreme court because what the supreme court

said about that observation is contained at

page 137 in the supreme court. What was there

said was:

As to the first of the questions, the learned trial Judge appears to have proceeded

on the assumption that the profits in question

were taxable under s.2(2) as profits from an

adventure in the nature of trade.

That appears to us to be a misreading of what the

primary judge said. But then the supreme court

goes on to say, or His Honour goes on to say:

I agree with that assumption and, in my view,

such profits would have been taxable income

in the hands of a resident of Canada.

No doubt about that because there is no doubt that

they would have been taxable in the hands of a

resident of Canada because 1(1) brings to account

income generally in respect of a resident and that

incorporates 139(1)(e). So that the position in the

appellate court is somewhat confusing on that issue

and that is why I hesitated when I said - - -

MASON CJ: Confused might be a better word.

McHUGH J: Extraordinary, even.

MR GZELL:  Well it gets better for us though, with respect,

as we go on because that was dealing solely with

the question of whether or not there was an
exigibility to tax in the domestic forum.	The next

question was: if there was an exigibility to tax

in the forum, do you get treaty protection?

And that is the important question from our point of
view.

In the lower court this was said at page 6377.

Perhaps before I do that I should indicate the nature

of the exemption provision in the Canadian treaty.

That appears at page 6376, in the second colurrm, paragraph 1 of Article III of the agreement:

C2T25/l/LW	43	3/4/90
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The industrial or commercial profits of an

Irish enterprise shall not be subject to

Canadian tax unless the enterprise is engaged in trade or business in Canada through a permanent establishment situated

therein.

And then, in paragraph (g):

The terms "Irish enterprise" and "Canadian

enterprise" mean respectively an industrial

or commercial enterprise or undertaking carried

on by a resident of Ireland -

So for our purposes the definition of "Irish
enterprise" is the same as the definition with which

Your Honours are concerned because it did link the

concepts with those words "carried on". And,

notwithstanding that, the primary judge and the

supreme court were of the view that this was the

profits of an enterprise carried on.

At page 6377, the primary judge, about two-thirds

of the way down the first colunm:

If, as I assume for the purposes of this part

of my judgment, the words "carry on" an
adventure in the nature of trade are apt to

include the appellant's share transactions in

Canada, it follows that the words in Article III,

"commercial enterprise or undertaking carried on"

by a company are apt to include those transactions.

So that while,on the one hand,His Honour is saying you do not have an actual carrying on of business for domestic law purposes, none 'the less·, you have a

carrying on of an adventure in the nature of trade

and that is sufficient to amount to commercial
enterprise or undertaking carried on for treaty purposes.

And that enforces the proposition that we have been

advancing, that one nrust adopt a broad approach to

the interpretation of what is commercial or industrial

profits or the profits of an enterprise.

So, notwithstanding that there was no business, the primary judge had no difficulty in concluding

that there was, none the less, a commercial enterprise

carried on and, in consequence, treaty protection was

available.

In the supreme court the same position was arrived

at. At page 137, His Honour sets out Article III

and the definition and then he goes on at page 138:

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All management and executive decisions

relating to the conduct and control of the

respondent's business were taken in Ireland.

The respondent had no employees at its head

office in Toronto, and no person resident

in Canada had the authority to contract or

conduct business on its behalf.

Although the respondent maintained a bank account in Toronto, most decisions with regard to the writing of cheques on this account

emanated from the president of the respondent,

who was resident and domiciled in Ireland at

all material times.

(Continued on page 46)

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MR GZELL (continuing):

An employee of the respondent's

accountant in Toronto, in charge of

accounts payable, had authority to

co-sign cheques without obtaining

approval from Ireland for routine

administrative accounts. On such

occasions, approval was obtained

from the respondent's solicitor in

Toronto, who in turn obtained the

requisite approval from Ireland.

I doubt whether the office in

Toronto was a "permanent establishment"

within the definition of that term

contained in the treaty. It seems to

have been little more than an office

maintained to enable the respondent
to comply with the requirements of
the CORPORATIONS ACT. In any event,
my opinion is that the profit made on
the purchase and sale of the Gortdrum

shares was not "attributable" to such

establishment. The decision to

purchase and sell the shares was made

by the management of the respondent in

Ireland. No one resident in Canada was

authorized to make that decision.

I would dismiss the appeal with costs.

And while that judgment is very short, it

none the less contains within it the approval of the

concept in the lower court, because the second

question upon which the supreme court had to deal

was whether such profits were exempt from tax

by virtue of the double tax agreement.

MASON CJ: What about the later decision to which

Edwardes-Ker refers, PLACREFID? There is no need

to go to it unless it throws light on the question.

MR GZELL:  I do not think it does. In fact, we have it.

If Your Honour looks at page 6 of our submissions, we have summarized what PLACREFID determined, and

we have provided Your Honours with copies of the

decisions, but in that case there was a

disastrous real estate venture by a whole series of

Italian gentlemen in Canada. A company was set up

and it had got to the stage where there was a

default under a second mortgage. So, the Italian

gentlemen had a Panamanian company set up which was

controlled in Switzerland, and its job was to go into

Canada and to salvage what they could from the debacle, and this company,which was held to be not a Canadian

resident, entered into an arrangement with the second

C2T26/l/FK	46	3/4/90
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mortgagee to share the profits emerging

from the exercise by the second mortgagee of

powers of sale. And there was a provision in

the agreement that the second mortgagee could

buy out the interests of this Panamanian company under the agreement, by paying a certain sum of money, which it did. It bought

it out and the question was whether they were

industrial or commercial profits, and it was

held that they were. It was held that the

arrangement between them - or, to share the

salvage from the venture was held to be carrying
on business and not merely an adventure in the

nature of trade.

MASON CJ: That is rather different.

MR GZELL:  Yes, and I do not suggest that any of those - the

closest case we have is the decision that I have

referred Your Honours to. I will not concern

Your Honours by taking you to the others, if it

suffices for me merely to mention what those other

cases decide. The other case that we had referred

to, after TARA, was TETRA PAK, and in TETRA PAK

there was a company which made cardboard packages
for drinks and the like, and its main business

outside South Africa - I am wrong about my

countries here - its main activity outside Rhodesia,

it being a Swedish company, was the manufacture of

the cardboard for use in these products. What it

did in Rhodesia was simply to lease the machines

into Rhodesia. No other activity whatsoever. It

simply received remuneration in respect of the

leasing of these machines, and that was sufficient

to amount to commercial profits of an enterprise for

the purpose of the treaty and treaty protection

was granted.

We do not pretend that the facts are similar to

this case, except that limited field of activity,

simply leasing a machine into another country and

receiving rental therefore, was none the less held to

be commercial profits for the purpose of the treaty.

Your Honours, at page 4 we go on to deal with the

question whether there is, in fact, a perceived meaning

for the words "carried on", and the first proposition

we advance is that, even if there is, and if there is

that perceived dichotomy in Australian tax law, then

Australian tax law ought not to be imposed upon the

treaty as a matter of course, because the treaty is

meant to have universal application. We then suggest

that the dichotomy does not appear to have worried

at least those who considered the decision in DOWNING,

and we have given you both the decision of the

Supreme Court of South Africa in DOWNING, and the decision below, because, essentially, in OO'WNING, it was

decided that profits emerged from a carrying out of an activity but

that none the less am:ru:nted to an enterprise carried on.

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MR GZELL (continuing):  So that there did not seem to be

much problem in the minds of Their Honours about

a dichotomy between "carried out" and "carried

on".

In the supreme court, the respondent had

emigrated from South Africa to Switzerland.

He was obliged to leave his property behind.

The management of his share portfolio was undertaken
by a broker and considerable profits emerged

and the question was whether those profits were

subject to tax in South Africa or under the treaty

whether he was entitled to be taxed only in his

new country of residence, Switzerland.

Looking at page 250 about half-way down

the headnote:

The Special Court held that the amounts

in issue constituted income earned in the

carrying out of a scheme of profit-making

but that, in terms of the Convention, the

said amounts were not subject to South African

tax. The correctness of this latter conclusion

was the sole issue in the appeal to the

Appellate Division.

And in the appellate division it was held that

they were not liable to tax in South Africa because

of the terms of Article 7(1) in the treaty:

unless respondent can rightly be said to

have carried on business in South Africa

'through a permanent establishment situated

therein' -

he is not liable to tax in South Africa.

In the court below, at page 32, down the bottom of the page:

Because I have come to the conclusion that	the appeal succeeds on the alternative ground
of objection and appeal, founded upon the
terms of the aforesaid convention between the Republic and the Swiss Federation (to
which I shall henceforth refer as the
"Convention") it is not strictly necessary for purposes of this judgment to decide
the issue whether the Secretary was wrong
in regarding the profits as income earned in the carrying out of a scheme for profit-
making.

And then, at page 36, after citing the AFRICAN

LIFE INVESTMENT CORPORATION case, he went on:

C2T27/l/ND	48	3/4/90
Thiel(2)

Giving full weight to these factors we have
come to the conclusion that in all the
circumstances of the case, and more particularly
having regard to the scale and degree of

the operations, to the multiplicity of the

transactions and to the many transactions

over a lengthy period in which the purpose

and intention appear to have been to obtain

profit on sales, the profits were justifiably

regarded by the Secretary as receipts of revenue rather than as capital receipts.

While we accept that the appellant was concerned

to ensure that he received sufficient dividend

income from shares, we are satisfied that

that was not the sole or dominant purpose

or intention in the acquisition of and dealing

in shares. The profits made were not

"fortuitous and unforeseen" but were made

pursuant to a definite purpose -

So, at page 36 the decision is given confirming

the view that this was, indeed, income earned

in the carrying out of a scheme for profit making.

At page 38 he then goes on to deal with the treaty

problem. About half-way down page 38:

Article 3. 1.(f) defines the term "enterprise

of a Contracting State" and "enterprise

of the other Contracting State" and it is

clear from that definition that the words

"profits of an enterprise of a contracting

State" in Article 7 would include profits

made by the appellant, as a resident of

Switzerland, in the carrying on of a business in the Republic.

No problem about the notion that the carrying

out of the profit -making which led to the income

is none the less, for the purpose of that article,

the carrying on of a business.

Article 7 deals with "business profits"

which, it was contended by Mr Kirkup, who

appeared for the Secretary, correctly described

the profits made by the appellant in the buying and selling of shares. The first paragraph of that Article reads as follows:

"1. The profits of an enterprise of a

Contracting State shall be taxable only
in that State unless the enterprise carries
on business in the other Contracting State

through a permanent establishment situated

therein.

C2T27/2/ND	49	3/4/90
Thiel(2)

MR GZELL (continuing):  I need not read the section. Page 39:

It is clear that the agreement that such

profits shall be "taxable only" in that

State" applies only to a case in which
the Swiss enterprise carries on the
business otherwise than through "a permanent

establishment" situated in the Republic.

The question whether in carrying on the

enterprise of dealing in shares the

appellant did so through a permanent

establishment in the Republic, is at

issue between the parties.

So that His Honour was not concerned by any dichotomy between 'carrying on"and "carrying out''.

