Thiel v The Commissioner of Taxation

[1989] HCATrans 85

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Perth No Pl of 1989

B e t w e e n -

GUNTER THIEL

Applicant

and

THE COMMISSIONER OF TAXATION

Respondent

Application for special leave

to appeal

MASON CJ
BRENNAN J

GAUDRON J

Thiel

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 14 APRIL 1989, AT 11.26 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

applicant. (instructed by Solomon Brothers)

MR D.A. IPP. QC:  May it please Your Honours, I appear together

with my learned friend, MR M.J. BUSS, for the

respondent. (instructed by the Australian Government

Solicitor)

MASON CJ:  Mr Gzell, although what I am about to say should

not give you too much heart, I think, in the

circumstances, it might be helpful to us if we called

on Mr Ipp in the first instance. Yes, Mr Ipp?

MR IPP: Your Honours, there are four points, basically, on which

we would submit that special leave should be refused.

The first is that the point of law involved is t

significant; the second is that the subject-mater

of the appeal is not of any particular importance;

thirdly, that the point at issue is of very narrow

application and, fourthly, there is nothing unusual

about agreements for the avoidance of double taxation

leaving some items susceptible to double taxation.

Dealing with the first point, that is the

relative insignificance of the point of law, what

is in fact in issue in the case is the meaning of

"enterprise carried on". It is really just those

three words that gives rise to the construction point

and that arises under Article 7(1) of the agreement:

the applicant must show that its profits were those

of an enterprise. And then, under Article 3(l)(f),
defines the term the "enterprise of one of the Contracting

States" and "enterprise of the other Contracting State" and that is defined to mean, "an enterprise carried on" and that is where the question arises, that is, was the activity involved an enterprise carried on?

Then one goes to Article 3(2) which provides

that:

one of the Contracting States, any term	In the application of this Agreement by
not otherwise defined shall, unless the context otherwise requires, have the
meaning which it has under the laws of
that Contracting State - - -

MASON CJ: Does the expression "an enterprise carried on" appear

in other international double-taxation agreements

to which Australia is a party?

MR IPP: In very many, Your Honour. In fact, under the 1953 -

as long ago as 1953, under the original United States

Convention which is one of the oldes~ that

phrase appears. It appeared in the original United

Kingdom Agreement in 1946 and it appears regularly

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in very many agreements. And that is really the

second point. It relates to - the second point,

I think, in which we submit that special leave should

not be granted and that is that although as is

outlined in my learned friend's submissions, this

phrase does appear in very many agreements and to

that extent, I suppose, it could be said to be a matter
of importance. It has never given rise to any

dispute since, at least, 1953. In fact, there are no

cases dealing with it at all. So, it is a matter which

really has been resolved without any difficulty for

at least some 40 years.

MASON CJ:  Can I ask you this question: apart from international

agreements to which Australia is a party, is it

also an expression that features in international

double-tax agreements generally?

MR IPP: Your Honour, I am not able to answer that except to

say to Your Honour that it is a phrase that appears

in the model treaty so one would expect then that

it is a phrase which does appear. It is a commonly

used phrase.

MASON CJ: Are there any decisions of other countries which bear

on its meaning and application?

MR IPP:  I am afraid I am unable to give Your Honour that

answer. I know that in the court below submissions on

both sides were that there were not.

BRENNAN J:  Mr Ipp, is Arttcle 3(2) a provision which is found

in many of the international agreements to which
Australia is a part?

MR IPP: Yes, Your Honour. That, again, comes straight of the model. These are standard provisions that have been

present in international tax agreements for very many
years and, in fact, relevantly to that, the commentary
to a model, when dealing with the meaning of

"enterprise", expressly provides that that is to be

determined by the domestic law of the States concerned.

So, in this case not only does the agreement expressly

provide that where a term is not defined, the

definition depends on the domestic law, but in the

model itself the meaning of "enterprise" is said to

be left to the domestic State for a determination under

the laws of that State.

