Thorpe Nominees Pty Ltd v Commissioner of Taxation
[1988] FCA 655
•11 Apr 1988
3UDGMENT No ..... b ? z & a
CATCHWORDS
INCOME TAX - Appeal to the Supreme Court of New South Wales from a decision of a Board of Review - whether question of
law involved - whether income formed part of the assessable income of trustee of a trust for the purposes of S. 99 of the Income Tax Assessment Act 1936 - determination of the source
of income for the purposes of Part 111 Division 6 of the
Income Tax Assessment Act - scheme for the purpose of
avoiding income tax - agreements for the sale of nomination
rights in relation to options over land slgned outside Australia.
Income Tax Assessment Act 1936: ss. 95, 97, 98, 99, 9 9 ~ , sub-5. 196(1)
Income Tax Assessment Act 1915 (Cth): S. 10, sub-s. 14(b). THORPE NOMINEES PTY. LIMITED v THE COMMISSIONER OF TAXATION
SYDNEY OF THE COMMONWEALTH OF AUSTRALIA
G149 of 1987
LOCKHART. SHEPPARD and BURCHETT JJ.
IN THE FEDERAL COURT OF AUSTRALIA )
1
NEW SOUTH WALES DISTRICT REGISTRY ) NO. G149 Of 1987 )
GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION
BETWEEN: THORPE NOMINEES PTY. LIMITED Appellant
-
AND : THE COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIARespondent
JUDGES MAKING ORDER: LOCKHART, SHEPPARD AND EURCHETT JJ. DATE ORDER MADE: 4 NOVEMBER 1988 WHERE ORDER MADE: SYDNEY
MINUTE OF ORDER
THE COURT ORDERS THAT: 1. The appeal be dismissed.
2. The appellant pay the costs of the respondent of the appeal.
NOTE: Settlement and entry of orders is dealt with in Order
36 of the Federal Court Rules.IN THE FEDERAL COURT OF AUSTRALIA ) 1 NEW SOUTH WALES DISTRICT REGISTRY ) No. G149 of 1987 1
GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION
BETWEEN: THORPE NOMINEES PTY. LIMITED Appellant
AND : THE COMMISSIONER OF TAXATION OF THE - COMMONWEALTH OF AUSTRALIA
Respondent
COURT : LOCKHART, SHEPPARD AND BURCHETT J3.
DATE : 4 NOVEMBER 1988 PLACE : SYDNEY
REASONS FOR JUDGMENT
LOCKHART J.
The appellant, Thorpe Nomlnees Pty. Limited ("Thorpe
Nominees"), appeals to this Court from the judgment of the Supreme Court of New South Wales, Administratlve Law Division
(Enderby J.), in favour of the respondent, the Commissioner
of Taxation. The matter came to the Supreme Court on appeal
from a decision of an Income Tax Board of Review also in
L.
favour (by majority) of the Commissioner. The reference to
the Board of Review was in respect of assessments made by the Commissioner under S. 99 of the Income Tax Assessment Act
1936 ("the Assessment Act") by which the sum of $150,000
received during the year of income ended 30 June 1974 and the
sum of $260,000 received during the year of income ended 30
June 1976 were treated as the net income of a trust estate
("the Duncan
trustee, being income to which no beneficiary was presently
entitled.trust") of which Thorpe Nominees was the
The question in issue income constituted
is
whether the source
of the
by the receipt of those two amounts was
within Australia or Switzerland.