Interchangeably, income arising from carrying out

a scheme for profit making is regarded as

carrying on an enterprise and carrying on business

in respect of Article 7. In the appellate court,

at page 256, about half-way down page 256, after

referring to the definition which deals with "an

enterprise carried on", it is said:

Applying these definitions to art 7(1) and
adapting them to the facts of this case, this

must be read to provide that the profits of

an enterprise carried on by a resident of

Switzerland shall be taxable only in
Switzerland unless thatperson carries on
business in South Africa through a permanent
establishment situated therein. If this

person carries on business in this way then

his profits may be taxed in South Africa, but

only to the extent that they are

attributable to that permanent establishment.

I need not trouble Your Honours with the

remainder of the judgment in respect of the

"permanent establishment". Suffice it to say

so far as the two court~ that there considered

those facts were concerne~ there was no dichotomy

in their minds between the notion of "carrying on"

and "carrying out". They were used interchangeably

and, indeed, profits emerging from carrying out a

scheme of profit making were regarded by them as

business profits from the carrying on of an

enterprise.

At the bottom of page 4, we raise the submission

that Article 3(2) only applies if there is a term

which is undefined and, in our submission, the
phrase "carried on by" is not a term for the purpose

of Article 3(2). Article 3(2) has defined the

term "enterprise of a contracting State" but the

simple phrase that is used "carried on by" in that definition is
not, in our sub:n:i..ssion, a term which y;ould warrant the exercise

under Article 3(2) of going to the danestic law for a definition

of a term.

C2T28/l/DR	50	3/4/90
Thiel(2)

MR GZEIL (continuing):  We make the submission that the

dichotomy between "carrying on" and "carrying

out" that does exist in Australian tax law is

in the different context of section 25A(l) and

its forerunners and the decision to which we

refer Your Honours is that oft quoted statement

in the PREMIER AUTOMATIC TICKET ISSUERS LTD V

FEDERAL COMMISSIONER OF TAXATION, (1933) 50 CLR 268

at page 297 to 298. About half-way down page 297:

The question then arises whether the

sum so derived should be considered as

income or capital. By Act No.SO of 1930,

(ba) was inserted in the statutory definition

of "income" as from 1st July 1922. This

paragraph defines income to include any

profit arising from the sale by any person

of any property acquired by him for the

purpose of profit-making by sale or from

the carrying on or carrying out of any

profit-making undertaking or scheme.

It is important to note, of course, that both

phrases are used in the second limb and both

phrases are used in relation to a profit-making

undertaking or scheme and assuming that the

second limb has an operation different from

25(1), then it presupposes that the phrase

"carrying on" and "carrying out" are appropriate

in respect of something that does not amount

to repetitive activity of business.

(Continued on page 52)

C2T29/l/SH	5 1	3/4/90
Thiel(2)

MR GZELL (continuing):

The adoption of this provision probably has

no more effect than to give legislative

authority to the tests propounded and

applied in decision ..... In RUHAMAH PROPERTY -

where -

the rule was restated:  "The principle of

law is that profits dervied directly or

indirectly from sources within Australia in

carrying on or carrying out any scheme of

profit-making are assessable to income tax,

whilst proceeds of a mere realization or change

of investment or from an enhancement of

capital are not income nor assessable to

income tax.

Quoting MELBOURNE TRUST case and DUCKER and BLOCKEY
and NEWMAN.

Their Honors added: "In our opinion the

authorities show that the objects and powers of

the company contained in its memorandum and articles of association are not decisive of the question whether the sale was an operation

of business in carrying out a scheme of
profit-making, but that a consideration of all
the matters advanced by the company was relevant
to a determination of that question.

The criterion, which the Legislature has now adopted and established, was formulated by the

Courts in the absence of any statutory direction

upon the way in which capital profits may be

distinguished from income profits. So far as it

lacks precision or is uncertain in its application,
the cause is to be found in the powerlessness of
the Courts to do more than state a wide general

proposition and to apply it as each case arose.

The statement of the proposition was not a

definition, but rather an explanation of principle.

No doubt, as the language of the statute it must receive a more literal application. It is not

easy to say whether the expres~ion "profit-making

by sale" refers to a sole purpose, or a dominant

or main purpose, or includes any one of a number
of purposes. The alternative "carrying on or
carrying out" appears to cover, on the one hand,
the habitual pursuit of a course of conduct, and,
on the other, the carrying into execution of a
plan or venture which does not involve repetition

or system.

C2T30/l/JL	52	3/4/90
Thiel(2)

MR GZELL (continuing):  We say that that is a different

context from the notion of whether or not an

enterprise is carried on by a resident of another

the facts in that case were not dissimilar from those here. In that case a company had been

contracting State. The CALIFORNIAN COPPER

established and it wa:s clear from a note that was

added that the evidence established to the satisfaction

of the Cormnissioners that the property purchased by

the company was acquired with the object of being

resold. The company acquired this property. It then

sold the property to another company in consiaeration of the issue of shares in that other company and then proceeded to reduce capital and to satisfy the

reduction by an in-specie distribution of the shares
in the new company to its shareholders and that was
held to amount to a business.

The appropriate paragraph which uses both the phrases is the oft-quoted passage at pages 159 to 160:

It is quite a well settled principle in

dealing with questions of assessment of

Income Tax, that where the owner of an

ordinary investment chooses to realise

it, and obtains a greater price for it than

he originally acquired it at, the enhanced

price is not profit in the sense of

Schedule D of the IMCOME- TAX ACT ..... But it

is equally well established that -

I am told that I have cited to Your Honours the wrong page.

BRENNAN J: Page 165, it is, is it not?

MASON CJ: Yes, 165 to 166.

(Continued on page 54)

C2T31/l/DR	53	3/4/90
Thiel(2)

MR GZELL:  Thank you, Your Honour. Yes, 165.

But it is equally well established that

enhanced values obtained from realisation

or conversion of securities may be so

assessable, where what is done is not merely

a realisation or change of investment, but

an act done in what is truly the carrying

on, or carrying out, of a business.

And both the terms are used and they apply equally,

in our submission, to the facts of this case.

That portion of that judgment has been cited with approval in this Court both in WHITFORDS

BEACH and in MYER and we also give Your Honours a reference to BLOCKEY where the dichotomy does

not appear to have been regarded as significant.

Then, finally, on the question of whether or not 3(2) of the agreement requires the imposition

of a definition from Australian domestic law,

we would say that even if Your Honours are againstus

on those propositions and you are of the view

that there is a term with a defined meaning in

Australian law that defined meaning drawing a

distinction between carrying on repetitive activities

and carrying out an adventure in the nature of

trade then, in our respectful submission, the

context would require that that definition not

be adopted to give efficacy to the purpose of

the convention.

In that regard, the context ought not to

be confined to the Vienna Convention notion of

context. In Article 31, at page 128 of the

supplementary material, paragraph 2 says:

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 connex.ion with the
conclusion of the treaty and accepted by
the other parties as an instrument related
to the treaty.

C2T32/l /ND	54	3/4/90
Thiel(2)

MR GZELL (continuing): If, in Article 3(2), "context"

were meant to be confined to the concept in the

Vienna Convention, then one would not look

beyond the terms of the treaty itself. That cannot, in our respectful submission, be the

meaning of the word "context" in Article 3(2)

and in the article by Avery Jones and others on

The Interpretation of Treaties, that stance

is taken at page 104, under the heading

"Conclusion":

We can sununarise the position under the

Vienna Convention by saying that one starts

with a narrow meaning of context, essentially

the internal context, which is used to

interpret a treaty in conjunction with other

factors, such as the object and purpose of the

treaty, subsequent agreements and practice,

supplementary means of interpretation, and

in some cases the text in the other official

language. Applying the Vienna context

definition to the expression "unless the

context otherwise requires" -

which is the Article 3(2) provision -

would make no sense because the Vienna

context was not meant to be used in isolation

from these other factors. It is therefore

suggested that all of the items which may be taken into account, or to which one may have

recourse, in interpreting treaties generally,

should be considered as "context" in the expression "unless the context otherwise

requires." To proceed otherwise would result
in the automatic adoption of internal law

definitions under Article 3(2) with consideration

only of the text of the treaty, its preamble

and annexes. The use of the word "context"

in the limited sense of the Vienna context would

have the effect of overriding or ousting those

additional tools of treaty interpretation

which the Vienna Convention itself indicates are

to be used. Context therefore should mean

anything that can normally be taken into

account or to which one may have recourse in

interpreting the treaty.

C2T33/l/ LW 55 3/4/90

Thiel(2)
MR GZELL (continuing): Then, in the footnote:

The US Treasury's Technical Explanation to

the proposed US-Canada Tready (1980) lies

somewhere in the middle:  "The term 'context'

refers to the purpose and background of the

provision in which the term appears."

Although the external context of purpose and background is included, these are limited to

the provision in question.

There is, in the article, at page 106 through to

108 an adoption of what one of the commentators

has said is the appropriate way of approaching

Article 3(2),Vogel,and we refer Your Honours

to what Vogel says and to the adoption by the

writers of this article suffice it to say that

there had been a suggestion that Article 3(2)

should be used sparingly and that it should

only be employed if there was a commonality

of definition between the two contracting States.

Vogel rejects that and says one does go - if

it is appropriate to utilise Article 3(2)(i) -

to the definition in the domestic country but then one looks at the context to see if it is

sufficient to override the adoption of the

domestic law definition.

We say that that does not arise in this case

because there is no definition to be adopted
but if we are wrong in that we submit that the

context overrides any use of a domestic definition
which has the effect of cutting down the ambit

of operation of Article 7 to purely business

profits.

If the object was to limit Article 7 to

business profits, it would have said so. It

could have quite easily been framed upon the

basis that business profits shall be taxable

only in the country of residence unless emerging

from a permanent establishment.

Finally, Your Honours, the decision by

the primary judge and in the court below has

been criticized by Edwardes-Ker in the International

Treaty Service and we have provided Your Honours

with that criticism.	We adopt the criticism
as part of our submissions.	The relevant - - -

McHUGH J:	The learned author seems to suggest that
Mr Justice Franklin's decision could have been
supported on the basis that these were not
business profits?

C2T34/1/SH	56	3/4/90
Thiel(2)

MR GZELL (continuing):  I am not sure whether it suggests that,

with respect, Your Honour. I think what it does

suggest is that more time should have been fastened on what is the meaning of'~usiness

profits" for the purpose of Article 7. It is

certainly a criticism that is not all one way, but

we do not read it in that sense, we read in the sense

of saying that the author says it is unfortunate that

the courts fixed their attention on the meaning of the

definition and carried on and did not come back then

to looking at the question, what is the ambit of

operation of Article 7? What profits is it meant to

cover? And, in our respectful submission, either on

the basis of saying that you look first at

profits generally, and only exclude business profits

from a permanent establishment, or, you look at it

from the point of view that you must construe business

profits broadly to include all types of commercial
activity that the nature of a business deal, on either

of those approaches to Article 7, the majority below

and the primary judge was wrong, in our respectful

submission.