So, it is on that basis too we submit that there

is no special point of importance because the law in

Australia, certainly relating to the phrase "carried

on", is settled.

Coming back to the point of law, in our submission,

there was no real dispute between the judges in the

court below. His Honour Mr Justice Sheppard found that

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"an enterprise", strictly speaking, on its own, had to

be interpreted broadly and it embraced not only an

entity but activities. His Honour Mr Justice Northrop

rested his judgment on that proposition, that is,

that there was a broad meaning to be given to

"enterprise" and it included an isolated activity

and this case concerned an isolated activity and

therefore the activity was, indeed, an enterprise.

His Honour Mr Justice Lee did not really consider the

meaning of "enterprise" alone.	He considered the
phrase "enterprise carried on".

MASON CJ: That was the correct method of interpretation.

MR IPP: And, in our submission, Your Honour, that, with respect,

is the case. And the simple reason for the difference

between the judges is that His Honour Mr Justice Northrop

just did not proceed to the next question.	He did not
ask himself that question.	He found that "enterprise"

had a wide meaning and never pro.ceeded to deal with

the meaning of the words "carried on". And if I may

take Your Honours to how His Honour does deal with

it. It is at page 100 at line 14. He says:

Put another way, the essential question

to be decided is really twofold and each

relates to the meaning to be given to the

word "enterprise". Does the true meaning

requre that the enterprise must be attached
to an entity whether an undertaking or

business, or does it apply to activities

unattached to an entity? If, on its

true meaning, the word "enterprise" applies

to activities without those activities
being attached to an entity, did the

activities of the appellant in acquiring

and selling the units and shares amount to an

enterprise?

And, Your Honours, that is really, in our submission,

where, with respect, His Honour went wrong because

that is not the true second question. The true second

question is:

If; on- i t.s true meaning, -the word II enterprise"

applies to activities_without thoseactivities
being attached ··to .an entity; .did ·the

aetivitie-s of the appellant in acquiring

and .. selling the units and shares amount to an

enterprise?

That is an enterprise carried on within the meaning

of the definition.	So that when His Honour proceeds
to say:

In other words, did the activities have

to constitute the carrying on (emphasis added)

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of a profit-making undertaking or scheme

or is it sufficient that he carried out

(emphasis added) a profit-making

undertaking or scheme -

he quite correctly posed the test that has to be applied

and His Honour Mr Justice Sheppard did, the next test

once it is determined that an enterprise exists.

or the next hurdle for the applicant is then whether

the enterprise is carried on or carried out and that

is an issue, although posed in this way by

His Honour at page 100, he never deals with again

in his judgment, and that appears, where he answers
the question, at pages 110 and 111. At line 20

at page 110:

In my opinion, the word "enterprise"

as used in each of Article 7(1) and Article 13(3)

of the Swiss Agreement, on its proper construction,

is to be given a broad meaning -

et cetera. He then finds that it can include one

isolated activity and with respect, Your Honours, we

do not seek to attack his judgment in that way at all.

He then, having found that, at page 111 at line 10, he

says:

In all the circumstances of this appeal,

in my opinion, the appellant, in entering
into the isolated activities .. ;.i~as~eng~ged

in an enterprise within the proper meaning

of the word - ·

so he, having found it is an isolated activity, finds

then that it is an enterprise, and he goes on at the

bottom of the page at line 24 to say, that:

constituted an enterprise within Article 7(1) - and that is to be contrasted with His Honour

Mr Justice Sheppard's approach which, we submit

with respect, is the correct one and that can be found

at page 148 at the top of the page. And, Your Honours,

this really encapsulates our submission and it is a

very brief submission. To use His Honour's words:

The difficulty which confronts the appellant

does not stem from the use of the word

"enterprise"; it arises because of the use

of the expression "carried on" in conjunction
with it. The question is whether the

transactions entered into by the appellant,

viewed in the light of the findings made
by his Honour about them which I have accepted,
amount to the carrying on of an enterprise

within the meaning of Article 7(1) -

et cetera.