McHUGH J:  Do you get any assistance from sections 3(2) of the

INCOME TAX (INTERNATIONAL AGREEMENTS) ACT in relation

to that - - -

MR GZELL: Activity, yes, and we submit that that does help

us because it clearly makes a distinction between

"activity" and "business". If the agreements were

to be confined solely to business, then why does one

have the word "activity" or "business" in the

AGREEMENTS ACT itself? That· assists our first

argument, the first argument being, profits is broader

than business profits - - -

McHUGH J:	The point I was rather seeking to put to you is
that  3(2) suggests that a profit of the business
includes any taxable profit, even if it may not - - -

MR GZELL~ I am sorry, yes. Because our Act proceeds upon the

basis of basically bringing gross receipts to account

and then allowing deductions, so it does not bring

a net result - basically - I mean, there are obviously

exceptions to that - to account. What is assessable

is income, rather than profit, and 3(2) says that in

the course of adapting the agreement provisions to our

domestic law, where you have profits being referred to

in the treaty, then read "income" under the provisions

of our domestic law. The comfort that I can draw from

that is to say, clearly, the concept of profits

embraces all the items of commercial activities that

are assessable under our Act, so that if the venture
in the nature of trade is assessable under 25A(l),
first of second limb, but is not a business, it does

not matter because the notion has been of bringing

profits back to an equivalence to income under our Act.

It is an indirect argument and, yes, I would draw comfort

to that extent from it, Your Honour.

C2T35/l/FK	57	3/4/90
Thiel(2)

The article of Edwards-Ker on the Field

decision, starts at page 2.5 and I am certainly

not going to take Your Honours through the - - -

MASON CJ: Basically, it is a synopsis of the judgment.

MR GZELL: Yes, it is, and then there are editorial cotmnents

at various points. At the bottom of page 3.2501,

there is an editorial cotmnent about DOWNING's

case. We have taken Your Honours to DOWNING's case,

both in the appellate court and at first instance.

At page 3.2514, the editorial cotmnent cotmnences:

There are numerous Canadian decisions
which focus on the existence or otherwise of

an "enterprise" which are analysed in detail

in relation to Article 5; see MASRI .....

RUTENBERG .... LOECK ..... and ABED.

Now, Your Honours, we have provided you with copies

of those judgments, or we have referred you to the

synopsis of them in Edwards-Ker. If I could

simply refer Your Honours to the sUtmnary that we

have set out at page 5 and 6, that suffices for

advance the matter at all. In MASRI, an individual share of profits from land dealing in the source country were held taxable as the carrying on of business in the source country. What happened in

present purposes, because none of those cases of

MASRI was that there were a number of land dealings

in Canada. The argument was advanced following the

primary judge in TARA that this was just a speculative

venture in the nature of trade and therefore there

was no domestic tax liability in Canada.

That was rejected, distinguishing TARA on

the basis that a repetition of land dealings was

sufficient to constitute a business in the domestic

sense of repetitive activity in Canada. (Continued on page 59)

C2T35/2/FK	58	3/4/90
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Mr GZELL (continuing):  TARA was then followed for the treaty

argument on the lack of a PE because the other

argument was,.well, there was a permanent establishment

in Canada and TARA was followed to that extent .. It

does not really advance the question with which

Your Honours are concerned. RUTENBERG, therewere real

estate activities in Canada by a United States
resident who was a jeweller, a diamond broker, had

some real estate activities in the United States and

overseas but the primary judge took the view that

the enterprise in Canada - the land dealings in

Canada was a separate and distinct enterprise from the

land dealings elsewhere and because of the problem

under the US Treaty which defines a US enterprise

as an enterprise carried in the United States, by

a United States resident, the treaty protection failed

in RUTENBERG because the court took the view that there

was no United States enterprise which was also being

carried out in Canada. So it does not advance the

case one way or the other. LOECK, an individual
share of profit from land dealings in the source
country was not merely an adventure in the nature of

trade but the carrying on of a business in the

source country. The agreement argument that had been

raised below was not taken on in the court of Appeal

and the treaty argument was open because this was not

a US treaty which had that limitation, it was a treaty

similar to ours, it merely required an enterprise and

a resident. It was not taken on and the suggestion

by Edwardes-Ker at the page that we have given you

is because it would have been pointless, this being

immovable property, Article 13 would have applied -

Article 13 allowing the situs country to tax

the profits from alienation of immovable property.

ABED, ABED was a partner with MASRI., so it was a similar sort of situation to MASRI, except that in

ABED's case there were no United States activities at

all.

(Continued on page 60)

C2T36/l/JL	59	3/4/90
Thiel(2)

MR GZELL (continuing):  The court in ABED criticized

MASRI to the extent that they thought that there

was not sufficient activity to amount to an

enterprise carried on in the US in MASRI but
in ABED said,"There is no activity carried on

in the US so it doesn't matter". So, none of

those decisions that are referred to in the

editorial there seem to us to have advanced the

case.

The editorial goes on and refers to a Swedish

supreme administrative court decision which does impinge upon this case to _the extent to which it was a case in which Article 3(2) was used.

MASON CJ: Perhaps we might defer our enjoyment of that

decision until 2. 15, Mr Gzell.

MR GZELL: If Your Honour pleases.

AT 12.56 PM LUNCHEON ADJOURNMENT

C2T37/1/SH	60	3/4/90
Thiel(2)
UPON RESUMING AT 2.16 PM:
MASON CJ: Yes, Mr Gzell.
MR GZELL:	Thank you, Your Honour.	Your Honou~ I omitted to

hand to Your Honours the commentary on Article 14,

which was not included in the additional material.

I do that now. Over lunch we have looked at the

transcript of the proceedings before the primary

judge and it is the fact that a question was asked

of the expert, or perhaps, if Your Honours please,

I could hand Your Honours an extract from that

transcript, because there is one question which was

asked before objection was taken, which may throw

light on the matter. It appears at page 199 of the

transcript, at the bottom of that page, where

Dr Clopath was asked:

Under the income tax law of Switzerland, would an Australian resident in Thiel's position -

taking into account the Swiss Australia

double tax treaty - be taxed in Switzerland

on the sale of Swiss shares?

The answer -

Most certainly if this transaction were

attributable to Swiss permanent establishment.

In the absence, however, of such a permanent

establishment if the deal were carried out

by Union Bank of Switzerland or a Swiss credit

bank or some other broker or banker then
certainly not. That is the way we would construe

the income tax agreement between Switzerland

and Australia under similar circumstances. It

is hypothetical, of course.

Then the question was asked of him:

What is the term used there which is the equivalent

of "enterprise" in the German version?

And at the top of page 201 he answers and then an

objection was taken and the objection was upheld,

but the point is that so far as the answer that he

gave before objection is concerned, it must be

inferred that in his view as an expert, if the matter

arose in Switzerland, under their interpretation of

Article 7, there would have been no taxability unless

there was a permanent establishment. Supporting the

proposition that I was advancing to Your Honours this

morning that the interpretation of the English version

of Article 7 ought to be construed widely to include

any activity which partakes of a business deal - - -

C2T38/l/CM	61	3/4/90
Thiel(2)

:MR SHAW:  The passage at 202, if Your Honours please.

MASON CJ: Yes, we have noticed that, Mr Shaw.

:MR GZELL:  And there is no doubt that this was a business deal.
A concession· was made in the lower court that it

was an isolated, connnercial transaction entered into
with a view to profit and the primary judge was of the view that it could be described as an activity

of a connnercial character entered into for the

purpose of realizing a profit. The view was expressed

by Mr Justice Sheppard and Mr Justice Lee in the

Federal Court that it was probably exigible to

tax under either or both limbs of 25A(l) as well.

If Your Honours please, I was taking Your Honours

to the editorial on the case in Edwardes-Ker_ and

I was referring Your Honours to the bottom of page 3.2514

under Article 3 and in the editorial there is reference

to a Swedish decision of the supreme administrative court

in 1987. We have digested that decision and we have

provided Yo11r Honours with copies of the digest of

it in Edwardes-Ker. What happened in that case was

that a capital gain in the source country was taxable

according to the domestic law of the source country

unless the agreement provision that gains from the
alienation of property were taxable only in the

residence country applied. There was another article

and that article provided that where income from a

source was relieved from tax under the treaty, but
a person was only exigible to tax in the country of
residence to the extent that the proceeds were

remitted into that country, then you would not get an

exemption from tax in the source country, except to

the extent that the proceeds had been remitted into

the country of residence and that is a provision which

appears in some of our treaties as well. And the

question was whether that article applied, which would
not grant him treaty relief, because while he had

sold in Sweden, before going to the United Kingdom he

had not remitted the funds into the United Kingdom, so

the question was, did that provision apply? And in the administrative court a majority of three

took the view that when you were using the equivalent

of Article 3(2) you had to interpret the phrase "income

from a source", because the phrase "income from a

source" in that article was foreign to Swedish law, but

it appeared in English law.

(Continued on page 63)

C2T38/2/CM	62	3/4/90
Thiel(2)

MR GZELL (continuing):  Therefore, albeit that it was a

Swedish court with Article 3(2) at its disposal

the majority took the view that you had to have

regard to the definition to that term in

English law and not in Swedish law and when that

was done English law did not include in the	concept 11.ncome from a source', capital gains,
and the consequence was that the majority then
said, "Well, the overriding article doesn't
apply because it doesn't apply to capital gains.
This was purely a capital gains matter, therefore
the UK resident who was a resident of Sweden gets
treaty protection".

The minority of two took a literal approach

to Article 3(2). They said, "Article 3(2) allows

us to adopt a term of Swedish law and we will

adopt the term 'income' simply and if we look at

income simply, according to Swedish law it doesn't

include capital gains and, in our view, he ought

not to be granted treaty protection". Now, that

was the case that I mentioned before the adjournment

that had some relevance to the task that

Your Honours have because it is a case dealing with

the application of Article 3(2).

In our submission, it lends force to the argument that the approach to the treaty and, indeed, the approach to Article 3(2) should be an

adoption of a course which gives to the treaty its

effect of avoiding the incidence of double taxation.

If I go on, at the bottom of that page in this

editorial comment by Edwardes-Ker, he goes on to

say:

None of the judgments in the above decisions

and that is referring back to THIEL's case -

are wholly satisfactory. The judgments of

Judges Frank]Jn, Sheppard and Lee are the

least satisfactory because they depend upon

distinguishing the words "carried on" from

the words "carried out". There is no

evidence that such a distinction is meant to

be drawn. Article 3(l)(c) of the OECD 1977

Model essentially states that an "enterprise of a Contracting State" means "an enterprise carried on by a resident of a Contracting

State". It is arguable that the only point this definition is seeking to make is that

the enterprise must be undertaken by a

resident of a Contracting State, and not that

an enterprise must be carried on, and not

merely carried out, by such a person. There

is no evidence that the words "carried on by"

C2T39/l/DR	63	3/4/90
Thiel(2)

are meant to distinguish activities which
are carried on from activities which are

carried out; they are merely used to denote

by whom the enterprise must be undertaken.

Indeed the word "undertaken" could be

substituted for the words "carried on" with

no loss of effect or meaning.

The reason why the words "carried on" are

used in Article 3(l)(c) is most probably due

to the fact that these words are used in

Articles 5 and 7. Article 7(1), which deals

with Business Profits, begins: , 111. The profits

of an enterprise of a Contracting State shall

be taxable only in that State unless the

enterprise carries on business in the other

Contracting State through a permanent establishment

situated therein. If the enterprise carries

on business as aforesaid, the profits of the

enterprise may be taxed in the other State but

only so much of them as is attributable to that

permanent establishment."

There is no evidence that Article 7(1) seeks

to differentiate between a business carried on
through a permanent establishment and a

business carried out through a permanent

establishment. Article 7(1) focuses on whether

the business undertaking gives rise to a

permanent establishment - in which case the

State where it is located may tax (only so much

of) the business profits attributable to such

permanent establishment. To achieve its purpose

Article 7(1) could equally well have used the word "undertaken" instead of "carried on".

The above comments are supported by Paragraph 4

of the OECD Commentary on Article 3(l)(c).

Its heading is: The Term "Enterprise". It then
begins: "4. The question whether an activity

is performed within the framework of an

enterprise or is deemed to constitute in itself

an enterprise has always been interpreted

according to the provisions of the domestic

laws of the Contracting States." These words

make it clear that an enterprise can simply

be the performance of an activity, or the

activity itself. No requirement is laid down

that the activity must be carried on, as opposed

to just being carried cut - it must simply be
performed. It is permissible to draw the
conclusion that the activity merely has to take
place for an enterprise to exist. It is
arguable that the real relevance of the words

"carried on" is not in relation to the
definition of an "enterprise", but in relation

to Article 7 (which requires a business to be
carried on through a permanent establishment

before the source State can tax business income).

C2T39/2/DR	64	3/4/90
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On the above interpretation of the treaty

T's activities would be regarded as a Swiss

enterprise. Does this mean that his gain

should escape Australian tax under Article 7(1)?

All the judges assumed that this would be the

result - but none of them focused sufficiently

on what should have been a key issue in this

case, namely whether the profit made by Twas

of a type covered by Article 7, the heading of

which states that it (only) applies to business

profits. There was disagreement over whether

T's profit was a business profit. Franklyn J.

held that T did not make a business profit - but then held him taxable. Northrop J. held

that Twas not "engaging in a business within .

the ordinary meaning of that word" - and held

him not taxable. Sheppard J. held that T's

activities amounted to "a business deal" - yet

held him taxable. Lee J. held that T's

activities were a "commercial venture" - but

because they were "isolated" the resulting

profits were taxable (as they did not fall

within Article 7).

Franklyn J. could have reached his conclusion

more satisfactorily by simply holding that T's

profits were not business profits, and hence

were not covered by Article 7. However the

three senior appeal judges might have experienced

greater difficulties in reaching their

conclusions had they focused on this key issue.

The judges might have focused on this issue

if they had been referred to other treaties,

such as the Australia/US tax treaty dated

May 14 1953. Article 2(1)(k) of this treaty clearly raises (a variant of) this issue. It

ran: "(k) the term "US enterprise" means an

industrial or commercial enterprise or undertaking

carried on by a US resident". Article 2(l)(n)

stated in part that "the term "industrial or

commercial profits" includes the profits of an

industrial or commercial enterprise or

undertaking" - the words "carried on" do not

appear here, as they do in Article 2(1)(k),

precisely because they do not embody any firm

requirement; they only appear in Article 2(1)(k)

to indicate by whom an enterprise is to be
undertaken.

Now, pausing there, Your Honours, the US agreement

to which Edwardes-Ker--is·re(erring is the old US

agreement not the current US agreement. The current

US agreement has the different approach but, none

notion that "carried· on" is not meant to be a term;

the less, the point is still good, in our submission.

it merely links and when you have a two definition

C2T39/3/DR 65 3/4/90

Thiel(2) (Continued on page 65A)

instead of a one definition, as we have in 3(l)(f),

it becomes apparent. Finally, the author refers

to PLACREFID and I have already indicated to

Your Honours what that decision was all about and

the final decision that he refers to is the

LEEUWARDEN LOWER COURT. We have given Your Honours

a summary of that case from Edwardes-Ker. In that

case an abortionist, conducting what was held to be
a business in the source country,was held exempt

from tax in the resident's country because of a

permanent base that he- had in the source country.

(Continued on page 66)

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MR GZELL (continuing):  A reverse of the usual argument.

Here he was in his residence country saying,

"You can't tax me because in the source country

I was carrying on an independent activity through a permanent base, a fixed base, and therefore,

under the treaty, it was the source country which

ought to have taxed me."

The equivalent of Article 3(2) was mentioned but could not be used because the term was not

defined in the resident's country and, again,

we do not see that it advances us greatly. We

adopt the criticisms that emanate from Edwardes-Ker

in support of our proposition that "carried on"

is not a term that needs definition. We say

that we fall within Article 7(1), either on the

basis that the words "profits first used" are

to be construed broadly to include commercial

activity in the nature of a business deal or,

in the alternative submission, that business

profits, for the purpose of Article 7, where

used secondly - and on this submission it also

encompasses profits where used firstly - is a

sufficiently broad concept to embrace the activities

here in question.

Were it not so, one would expect that

Article 21 would have been utilised in other jurisdictions in respect of precisely this problem:

what does one do with activities which are not

business in the sense of repetitive activities

but are none the less taxable in the country

of source because they are regarded as commercial

activities? What does one do? If the problem

had been perceived to be a real problem one would

have expected it to have emerged in decisions

in other jurisdictions before this.

The fact that there are no cases in any

other jurisdiction which we have been able

to find - and we understand the same applies

to our learned friends - is indicative of the

fact that the problem has been regarded as a

self-evident one or one not needing to be resolved

by a court.

(Continued on page 67)

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MR GZELL (continuing):	We say	that if it is in that

category it is self-evidently reconciled by
construing Article 7, in the broad sense that

we have submitted, for only in that way do you

achieve the result of eliminating double

taxation. I doubt if I can assist the Court further.

MASON CJ:  Thank you Mr Gzell. Yes, Mr Shaw.

MR SHAW:  If .the Court pleases, the cycles, if that is

the right word, to the Australian/Swiss agreement

refers to a desire to conclude an agreement for the

avoidance of double taxation with respect to taxes

on income. It does not, anywhere, say that it is

the intention of the parties, or the desire of the

• parties,to avoid all double taxation on all income

and, in our submission, it is plain that that is not

what it is endeavouring to do, not least by the

fact that - by reason of the fact that the

Swiss/Australian agreement does not include articles in the form of Article 21 or Article 13(4) of the

OECD model.

BRENNAN J: Are we. conflating· · tMJ argurrents here? Arie we cons truing

the recital at the opening by reference to what

is not in it?

MR SHAW:  What I was doing was taking two steps in the same

argument, if Your Honour pleases. I was saying,

first of all, the recital does not say"alr'and

secondly, when one looks at the terms of the agreement

and one sees the model on which it was based, one
can see differences between the model and the agreement

as it was actually re cehed which demonstrate that

the contracting States cannot have thought that the

agreement as. it was actually entered into did avoid

all instances of double taxation.

BRENNAN J:  Why does the introduction not express a purpose of

avoiding double taxation with respect to taxes on all

income? (Continued on page 68)

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Thiel(2)

MR SHAW: It, in our submission, simply expresses a desire

to conclude an agreement and that the agreement

is an agreement for the avoidance of double

taxation with respect to taxes on income and,

in our submission, that is perfectly satisfied

by an avoidance to a greater or lesser degree.

Your Honour, all I can say is that the words

do not go any further than that.

If one looks at Article 21 of the model, which is at page 59, one sees that the first

part of Article 21 is that:

Items of income of a resident of a Contracting

State, wherever arising, not dealt with in the foregoing Articles of this Convention shall

be taxable only in that State.

If one goes to the commentary, one sees, at page 107,

that Australia amongst other countries made a

reservation in respect of that article and that

reservation was that they:

Would wish to maintain the right to tax

income arising from sources in their own

country.

Now, in our submission, there can be little doubt

but that the source of the profit or income in

question here is a source in Australia.

There is also a reservation, although not

precisely to that effect, in relation to Article 13(4).

Article 13(4) is at page 56 in the model:

Gains from the alienation of any property

other than that referred to in -

the earlier paragraphs of the article -

shall be taxable only in the Contracting

State of -

the resident in effect and the reservation in

respect of that will be found at page 104. There

are a number of countries which made reservations.

Australia's reservation is in paragraph 33:

Australia reserves the right to propose

changes to reflect the facts that Australia

does not levy a capital gains tax and that

the terms "movable property" and "immovable

property" are terms not used in Australian

law.

C2T42/1/SH	68	3/4/90
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MR SHAW (continuing):  Now, in our submission, those

considerations form a conclusive answer to the suggestion which was made by my learned friend,

as we understood him, at the end of this morning,

that the agreement was intended to cover the field

and to eliminate all double taxation. In our

submission, that is simply a submission which will

not stand and, what is more, we would submit that

in the light of the way in which the agreement is

drawn it is illegitimate to say, "Well, they really

meant to avoid lots of double taxation and, therefore,

anything that you can find there ought to be

interpreted as widely as possible because that must

have been what was meant". In our submission, all

one has to do, and all one should do, and all one can

do, is look at the terms of the agreement and give

effect to it in accordance with its fair terms,
not seeking to attribute to words any meaning

which they will not bear and not seeking to be

over enthusiastic to introduce into the agreement

technical terms of Australian law. But even that

way of treating the agreement is, in our submission,
not to be taken to its fullest extent because of

the provisions of Article 3(2) because, in our

submission, that makes quite plain that, in certain

circumstances at least, technical terms, if they
occur in the agreement, are to be given the meaning

which they bear in the law of one State or another,

despite the fact that they may not bear the same

meaning in other States and, indeed, it would appear

that that article contemplates the fact that the

agreement may be interpreted, or applied, perhaps I

should say, differently in the two different States.

And although that at ·first blush may seem a surprising

submission, in our submission, it is not in the

circumstances of a treaty in relation to tax which is,

after all, a fairly technical subject, and what the

agreement is doing is modifying the application in

each of the States of their local laws to a certain

extent, and it will be remembered that, in fact,

Schedule 15, the Swiss/Australian agreement, has

effect here by reason of the(INTERNATIONAL AGREEMENTS)

ACT and the ~NTERNATIONAL AGREEMENTS)ACT expressly incorporates the INCOME TAX ASSESSMENT ACT into its

terms.

C2T43/l/LW	69	3/4/90
Thiel(2)

MR SHAW (continuing):  So that, it is not as if one is

looking in relation to the schedule to an entirely

foreign, as it were, piece of legislation.

Section 4 of the INCOME TAX (INTERNATIONAL AGREEMENTS)

ACT, which is at page 11, incorporates the

ASSESSMENT ACT into the Act itself.

MASON CJ:  Now, you have indicated that, in your submission,

Article 3(2) picks up technical terms according to

their meaning under domestic law. Now that seems to

have been the view taken in the Swedish decision
as well. Is that the accepted interpretation of 3(2)

according to the judicial decisions?

MR SHAW: Your Honour, I think it would be going too far

to say that there was an accepted interpretation of

that clause according to the judicial decisions. The

odd thing about this whole area is that there seems

to be so little about it and, in our submission, in

fact, the scope of 3(2) is wider than that because it

does not say "technical terms", it says "terms", and

what it is saying is, "Well, look, you apply this as

a local law, relating to income tax, in your State

subject to the various provisions which it contains",

and the endeavour which one might ordinarily have to

to produce, as it were, a consonant application of the

agreement in both of the contracting States, is one which

is met, it is submitted in relation to this agreement,

by the presence of that article.