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So, that, in our submission, was the correct

approach, not followed by His Honour

Mr Justice Northrop, and followed also by His Honour

Mr Justice Lee at pages 183 to 184. At page 183, at

line 21, His Honour Mr Justice Lee deals with the

point. He says that:

If Art. 7 of the Swiss Agreement is

read with the definition of "enterprise
of one of the Contracting States" contained
in Art. 3(1)(f), it is necessary for the
appellant to show that the gains made on

the sale of the units and the shares were

profits of an enterprise carried on -

and it is that, with respect, that we emphasize.

And at page 184, the next page, His Honours says at

line 9:

Because the context of the Swiss

Agreement supplies a meaning for the term

"enterprise carried on", it is unnecessary

to resort to Australian law relating to

taxes to find that meaning but such a step

would only confirm the meaning supplied by

the context.

So, His Honour Mr Justice Sheppard does look at the

Australian law; His Honour Mr Justice Lee deals with the context and the Australian law; and His Honour

Mr Justice Northrop does not deal with the position at all.

So, in our submission, there is no real uncertainty

between the judges in the court below. The issue between

them arises simply from the fact of His Honour failing

to deal with the words "carried on". So, that is the

first ground on which we oppose the grant, that is,

that the point of law is really of insignificance and

there is no genuine dispute between the judges below.

Dealing with the second point, and that is the subject-matter of the appeal, I think I have mentioned

firstly that - and this is the first case that has

arisen although the agreements, and many agreements,

contain similar clauses over the period since at least
1953 and, secondly, there is always the potential for
cases, if there was a real problem with the meaning
of the phrase, as taxation would arise under the old

section 26(a) of the INCOME TAX ASSESSMENT ACT, now

section 25A(l) and 26AAA. There was always a potential

for disputes of this kind and this is the first time

it has arisen.

The third ground is, in our submission, that

the point isof very narrow application and we put it
this way: firstly, it only deals with a very limited

class of isolated transaction and that is an isolated

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transaction which results from a taxpayer who does

not have a permanent establishment in Australia. It

is only that class of transaction with which this

application is concerned. That is the first point.

The second point under this head is that Article 23 gives an appropriate remedy. Should there be any

concern about the practical application of the
agreement, Article 23 provides that there can be

some approach through diplomatic channels to resolve

any difficulties. And this is, in fact, dealt with
by His Honour Mr Justice Lee at page 175 where he

points this out and says that no attempt has been made

to utilize that procedure.

Finally, on the issue of a very narrow application, it

is perhaps apposite to mention what His Honour

Mr Justice Northrop found to be an anomaly in the

result of the majority and his whole judgment really

flows from his view that the decision of the majority

does give rise to an anomaly and this appears at

page 105 starting at line 25 when His Honour is dealing

with the general principle which applies to this tax-

avoidance agreement. He says:

The general principle ..... 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. 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.

And His Honour goes on to say there is no rationale for
holding that where a person has a series of transactions -

His Honour points out:

It is difficult to see any rationale -

of a situation where there are a series of transactions

and the taxpayer then has the benefit of double

taxation but if there is only one isolated transaction

he does not have the benefit. And,.

based on that, he reasons that the meaning of the word

"enterprise" is sufficiently wide to have the effect

which is not an anomaly. In our submission, there is
no anomaly. It all depends on how, on the starting

point, when one approaches this agreement and, in our

submission, the way in which one should deal with the

matter is this, that the starting point is that

Australia as a sovereign State has the right and,

in fact, does tax all income which has, as its source,

Australia. It then, for the purposes of international trade and international comity, arrives at agreements

with other States whereby it agrees to give up its right

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to tax certain classes of income. Now, it has given

up that right in relation to a series of transactions

or any transaction where the taxpayer has a permanent
establishment within Australia, and that would be

regarded as the nexus point. I withdraw that.

It has not given up its right as regards that but the

other contracting State has and that is because of the

nexus.

When it comes to a series of transactions within

its State, it has given up its right so that the

taxpayer then is only taxed in his country of

residence. But where there is only one isolated

transaction then Australia has said, "We are not g1.v1.ng

up our basic right to tax income where a person comes

within the country and in one single instance earns

a profit." Now, in our submission, there is no anomaly

in that. In that case of a single transaction there

is no reason to suggest that there should not be

a double taxation.

So, if one looks at the agreement on the basis that the only part of business profits which Australia

is giving up its taxation rights is profits arising

from a series of transaction, that is, flowing from an

investment of some permanence within Australia, then

there is, in our submission, a proper rationale for

the result.

Now, the last point is that there is nothing

unusual about agreements for the avoidance of double

taxation, leaving some items susceptible to double taxation. And that has been held - there have been

two cases mentioned by His Honour Mr Justice Sheppard

at pages 137 to 138, in this Court, where the taxpayer
has sought to rely on double taxation agreements to

extend the ordinary meaning of words to take advantage

of the provisions of the double-taxation agreements
and the Court has held the taxpayer to the
ordinary meaning of the words, so that the taxpayer

has not obtained the benefit of the double-taxation

agreements and those are the cases of EMMANUEL V

FEDERAL COMMISSIONER OF TAXATION and ENGLISH, SCOTTISH

AND AUSTRALIAN BANK.

MASON CJ: That must flow from Article 3(2) in any event.

MR IPP: With respect, Your Ho.nour. And then, finally, there is

a clear intent on the parties to exclude certain kinds

of income from the provisions of the agreement and that

is really dealt with again by His Honour Mr Justice Sheppard

at page 139 where he refers to:

The omission from the Swiss agreement

of a provision to the effect of Article 21

of the OECD Model -

and Article 21 of the model contained a sweeper provision,

that is, it contained a provision to the effect that

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there would always be payment of single tax. So

that if tax was paid in one contracting State, it

would not have to be paid in another State. Now,

that has been expressly omitted from this agreement

thereby indicating an intention on the part of the

parties that that general principle is not to apply.

In an express reservation on the commentary to

the model, Australia expressly stated that it has

reserved its position on Article 21, that is, that

it did not bind itself to comply with that sweeper
provision. So, in our submission, there is nothing
unusual about the result. And those are the four
points on which we resist the application, may it

please Your Honours.

MASON CJ:  Thank you, Mr Ipp. Mr Gzell, you might direct your

attention to persuading us that the conclusion reached

by the Full Court of the Federal Court is sufficiently

arguable to warrant the grant of special leave.

MR GZELL:	Yes, Your Honour. Your Honours, we start with the proposition that the question of the construction
of the double-tax agreements must be approached in a broad fashion because terms are used within the
double-tax treaties that may have no relevance to the
domestic laws of either country but are used in an
international context. That was said in OSTIME
and the reference to that is contained in
Mr Justice Sheppard's judgment at page 142 where it
is su£fi~ient for our purposes simply to draw
Your Honours' attention to the portion of the speech
of Lord Radcliffe that is there set out. What
His Lordship said about half-way down the paragraph
that is set out:

The aim is to provide by treaty

for the tax claims of two governments

both legitimately interested in taxing a

particular source of income either by

resigning to one of the two the whole

claim or else by prescribing the basis on

which the tax claim is to be shared between

them.

No question - I might interpolate - at that stage of suggesting that there is an absence of covering the field in relation to the approach to be made to the double-taxation agreement.

MASON CJ:	Was there an Article 3(2) provision?
MR GZELL:	An Article' 3(2) provision exists in many of the

treaties. I am not sure whether, in 1946, it did

exist but the point about the Article 3(2) provision,

in our respectful submission, is to allow for terms of

art that are used in the treaty to be considered first

in· terms of the domestic law of the country but if

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the application of that domestic law of the country would not give rise to the underlying policy of the double-tax agreement, then the context will suggest

that that term be not used in accordance with the

general approach to treaty interpretation.

MASON CJ:  Do you have any authorities that deal with the

interpretation of a provision such as Article 3(2)?