Now, we go on to say this, that first of all,

it is legitimate to take into account the heading of

Article 7. There does not seem to be anything in

the Vienna Treaty which expressly refers to headings,

but section 13 of the ACTS INTERPRETATION ACT would

seem to make the heading something which ought to be

taken into account, and the general words of the treaty

and the ordinary principles of interpretation of

international treaties, since they go so much wider

than the headings would, we submit, permit and, indeed,

require the heading to be taken into account, and we

would submit that it is impossible to regard the

heading as referring to the exception, as my learned

friend put it, rather than the main subject-matter of

goes to subarticle (1):  the article. What the article says is - and if one just

The profits of an enterprise of one of

the Contracting States shall be taxable only

in that State unless the enterprise carries on

business in the other Contracting State through

a permanent establishment situated therein. If

the enterprise carries on business as aforesaid,
the profits of the enterprise may be taxed in
the other State, but only so much of it, as is

attributable to that permanent establishment.

C2T44/l/FK	70	3/4/90
Thiel(2)

Now, the exception, if that is the right

description of it, and we would not really accept
that, but one understands what my learned friend

was referring to - the exception relates to

enterprises which have permanent establishments, not

to business profits. The whole subject-matter of

the article is, in our submission, business profits,

and it is a error to regard what my learned friend

calls, the exception, as being an exception which

relates to business profits. It is, in our

submission, a part of the article which deals with

profits of an enterprise carrying on a business which

has a permanent establishment in a State other than

the State of residence.

Now, the next thing we would submit is this,

that - perhaps I should interrupt myself. we are,

if the Court pleases, happy to endeavour to provide

to the Court, in agreement with my learned friend's

advisers, if that is possible, what was suggested this

morning, although I am not quite sure what that was.

It was, I think, a translation of Article 7 - is that

right? We are happy to do it, we do not want to do the

wrong thing, that is all.

MASON CJ: Yes, well I thought we were looking to the word

"enterprise" actually.	Still, I do not mind a
translation of Article 7.	It is a question of what

the parties can agree in the first instance.

MR SHAW: Yes.

BRENNAN J:  It is the original of Article 7 in the German text.

MR SHAW: Article 7 in the German text, yes.

BRENNAN J: And a translation of that?

(Continued on page 72)

C2T44/2/FK	71	3/4/90
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MR SHAW:	Yes. I suspect, Your Honour, it will simply
be in the terms that Your Honour already has
but perhaps it may not be. All I am saying,
Your Honour, is that the German text and the
English text are meant to say the same thing
and if they do not something has gone wrong.
And if the English is ambiguous so is the German, I expect, but maybe not.

BRENNAN J: Justice Gaudron reminds me that the specific

question is whether the German text imports any

element of continuity in the carrying on, the

words that he used?

MR SHAW:	Your Honour, whether a translation will help
to elucidate that I do not know but we are happy
to seek to agree with my learned friend and have it provided to the Court with our joint agreement
but one suspects it might not advance things
much.  And one of the reasons why it might not
advance things much is, of course, Article 3(2).

BRENNAN J: Perhaps the proposition might be addressed

as to whether it would be an equally valid

translation of the German to use the words "not

carried on by" but "conducted by"?

MR SHAW:	Your Honour, I was going to say something about
"carried on".  In fact, Your Honour may think
I am carrying on about it but the fact is that -
I think the fashionable phrase is "the reality is" - in the Swiss/Australian Agreement the words
"carried on" do not turn up once to cause a
question to arise.  They are words which appear
frequently - well, frequently may be exaggerating things but, certainly, more than once and if
one looks, for example, if one starts off at the
definition of "enterprise of contracting State': there

is, of course, 'tarried o~ there, but if one

goes on one finds that in Article 5 one has,
in Article 5(1): For the purposes of this Agreement,

the term "permanent establishment" means
a fixed place of business through which
the business of an enterprise is wholly

or partly carried on.

And it goes on, for example, in subparagraph (4)

to talk about an enterprise carrying on supervisory

activities; that is 4(a).

C2T45/1/ND	72	3/4/90
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MR SHAW·(continuing): Subparagraph (6) talks about carrying

on business "through a broker, general commission
agent or any other agent" and in Article 7 itself,
one has the phrase "enterprise carries on business"

so one, as it were, when one realizes that the

enterprise that is being spoken of is an
enterprise of a contracting State and one

introduces the definition, it means a resident

of Australia or Switzerland "carries on business"

so one has a repetition of this concept and,

in our submission, the overwhelming impression

one gets from the way in which "carried on"

is used in the various places one finds it

used - and · indeed, I th ink one even finds it

is used in the protocol where they are speaking

of "carrying on the business of insurance"- is

of a business being carried on in the sense

that English and Australian lawyers have been

used to ever since SMITH V ANDERSON and, in

our submission, when one finds in this agreement

the words "business carried on" which is a

phrase commonly used for all sorts of different
purposes in our law, where one knows that the

primary connotation that that phrase has and,

no doubt, it takes it partly from the word

"business" but when one knows that, the primary

connotation of the word is something which

involves, I think, Lord Justice Brett said

reiteration or system, it is difficult in

our submission to resist the conclusion that

the words are being used to refer to something

which is not simply an isolated transaction.

McHUGH J: 

Can I ask you something which has been puzzling

me for some time and it puzzles me because you

do not seem to rely on it and nobody has mentioned
it below but when Article 7 talks about the

profits of an enterprise and one of the contracting

States, it occurred to me that you must be able

to identify the enterprise in the contracting

State; for example, in this case, Switzerland

by requiring it be carried on by a resident	and that what Article 3 does is identify that
of that.	You do not seem to place any reliance

on the words "an enterprise of one of the
contracting States".

MR SHAW: 

Yes.  We do, Your Honour. What we do is - and

this may not be exactly what Your Honour has

in mind but what we say is that, really, when

one looks at the way in which the agreement

deals with enterprises, it personifies them

and gives them - we know that partnerships in

our law, for example, do not have a legal

personality separate from their members and

even lawyers have difficulty in remembering

that sometimes, but in other systems the

partnership is regarded as having a legal
personality.

C2T46/l/SH	73	3/4/90
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McHUGH J: Well, that is what troubles me because on the

findings of fact in this case, the only - what you

have here is an enterprise carried on in Australia,

at the highest, by a resident of Switzerland but
that seems to me a different thing from an

enterprise of one of the contracting States; that is

an enterprise of Switzerland.

MR SHAW:	We would submit there is not an enterprise - - -
McHUGH J:	I know you submit that.
MR SHAW:	- - - because it is not something sufficiently -
the embryo has not sufficiently developed to get a
legal personality and all you have got is an egg that is a little bit warm.
McHUGH J: ..	But let me take you up on that, why is this not

an enterprise~/ After all, it is a series of

activities that takes place over more than a 12 month

period; you start off, there are some units bought,

some more units bought, time goes by; an, agreement

is entered into; then they are sold over a number of

days; why-. is that not an enterprise~ Carried on -

an enterprise carried on over that period of time.

MR SHAW: In our submission, one of the troubles is that

enterprise is a word which might have a number of

different meanings and, in our submission, it is

very difficult to say of it, however, that it has

got all the meanings at once and what one has to do

is try and see how it is used in the particular

context it is used. Now, if, for-example, these

particular units were terribly risky or whatever,

one might say, for example, of Mr Thiel that he

showed great enterprise in taking up these units

when there was such a huge risk.

But when one is speaking of what an enterprising

chap he is or looked at the results of his enterprise

or might even get to enterprise in the sense

that Your Honour says, that use of enterprise is,	in our submission, a different use of enterprise.
from the use if one spoke of the banking enterprise
of the Westpac Bank or the steel making enterprise of BHP or whatever it might be. They are using the same word but you could not apply, in our submission, the
word as it is used in ~he first of those examples to
the second or vice versa. And what we are saying is
it may be in some circumstances one might regard this as an enterprise but when one looks at how the words
occurred one is thinking of something that one can regard as a separate thing. You can say, just like
you regard - I know BHP's ste~l making business is
not a separate thing but people always think that it is and that is the sort of idea which is present here.

McHUGH J:  Some profit-making structure?

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MR SHAW:	Yes, and what is·moreif..~otrseethat an enterprise is something which is capable, for example, of
carrying on a business and one sees, for example,
that it is, if one looks at Article 9, that an enterprise is something, in the sense that
it is used, capable of participating in the
"management, control, or capital of another enterprise".
These are matters which are referred to and I
probably have not got all the examples, but they
are in 5.2 of the outline and,in our submission, when
one sees the way it is used, one is seeing what, one has been told, I do not know how truly, as a
characteristic of other systems of laws than ours, that they are very willing to regard things we would
not regard as capable of having legal personalities or regarded as separate things in the law; that is
what is happening here. And in OSTIME at the page which is referred to in 5.3, Lord Radcliffe says at 38 TC 492 at 517 -I do not suppose it advances
things much-: but it is the second-last paragraph
on the page_ His Lordship says:

Turning then to the Agreement, there is no

doubt that the Respondent is an Australian

enterprise -

that is the AMP Society. So that he was - and it was

not a matter that was argued obviously. Everybody

just · assumed it, but what they assumed was the

enterprise was the AMP Society and that simply

demonstrates that, in relation to that particular

agreement, everybody had no trouble in regarding

'enterprise' as referring to some structure, some

entity, some identifiable thing which could be

regarded as a separate thing in the law which would

have a separate personality and separate profits and

separate business and could do things and all that

sort of thing and, in our submission, on the facts

here, one simply does not have it.

And that, in our submission, is simply looking

at the word "enterprise" by itself and row it is

used in the agreement, but my learned friend says,

"carried on" does not mean anything. "It is a piece

of glue, meaningless Clag ," he would say, "which

sticks together tresident' and 'enterprise' ."

(Continued on page 76)

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MR SHAW (continuing): And, in our submission, thereis the

difficulty about that, that in fact"carried on"

is a phrase which is used in the other places we

have pointed to and we have not pointed to them

all, out, not only is that so, but he says

it means the same as"undertaken by" but what he

means is, it means the same as "of".

Now, in our submission, it cannot mean the

same as "of" and that is what he wants to say and,

we would submit that there are - I have referred to

SMITH V ANDERSON, SMITH V CAPEWELL is a section 92

case, it was a case about whether somebody who sold

kangaroo skins in New South Wales, having his business,

or his primary business in Queensland,was entitled to
the protection of section 92 or cormnitted an offence

was an offence under the State Act and whether it was

under a New South Wales Act and at 142 CLR 509, at 517,

or not depended on whether there was a carrying on of business and as one goes over the page, there is a reference to SMITH V ANDERSON which relates to

registration under the COMPANIES ACT. The Court will

recall that was a case about whether or not - it was

a number of people who had formed together, had committed

an offence against the COMPANIES ACT because there

were more than 20 of them and that depended on whether

or not they were associated for the purpose of
carrying on any business and it was held to be formed
for the purpose of carrying on any business, that

implied the repetition of acts.

KIRKWOOD V GADD is a case about carrying on the business of a moneylender; PREMIER AUTOMATIC

TICKET ISSUERS V FEDERAL COMMISSIONER OF TAXATION is

a case about what is now section 25A of the

INCOME TAX ASSESSMENT ACT; CORNELIUS V PHILLIPS is

another case .about moneylenders and YANGO is a case

about registration as a bank and what that case shows,

in our submission, is that the phrase "carrying on"

is a phrase which has. frequently been used in our law.

It does not have I suppose, a technical meaning but	there is uniformly, or almost uniformly given to it
the meaning that what is required is a repetition of
acts or a system because that is simply what the words
mean in .their ordinary meaning. And, in my submission,
my learned friend is not right when he says .· that
PREMIER.AUTOMATIC TICKET ISSUERS is an aberration
produced by the fact that section 25 - what is now
section 25A, section 26A as it used to be - had both
the phrase "carrying on" and "carrying out" in it.
It is plain, in our submission, from SMITH V CAPEWELL
that that is not so and that in a number of instances
the word has been understood in the same way and in relation to the same sort of words as we have here.
So that, in our submission, whether one does it by

C2T49/l/JL	76	3/4/90
Thiel(2)

saying, it·; is. the ordinary meaning of the words , or it is the meaning in income tax law, or it is the meaning you give it because ef- · 3(2},

whatever it comes to, it is plain that our law

regards the words "carried on" or "carrying on" or

"carries on" as involving this more than a mere

isolated act or acts and when that is placed with

the fact that the word is used more than once and

in other contexts than in relation to"enterprise"

in the agreement, it is submitted that the
significance of the words becomes difficult to
ignore and, in our submission, to give that meaning

to the words is not being, as my learned friend

would have i4 technical, rather it is using-applying

to what are ordinary English words, the ordinary English language, one's appreciation of what the English language means when it is used in ordinary

speech and when it is adopted into the law it has

received the same meaning as well.

Now, my learned friend - so that what we would

say is that when one looks at the context of the

agreement, one does not have an enterprise here

any way but you cannot ignore the other words in

connection with which it is used in the agreement.

When one sees that it has to be an enterprise

carried on,the courts below were quite right to say

there, was not an enterprise carried on here

Now, my learned friend referred to - - -

BRENNAN J:  What is involved - would it be right to say

that what is involved in "carrying on" depends upon

the subject which is "carried on"?

(Continued on page 78)

C2T49/2/JL	77	3/4/90
Thiel(2)

MR SHAW: Well, Your Honour, yes, so long as agreement to that

proposition does not carry with it that one can say

that something which you ordinarily could not speak

of as being carried on, is carried on, because all

one had done towards carrying it on was being done.

BRENNAN J: Well, you might be able to say that it is not being

carried on because the only thing that is

done is to carry it out, as it were, uno .....

But, if I could take you back to the question which

Justice McHugh asked you before, if you have an

acquisition of units, a further acquisition of units,

an exchange of units for shares and 40 sales of shares,

why is not the performance of each of those activities

a carrying on of that which might fairly be described

as an enterprise?

MR SHAW:  There are two bits to that, Your Honour. One is

whether it is fairly described as an enterprise and

that was the thing that I answered to His Honour

before. The reason why, in our submission, one would

not call it a carrying on, which is the bit I did not

answer before, is because, in our submission, all

that happened was there was an investment in these

particular units, then a further investment and then

the disposition. In our submission, that is not

sufficient to amount to carrying on.

BRENNAN J: Would it be right to say that until the final

disposition there was no carrying out?

MR SHAW:	It depends on what "out" means.	"Out" might carry
with it completion or might - - -

BRENNAN J :Well "into execution" were Justice Dixon's words,

I think.

MR SHAW: Well, again, that is ambiguous because it might mean

you have simply entered on doing what you decided to

do,whatever it was. For example, you might say,

when Mr Thiel bought his first units, "Are you

carrying out any plan?", and he might say -"Not a

very precise one, perhaps,but I am hoping'to sell

them and make a profit", which would be a qualified "yes",

I suppose. But all that would mean is that I have

started to do whatever it is and, in our submission,

that does not mean - although it might mean - that

one had embarked on carrying on something. One

might say that one was carrying on a plan if one

had a plan to make a series of purchases in

different sorts of stocks, to hold them, to take certain

advice and to do things. It might even just be the first

act. But one would say that it was carrying on because

it was not intended to be the only one and there was
a business in mind, so that one cannot answer, perhaps,
absolutely, but we would submit that in relation to what

happened here, knowing what was intended, that one could

not say that Mr Thiel was carrying on anything.

C2T50/l/LW	78	3/4/90
Thiel(2)

McHUGH J: Supposing you had a company formed for the specific

purpose of building a building or a hotel, for

example. Would you not accurately describe

it as an enterprise being carried on while it

was building that hotel or building that building?

MR SHAW:	I think you probably would, Your Honour, yes.
DAWSON J:	So that a single adventure can be an enterprise.

MR SHAW: Well, Your Honour, the answer to that is it depends

on the sort of thing. The example given by

His Honour, if one thinks of building a hotel,

obviously -or even the smallest hotel - I was

thinking of a big one but even a small one -

• involves great applications of time, money,

endeavour and frustration, I should imagine

and, in our submission, one cannot say just
because building the Empire State Building is

an enterprise, therefore, building a sand castle

is, even if it is to win a prize in the competition.

DAWSON J: Well, how do you decide between which single

adventures are and which single adventures are

not enterprises?

MR SHAW: Well, one knows here that what is spoken of as

an enterprise is something which is capable

of carrying on a business amongst other things,

here and if one asks oneself could one regard

carrying out this plan as having a business,

in our submission, the answer is no and if

Your Honour ask me why -

DAWSON J:	But a single man can be engaged in an enterprise and you had a single man here.
MR SHAW:	Yes, of course a single man can.

DAWSON J: Well, then, you had the vehicle for carrying

out an enterprise.

MR SHAW:	I am sorry, Your Honour.
DAWSON J:	You had the vehicle - the man and the enterprise were one and the same.
MR SHAW:	I imagine it is probably easier to regard an
enterprise as being carrying on by a company
or more than one because there is a greater element of planning necessary but- for example,
I suppose one could test it by asking oneself -
well, say I heard tomorrow that the shares in
XYZ were a good thing and I knew I had to pay my
tax next week and I did not actually have quite
enough money but I did have $500 which I could
put into XYZ shares, so I went out and I gave
instructions to my broker to buy $500 of XYZ shares

C2T51/1/SH	79	3/4/90
Thiel(2)

tomorrow and then I sold them the next week just our submission, the answer is no.

before I had to pay my tax and I made - because

Your Honour asked me why do I say that. All

I can say is because that is what the words mean.

DAWSON J: Yet, on your opponent's argument, that would have

to be an enterprise, a single share transaction.

MR SHAW: It would. Yes, it would.

DAWSON J:	So that every time I buy a parcel of shares or
sell, I am engaged in an enterprise on that argument.

(Continued on page 81)

C2T51/2/SH	80	3/4/90
Thiel(2)

MR SHAW:	And what is more, according to him, not only do
you'have an enterprise, but the enterprise is
being carried on.

McHUGH J: This is very different, is it not? This case is

in an immediate situation, you have really got

to scheme here, something he jumps at and so he

takes up some units; then he takes up some more

units; then he enters into an agreement; then the

shares are sold slowly over a number of days - what,

there is something like about 40 transactions,

no doubt so that the market price will not be

depressed. It is a real scheme; it is an enterprise.

DAWSON J:	But that is really accepting your argument and
deciding against you on the facts.

MR SHAW: Well, Your Honour can accept the argument but you

cannot use the facts against me because, in

our submission, the facts cannot be used against

me. ,It is true there is more element of scheme

than there was in the example I gave to

His Honour Justice Dawson but, if you like - I

mean I know that my learned friend says, you cannot

use the terms of section 25.A but, if you like,"Yes,

it is carrying out a scheme but is there an enterprise,

and if there is, is it being carried on by me

in	the example?"
These things are, of course, matters of degree.
Just like hatching an egg.	How hatched it is

depends on how long you have sat on it, but here

all you have got is a warm egg. Perhaps I should

say, Your Honour, not only is it just a warm egg,

it is the sort of egg that would not hatch however

long anybody sat on it because there was not enough

scheme about it to begin with. It was not fertilized.

My learned friend referred to what Mr Justice Northrop

said at pages 99 to 100 of the appeal book and

we wanted to say something about that. In our

submission, it is really - the passage from

lines 20 to 25, that my learned friend referred

to - and all we would say about that is, one can

see why this agreement might make provision for

businesses and enterprises and not make provisions

for things which do not amount to business

or enterprises, first of all because that is

the thing that is most likely to happen; secondly,

because the encouragement of business is, no

doubt, more helpful to the economies of both

countries than isolated acts of madness and, in our

submission, there is nothing in that argument.

C2T52/l/DR	3/4/90
Thie1(2)

MR SHAW (continuing):  My learned friend went on to refer to

some cases which he said helped him. Perhaps

before I do that I should have before said, in

relation to that second bundle of

things that I handed up, they are extracts from

other agreements. If one looks, for example,

at - the first one, I think, is the Swedish one

which is not in the same terms as most of the

other ones, but the next one is the Danish one.

If one looks at the first page of that, one discovers an Article 21 and if you see the form

of Article 21 - and that is the form in which most of them have been since about 1981 - is that there

is an Article 21 which includes items of

"Income Not Expressly Mentioned" in the foregoing

articles. But in the form of Article 21, which is

adopted, there is provision that:

if such income is derived by a resident of

one of the Contracting States from sources in

the other Contracting State, such income may

also be taxed in the Contracting State in

which it arises.

So that in this form of Section 21,which is substantially the modern form in which it has been

adopted in Australian double tax agreements,

effect is given to the reservation which was made

in respect of Article 21 to the OECD model. I should

have mentioned that before. In that bundle there are

others, and it would be seen that there are a whole

series of agreements in which the qualification

has been given effect to. This is something which

Mr Justice Lee refers to in his judgment, that there are, in fact, more agreements in the form he refers to than the three agreements which he, in fact,

refers to and some of them are in that bundle.

My learned friend referred to really two cases

which he said helped him. The first of them was

TARA. If I might first go to the first report of that

case, that is, in the court below, (1970) Canadian

Tax Cases 557 and, in our submission, the case when

it is examined is really of no help although it does,

perhaps, illustrate some of the perils of the judicial

office. At 559, President Jackett says in the second

paragraph:

C2T53/l/LW	82	3/4/90
Thiel(2)
MR SHAW (continuing):

I turn first to the question

whether the profits in question were

profits from a "business" within the

meaning of section 139(l)(e) of the

INCOME TAX ACT -

and the Court will see there is a definition of

"business" which includes "an adventure. in the nature of trade", and then, there is a

provision in section 3 that:

The income of a taxpayer for a taxation

year for the purposes of this Part is his

income for the year from all sources inside

or outside Canada and, without restricting

the generality of the foregoing, includes

income for the year from all -

amongst other things -

businesses.