MR GZELL:  No, Your Honour. Indeed, the question whether

the application of Article 3(2) was ambulatory or

static was a matter that was not determined in the

SHERRITT GORDON case of which Your Honour

the Chief Justice was one of the Justices. No, we

do not, Your Honour. Indeed, it is surprising that

there are no authorities that stand out in relation

to the application of Article 3(2) and, in our

submission, the reason is that Article 3(2) is meant

to enable resource to the domestic law of one of the
two contracting States if there is a term of art;

not a resort to the domestic law of one of the two

contracting States when one simply has words such as

"carried on".

MASON CJ: Yes, the language of Article 3(2) may support you

in that when it refers to "meaning under the law".

MR GZELL:  Yes, quite, Your Honour. I was attempting to say

that terms such as "enterprise" do not necessarily

find a correlative in either of the domestic laws

of a contracting State and so Lord Radcliffe refers to

that circumstance in the forerunner of the present

agreement that we have.

We submit that Their Honours in the court below

each approached the task - perhaps I should draw

Your Honours' attention to a passage in the OECD

Model Convention that was cited below but does not

appear to have been repeated in any of the judgments,

and I have four copies which I will - - -

BRENNAN J: Mr Gzell, the phrase that causes you the difficulty

here is not so much "enterprise", it is "carried on",

is it not?

MR GZELL:	Quite, Your Honour.
BRENNAN J:	And the notion of "carried on", whether you call it a

succession of acts or whether you call it a repetition

of acts, has been used in this country in qualification

of the term "business".

MR GZELL: Quite, Your Honour.

BRENNAN J: Now, if you have got a phrase, "carried on", used

in qualification of "enterprise", is there room for

distinction?

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MR GZELL:	We would say, no, Your Honour.	We would say that

when you come down from a business to transactions

which we might call an adventure in the nature of

trade, then the authorities in this country dealing

with the notion of "carry on" are distinguishable

and when one is talking about an adventure in the

nature of trade, the notion of "ce.rried on" or

"carried out" are equally applicable.

We would also say, Your Honour, that that does

not seem to have deterred courts in the past because

in the Supreme Court of Canada that was precisely the

circumstance that was involved. Now, admittedly,

this case does not discuss the question whether or

not an adventure in the nature of trade is an

activity of an enterprise carried on as distinct from

an activity of an enterprise carried out, but in the

Supreme Court of Canada Their Honours found that the

finding of the court below, that it was an adventure

in the nature of trade, was correct and that being so

they found no difficulty in providing treaty exemption

to that circumstance and the treaty, similar to

ours, defined the terms "Irish enterprise" and

"Canadian enterprise" as an industrial or commercial

enterprise or undertaking carried on by a resident of

Ireland or an industrial or commercial

enterprise or undertaking carried on by a resident

of Canada.

BRENNAN J: And was the adventure there a one-off activity?

MR GZELL:  Yes, Your Honour, very similar to this. It was a

purchase of shares or a series of purchase of shares

and then a sale of the entirety and the Supreme

Court found little difficulty in the conclusion.

The relevant passage is at page 137 of the report

about half-way down that page:

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.	I agree with that assumption and,

in my view, such profits would have been

taxable income in the hands of a resident

of Canada. However, since I am of the

opinion that respondent is entitled to

exemption under the Canada-Ireland Income Tax

Treaty, I prefer to dispose of the appeal

on that basis.

And then Your Honours will see that the relevant

definition of the term "Irish enterprise" and "Canadian

enterprise" contains, like it does in our agreements,

the words "carried on".

So that essentially, Your Honours, we submit that

the majority of the court below erred in taking the

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view that the words "carried on" were a term

enlivening Article 3(2). But if we are wrong in

that submission then, we submit, in the context

of an adventure in the nature of trade the dichotomy

between "carried on" -

MASON CJ: Very well, Mr Gzell, the Court need not trouble

you further in the circumstances. There will be a

grant of special leave to appeal.

AT 12.01 PM THE MATTER WAS ADJOURNED SINE DIE

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