And then, it goes on to describe the facts about

how the appellants business was exploring for minerals

in southern Ireland and it raised capital on the

Canadian market, and had some that it had not used

so it bought some shares, and on the next page, about

a third of the way down, he says, the line that

starts with "an adventure or concern in the nature

of trade", His Honour says:

Having regard to the view that I had tentatively formed that, on the facts, the

profits were from an adventure in the nature

of trade within the sense of that phrase -

he stopped counsel - however, disaster struck, because

the next sentence say~ that he had forgotten the case

which said precisely the contrary, which made it all	rather embarrassing to decide the case, and he says	if he were to follow IRRIGATION INDUSTRIES he would
be bound to hold that there was not an adventure in
the nature of trade and that was all going to cause
terrible expense and one thing and another, and he
says, well anyway, it is not essential, so I will just
proceed on an assumption, although, as it were, he
acknowledges the assumption is wrong, and then he goes on:

The next two questions are raised by

section 2 of the INCOME TAX ACT -

and he says, section 2 says, income tax is payable by
residents on taxable income, and subsection(2)says,
if you are not a resident, then you may be taxed in
a particular way if, amongst other things, you carried

on business in Canada, and that is(~(b).

C2T54/l/FK	83	3/4/90
Thiel(2)

And then, he goes on at the bottom of

that page, and on the next page, to hold that the

company was not a resident of Canada, and then he

goes on at the bottom of page 562 to examine the

question posed by section 2(2), namel½ whether the

appellant carried on business, and he goes on and

concludes that it does not because the effect of

section 139, with the extended definition of

business, does not make any difference to the words

"carries on" in section 2(2), and the result is,

at page 567, it was not taxable in Canada anyway.

That is the third complete paragraph.

So that the conclusion he comes to is that the

profit was not taxable under the income tax of

Canada because the appellant was not a resident and

he was not carrying on business. And then he says,

well, in effect, because there is this difficulty, I

had better go on and decide it under the treaty as well.

And, he goes on and sets out the treaty and at

page 569, the second paragraph - perhaps I should go

to the top of page 569:

The . . . commercial prof its of. a

commercial enterprise or undertaking carried

on by a company whose business is managed or

controlled in Ireland and is not managed or

controlled in Canada shall not be subject to

Canadian tax unless the enterprise or undertaking is engaged in business in Canada

through a permanent establishment.

And, in, not the paragraph immediately following that, but the next one, His Honour says:

If, as I assume for the purposes of this

part of my judgment, the words "carry on" an

adventure in the nature of trade are apt to

include the appellant's share transactions in

Canada, it follows that the words in Article III,

"commercial enterprise or undertaking carried on"

by a company are apt to include those transactions.

The respondent does not challenge this.

And then he goes on to say, well, is it a case in which

there is a permanent establishment? And he concludes

that it is not, and he says the.result of that is, it is

not taxable in Canada. So that the way in which His Honour

dealt with the question does not advance the question
here at all, except to this extent that he does give to
the words "carries on business" where it relates to the

basis of taxability of non-residents, the same meaning

as it was given in SMITH V ANDERSON and SMITH V CAPEWELL

and PREMIER AUTOMATIC TICKET ISSUERS LIMITED. So, to that

extent His Honour does say "carries on" has the
connotation of repetition and the exclusion ot isolated

acts. And then one comes to the appeal and, in our

C2T54/2/FK 84 3/4/90

Thiel(2) (Continued on page 84A)

submission, that really does not advance the

matter either. That is in 28 DLR 135 (3d). a "not" seems to have been left out in the

paragraph that my learned friend referred to as

causing difficulties, on page 137. The reason

I say that, and I might say that I have looked

at the corrigenda and there does not seem to be

anything that is corrected. I have looked at two

other reports of the case and they all say

exactly what this says.

(Continued on page 85)

C2T54/3/FL	84A	3/4/90
Thiel(Z)

MR SHAW (continuing): But, in our submission, when one looks

at it, it is clear that a "not" has been omitted,

and the reason we say that is because what - - -

McHUGH J:  That is not what they intended. The next sentence

makes it clear.

MR SHAW:  Yes, he says:

I agree with that assumption and, in my view, such profits would have been taxable in the

hands of a resident - - -

which this - people was not -

However, since I am of opinion that respondent

is entitled to exemption under the ..... Tax

Treaty, I prefer to dispose of the appeal on

that basis.

Now you could only say that if there is a "not" left

out.	He is saying, "I will not hold him not taxable
under the INCOME TAX ACT, although I could.	I will

just hold him not taxable under the treaty, which is

easier,"or't prefer to do it"or whatever. And,

in our submission, the examination of the treaty
question really does not advance things any further
than the way in which it was dealt with below, because

it all turns on the question of permanent establishment

and, one would have thought in any case, it is

perfectly plain that, as what had happened was, the

enterprise, having raised capital in Canada for the

purpose of exploring for minerals in Ireland, not

having an immediate investment of that kind for the

capital which it raised in Ireland, laid out the funds

in the meanwhile on the Canadian exchange and bought these shares. and then sold them, it is obviously all

part of the Irish enterprise anyway.

Now the other case that my learned friend referred

to was - when I say "referred to" I am not going to

reading. All I wanted to do was to refer to the cases	deal with the cases that he simply referred to without	that he read to Your Honours from and there seem to
be only two. One was the one I have just dealt with.
The other one was DOWNING. And it was in relation to
this case that my learned friend made some play of
the difference between, or, as he would have it, the
similarity between, "carrying on.'' and "carrying out".
Now I think I need only deal with the report on appeal
which is at page 249 of 37 ITA. If one looks at page 252,
what the facts were are set out on the bottom of that
page and the next page:

C2T55/l/CM	85	3/4/90
Thiel(2)

the respondent, who had previously been

domiciled and resident in South Africa, left

this country in 1960 and went to live in

Switzerland. Since then he has been resident

at all times in Switzerland.

When he left he was only allowed to take a bit of

his money and he left lots of assets behind as -

blocked assets.

And they were fairly considerable, In his absense

he entrusted the handling of his financial affairs

to a firm known as Palmers Investment and

Estate Administrators Limited ..... and the

management of his share portfolio to a

Mr D. A. Smith ..... When respondent departed

from South Africa in 1960 he verbally instructed

Smith so to manage·. the portfolio as to cause it

to yield the greatest possible income for
respondent's enjoyment in Switzerland.

And then there was talk about consultations which went on between them.

Once every three years, on visits to South

Africa, respondent would see Smith, mainly at

lunch.

And there was lots of advice and there was talk about how the thing was carried on and if one goes to the

next page one sees under the quotation:

During the period 1 July 1962 to 1 March 1971

the value of respondent's portfolio increased - by a large amount. And on the next page in the third

paragraph, His Honours says:

Inasmuch as the respondent has not challenged

the finding of the Special Court that the amounts

in issue constituted income earned in the

carrying out of a scheme of profit-making, the

only issue on appeal is whether in terms of the
convention the respondent was exempt from

South African tax in respect of those amounts. And going over two pages in the second paragraph:

It is clear from art 7(1) that, in order

for the business profits of a Swiss resident

to be taxable in South Africa, it must appear -

(a) that he has carried on business in South Africa;

and

C2TSS/2/CM 86 3/4/90

Thiel(2) (Continued on page 86A)

(b) that the business has been carried on

through a permanent establishment

situated in South Africa.

In the present case it is not disputed,

on appeal, that the respondent carried on

business, viz the business of buying and

selling shares on the stock exchange in

order to make profits, in South Africa.

The crucial question is whether or not this

was done through a permanent establishment

situated in this country.

(Continued on page 87)

C2T55/3/CM 86A 3/4/90

Thiel(2)
MR SHAW (continuing): Well, in our submission, when one sees

what those facts are, there surely can be no doubt

but that the respondent was carrying on business;

it was done on a large scale over a long time

through very many transactions and to say that

because that may also be described as carrying

out a scheme of profit making, that demonstrates

that there is no difference between carrying out

something and carrying on something, is, in our

submission, to ask the case to stand for something

which it does not stand for. S:> that our submission

is that, in fact, the cases which have been referred

to do not really reflect on the issues that this

Court has to decide at all and the Court is really
left without the assistance of any consideration

of the matters that the Court is here concerned

with in other places at all except - by that I

mean questions under the treaty. There are, of course, the cases relating to carrying on business and so on.

In our submission, one really does not get

anywhere by saying, "Well, the treaty is to be

interpreted broadly'·' or "enterprise is a broad

word." I mean, "sheep" is a broad word but it

does not make any difference to the fact that if

it is not sheep, it is not sheep and, in our

submission, what one simply has to decide is
whether or not on the facts as they are now

accepted to be, one can say there is in the

words of the agreement the profits of an

enterprise carried on by Mr Thiel and in deciding

that question, in our submission, it is relevant

to have a look, of course, at the rest of the

agreement and the ordinary meaning of the English

language and any authorities which might help in

construing the words of the treaty and one is not,

of course, bound by them but in our submission they

provide some substantial assistance and when one
sees that here one has a profit whose source is

plainly to be found in Australia arising from an

isolated transaction one can see, in our submission,

looking at the matter without trying to stretch

anything in any particular direction, it is the
sort of thing that would have fallen within

Article 21 if there were one. It is not appropriate,

as we would submit and as the courts below have

held, to say that there was an enterprise or an

enterprise carried on and it does not come to

any more than that. If the Court would excuse

me for a minute.

My learned junior points out that I have left

out one point that I should have referred to. It

is point 3 in our summary.

C2T56 /1 /SH	87	3/4/90
Thiel(2)

MR SHAW (continuing): Although Mr Clopath was stopped from

answering the question that my learned friend

referred to, he did answer lots of other questions

and at pages 48 through to 51 -

MASON CJ: This is about the taxability of the appellant's

income in Switzerland?

MR SHAW:  Yes, Your Honour. It is not a matter which anybody

seems to have referred to on appeal but His Honour

the trial judge did deal with it and the conclusion he

came to, at page 51, was that - the question of his

evidence is dealt with <Dver the whole two or three pages there and I do not think I need read it all,

but the conclusion is on line 5 page 51:

His answers did not in any event lead

to the conclusion that the appellant was

subject to taxation in Switzerland on
such profits, nor to the conclusion that

the profits were exempt from taxation in

Australia.

I did not, unless the Court thought I should, propose
to deal separately with so much of the argument as

my learned friend adopted from Edwardes-Ker. In

our submission that is wrong for the reasons that

we have given. If the Court pleases.

MASON CJ: Thank you,Mr Shaw.

MR GZELL:	I refer to page 50 of the record in relation to this question of the non-establishment of taxability
in Switzerland. One looks at page 50 at about line 5:

He was asked questions as to the information disclosed by the taxpayer in his 1985

return in respect of the years 1983 and 1984 - The return in Switzerland is for two years in arrears

and down at the bottom of that page, His Honour says: It must also be remembered that as at	the date of the trial, there had been no
occasion for the appellant to lodge a return
disclosing as taxable income the profits made
on sale of the shares and units·~- and it would seem from Mr Clopath's evidence that it is on
that return that the question of Swiss tax liability
liability will be decided.

and it is in that context that His Honour rightly
says that it had not been established at the trial
that he would be taxed in Switzerland. That does not

matter, in our respectful submission! The question whether or not he is ultimately to be taxed in the

C2T57/l/JL	88	3/4/90
Thiel(2)

resident's State was a matter raised in DOWNING's

case and rejected by His Honour at first instance.

If I take Your Honours to page 40 of the judgment

in the lower court in DOWNING:

Mr Kirkup contended that on a proper

interpretation of the Convention, which

was entered into for the purpose of

avoiding double taxation, its provisions

would become applicable only if and when

"there was indeed double taxation on a

particular taxpayer by reason of the

application of each State's internal law".

That, he said, must necessarily be taken

to have been the intention of the legislature

in enacting section 108 of the INCOME TAX

ACT, against the background of the terms of

which the Convention itself had to be

construed and applied. He referred to the

1963 Report of the ..... OECD which contains

a draft convention for use or adaptation by

contracting States, together with explanatory

notes and comments. It is said in that report

that" ...... double taxation" may be "generally

defined as the imposition of comparable taxes

in two (or more) states on the same taxpayer
in respect of the same subject matter and for

identical periods". To the same effect is a

statement in Koch's "The Double Taxation

Conventions":

"International Double Taxation arises where

various sovereign countries exercise their
sovereign power to subject the same person to

taxes of a substantially similar character

on the same subject."

I have no doubt that the hardship or inequity

which international taxation conventions were

designed to avoid or ameliorate was that of

actual double taxation. And it is clear that

the draft convention contained in the O.E.C.D.

report was designed to serve as a model for

the attainment of that end. But it does not

follow that because actual double taxation was

the malady sought to be prevented, contracting

States necessarily stipulated in their own

convention that their arrangement or agreement

was to be of application 9nly where an instance

of double taxation actually arose.

C2T57/2/JL	89	3/4/90
Thiel(2)
MR GZELL (continuing):

It is important to keep in mind that the
avowed object of the draft convention (and
of the particular convention with which
we are concerned) is to avoid double taxation.

In section 108(1) or our INCOME TAX ACT,

the State President is empowered to enter

into an agreement with any other country

with a view to the prevention of double

taxation.

And then he uses the domestic word.

It appears to me to be implicit in a purpose to enter into an agreement to avoid, or

to prevent, double taxation, that such
agreement need not be confined to therapeutic
measures that may include prophlactic measures

as well. An agreement between two States

which determines which of them shall have

the sole right to levy or claim tax in

specially defined circumstances, whatever their respective internal tax laws on the

subject might be, would be effective
prophlaxis against double taxation in those

particular circumstances. The question

at issue appears to be whether that is

the meaning- and effect of the particular

terms of the Convention upon which the

appellant relies.

So that we would say it does not matter so far

as the problem that Your Honours face in this

Court is concerned that it had not been established

at the time of the trial that double taxation

would eventuate if a relief from Australian taxation

were not held.

BRENNAN J: Mr Gzell, let us assume that a Swiss banker

gets on the plane in Zurich and comes to Surfers

Paradise for a holiday and whilst there seizes

an opportunity on the market, rings up and makes

one placement, one purchase, and before going

back sells at a profit, what, in your submission,

is the tax consequence of that?

MR GZELL:	That was the question that Justice Dawson put
to my learned friend in argument - or a similar
propositionand that is that our argument taken to its ultimate must presuppose that whenever
there is a purchase and sale that is the activity
of an enterprise. There are two answers to that proposition: the first is that enterprise connotes something more than the mere acquisition and
sale of a capital asset.  We say that because

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Article 13 which deals with the alienation of

capital assets would not be necessary if

Article 7 were interpreted so broadly that

enterprise covered the notion of the purchase

and sale of a capital asset.

So that we say that you need something more

than the mere activity of purchase and sale to

constitute an enterprise. We simply say that

so soon as the activity is regarded as being cot:11:lercial

that is sufficient to constitute it as an enterprise.

DAWSON J: That really does not answer it because, I mean,

it is commercial to buy and sell shares with

a view to profit but is there not something more,

a certain aegree 9f continuity _or repetition? ·

Is that not what you are really saying?

MR GZELL:  Not necessarily, I suppose, Your Honour, because

what we - I think it is probably sufficient for
us to simply say that if what is done smacks

of a business deal then it is an enterprise and for the purpose of this appeal we say that what

was done was clearly of the nature of a business

deal and that is sufficient for our purpose. extension of the argument there is an area in

which it is of some difficulty. One has to - - -

(Continued on page 91)

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MR GZELL:  Or the concept of something which is purely a

realization of capital on the one hand and that

which partakes of an activity in the nature of

business on the other.

BRENNAN J:	Do you say any adventure in the nature of trade?
MR GZELL:	Any adventure in the nature of trade, we would

submit, falls within the notion of an enterprise.

DAWSON J: Does the word "entrepreneurial" help?

MR GZELL:  One would think that it would be entrepreneurial

and that certainly would help. The other answer

I was going to give to Your Honours was to say

that in the case that both Your Honour Justice Dawson

and Justice Brennan put, it is probable that that

transaction would be taken out even if it did fall

within the notion of an enterprise by the Article 13

alienation of capital assets argument.

BRENNAN J: The proposition I put to you was that it was not

of a capital asset.

MR GZELL:	I am sorry, Your Honour.
BRENNAN J:	I was not suggesting the acquisition of a capital

asset.

MR GZELL:  But if the only evidence were that this gentleman

came in, purchased and then realized by selling in

a transaction, and assuming for present purposes

that we do not have section 26AAA in the Act and
that were regarded simply as a realization of a

capital asset, we would have thought that would not

fall within the concept of an enterprise. If it

did - if per chance it did - then it would be

taken up by 13(3) of the Swiss treaty which excludes

tax on the alienation of a capital asset of an

enterprise.

Your Honours, that leads me to the point that

our learned friend made about Article 13. He

suggests that Article 13 in the Swiss treaty does
not have the equivalent of Article 13(4) in the

OECD model. But, if one compares page 36 with page 56 in that supplementary material, there is,

in 13(3) of the Swiss treaty, a version of 13(4) of

the OECD model. Article 13(3) says:

Subject to the provisions of paragraphs (1)

and (2), income from the alienation of

capital assets of an enterprise of one of the

Contracting States shall be taxable only in

that Contracting State -

I need not go further to deal with what I have called

the exception. If one then compares that with

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Article 13(4), it says:

Gains from the alienation of any property

other than that referred to in paragraphs
1, 2 and 3, shall be taxable only in the

Contracting States of which the alienator is

a resident.

The essential difference is that in the OECD

model it applies to any property of a resident of

the other contracting State. In the Swiss agreement

with Australia, it applies if it is an enterprise

that the resident of the other State is carrying

out. So that if one does interpret "enterprise" to

cover every activity - and we certainly do not go

so far in this case to make that submission, but

if that were the case then Article 13(3) would take

out that single situation of simply buying and

selling an asset.

Article 21:: our learned friends have given

Your Honours the versions of Article 21 in the
Australian treaties in which they appear. There are

two other agreements where that Article 21 has now

been included. They are the new US agreement and

the new Canadian agreement. There was not an

equivalent of Article 21 in the earlier ones. Might

I take Your Honours to TARA and the suggestion of

our learned friend that a "not" has been omitted

in that somewhat troublesome paragraph that I

referred Your Honours to this morning. If our

learned friends are right and a "not" has been missed

out, then there is the use of the word "and" which

does not sit well. It would then read - and this

is the paragraph at page 137:

As to the first of the questions, the learned

trial ~udge appears to have proceeded on the

assumption that the profits in question were -

not -

taxable under s. 2(2) as profits from an

adventure in the nature of trade. I agree with that assumption and, in my view, such

profits would have been taxable income in the

hands of a resident of Canada.

One has to read "and" as "but" to have it

sit cogently.but whatever the view that was taken

by the appellate court on the domestic law, we

rely upon the later portions in that judgment and
in the court below in dealing with the treaty

question and taking the view that there was an enterprise carrying on for the purpose of that

treaty.

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MR GZELL (co_ntinuing):  The cases our learned friend has

referred to of SMITH V CAPEWELL, KIRKWOOD V GADD
and the like which discuss the notion of carrying

on in the context of a business are a different

context to that which the Court is concerned with.

The words can partake of different meanings

depending upon their context. The Court is not

concerned with the notion of "carrying on a business".

It is concerned with the notion of "an enterprise carried on by a resident of another State" and,

in our submission, it does not assist the Court

that in the particular context of what is "a

carrying on of a business" where, indeed, the notion of "business" in that context is going to require repetitive activity which is going to

obviously colour the words "carrying on". Indeed,

one wonders whether the words "carrying on" in

that context is going to add anything to the notion

of repetitive activity which springs from the word

"business".

In any event, it is not any term of the general

law of the source country which is to be taken into

accountunder Article 3(2) but only a term that has

been the laws of the contracting State relating

to taxes. Article 3(2) says:

In the application of this Agreement by one

of the Contracting States, any term not

otherwise defined shall, unless the context

otherwise requires, have the meaning which

it has under the laws of that Contracting

State relating to the taxes to which the

Agreement applies.

It is for that reason that we confined our attention

to the suggested dichotomy arising from the use of

25A(l) and its predecessors.	I cannot assist the
Court further.

MASON CJ: Mr Gzell, what is the reasons for the existence

of doubt as to whether or not the income earned

by the appellant in this transaction or transations

in Switzerland? What is the reason for that doubt?

MR GZELL:  I wonder if I can tell Your Honour precisely.

(Continued on page 95)

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MRGZEIL (continuing):  I thought it was discussed by

Mr Justice Franklyn in his reasons. Perhaps if

I commence reading and it may appear from this

passage - at the bottom of page 48 in the appeal

book:

I accept the witness Clopath as an expert on

Swiss tax law. However, his evidence is not

particularly helpful. He advised that the

return lodged by the appellant is one

normally lodged by a Swiss resident who

is "the ordinary taxpayer" and as such is

subject to unlimited tax liability on

world-wide taxable income from all sources

and net worth wherever located. He indicated

that "taxable income" for the purpose of
Swiss tax liability is that set out in

Article 21 of the Swiss TAXING ACT which was produced in evidence, and which in

paragraphs (a), (b), (c) refers specifically

to various types of revenue income which are

clearly not relevant, and in (d) to

"capital gains'' relevantly in the following

terms:

"(d) In the case of a business run with

compulsory bookkeeping, on capital gains

obtained by transfer or sale of property,
such as profit from sale of real estate,
appreciation through transfer of deeds,
profits from receivership action in the

handing over or transfer of a business

etc ... "

It was clear from Mr Clopath's evidence that

if taxable at all in Switzerland the relevant

profits would be taxable under that part of

Article 2l(d) quoted above. He advised that

whether or not paragraph (d) applied in any

particular case depended upon whether or not

the capital gain was the result of a

"business activity" or the sale of an asset

acquired for a "business purpose".

MASON CJ:  Well, it is obviously a reflection of the same

problem that arises here.

MR GZEU.:  Quite.

(Continued on page 96)

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MR GZELL (continuing):  I am sorry, my attention has been drawn

further down the page, down to line 25:

He pointed out that profit making by a Swiss

taxpayer from a "one-off venture" was not

necessarily exempt from Swiss income tax,

the answer depending upon "the purpose and the

particular profit motive", giving the example

of a transaction being caught under s. 21(d)

when it was "a furtherance of a business

activity in another area" and "for furtherance of a given business activity of the taxpayer".

He conceded that a person in business might

well buy and sell shares for gain without them.

being liable for Swiss income tax. He was asked

questions as to the information -

and then it goes on to the other questions.

If the Court pleases.

MASON CJ: Yes, thank you, Mr Gzell. The Court will consider

its decision in this matter.

AT 4.09 PM THE MATTER WAS ADJOURNED SINE DIE

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