There is an initial question as to whether the appeal to
the Supreme Court from the decision of the Board of Review
involved a question of law (sub-s. 196(1) of the Assessment
- Act). The critical question is whether the relevant income
for the years of income 1974 and 1976 was assessable income of the Duncan trust, there being no beneficiary entitled at
any relevant time to the income of the trust. That is the
question posed by ss. 95 and 99 of the Assessment Act in the form which those sections took at relevant times. Only trust
estates with income from Australian sources are within the scope of Div. 6 of Part I11 of the Assessment Act: Union
Fidelity Trustee Co. of Australia Limited v Federal
Commissioner of Taxation (1969) 119 CLR 177 per Barwick C.J. at 183, per Kitto J. at 187, per Menzies J. at 189. Whether
the facts as found by the Board of Review led to the
conclusion that there was income which formed part of the
assessable income of Thorpe Nominees as trustee of the Duncan
trust for the purposes of S. 99 can be determined only by
applying the relevant legal tests as to the determination of
the source of income for this purpose. Hence, whether the
moneys in the hands of Thorpe Nominees as trustee fell within those sections is a question of law: Lombardo v Commissioner of Taxation (1979) 79 ATC 4542 per Bowen C.J. at 4543-6, per Franki J. at 4547 and per Toohey J. at 4549-50. Moreover, questions were raised in the notice of appeal from the Board of Review's decision to the Supreme Court as to whether the
Board of Review had applied correct principles of law in reaching its ultimate conclusions of fact. The issues raised in the appeal to the Supreme Court in turn involved the
questions whether the Board took into account extraneous
considerations or failed to take into account relevant
considerations. In my opinion those grounds of appeal raised questions of law. I am therefore satisfied that the appeal from the decision of the Board of Review to the Supreme Court
involved questions of law.
The question which is before us, to which the argument
of both parties was primarily directed, is whether the
Supreme Court erred in its finding that the source of the relevant income was Australia.
Facts
c
The essential facts are not in dispute, but they must be stated in some detail to understand the issues
in the case.
Collaroy Holdings Pty. Limited ("Collaroy Holdings"), a
company incorporated in New South Wales, owned land in that
State including land at Hay with an area of 400 hectares and
land at Broke with an area of 370 hectares. In 1974 both
parcels of land were ripe for subdivision and development. Leonard Thomas Thorpe and his wife were the shareholders and
directors of Collaroy Holdings; Mr. Thorpe was its driving
force. Mr. Thorpe wished to subdivide and develop the land
at Hay and Broke, but did not wish Collaroy Holdings to pay income tax on the profits from the sale of the subdivided lots. He received advice from senior and junior counsel of
the New South Wales Bar which indicated that a mechanism with an off-shore component should be established. Counsel took the view, in the light of income tax law as then judicially
interpreted, that such amechanism would minimize the
liability to income tax of Collaroy Holdings. The broad plan was to establish a trust; for Collaroy Holdings to grant options to purchase the land to the trustee or its nominee;
for the trustee to nominate another company as purchaser
pursuant to an agreement to sell the nomination rights, the
agreement to be made in writing outside Australia; and for
the other company to exercise the options. In the result,
the price received by the trustee from the sale of the nomination rights was perceived as being a receipt from a
source outside Australia, thus attracting no Australian
income tax; and the price paid by the other company for the
acquisition of the nomination rights would represent the cost
to it of the land, thereby reducing for tax purposes its profit resulting from the sale of the land on subdivision in Australia. The plan was put into operation in February 1974, though with some refinements.
On 14 February 1974 Thorpe Nominees was incorporated in
New South Wales. By deed of settlement dated 15 February 1974 the Duncan trust was established. The settlor was a
person of whom the evidence reveals little except that he was
a pensioner named Duncan who was not associated with Mr.
Thorpe. Thorpe Nominees was appointed trustee of the trust. By the deed of settlement the settlor settled $50 upon Thorpe
Nominees to be held by it upon trust for the children and grandchildren of Mr. Thorpe and their spouses. The deed was
prepared by Mr. Thorpe's solicitor ("the solicitor") on the
instructions of Mr. Thorpe and was settled by the senior and
junior Counsel mentioned earlier. The directors of Thorpe Nominees were Mr. Thorpe and his wife. They were also its shareholders and Mrs. Thorpe was its Secretary. Mr. Thorpe controlled Thorpe Nominees as well as Collaroy Holdings.
On 18 February 1974 two deeds poll were executed by
Collaroy Holdings whereby it granted Thorpe Nominees or its
nominee options to acquire the land at Hay for an exercise price of $59,000 and the land at Broke for an exercise prlce of $130,000. Each option subsisted for six months and would
expire unless exercised on or before 18 August 1974.
It was submitted by counsel for Thorpe Nominees on the
appeal that its receipt of the option rights was by way of
gift from
correctly described as a volunteer does not matter. Whatever
is the correct legal categorisation, Thorpe Nominees acquiredCollaroy Holdings. whether Thorpe Nominees is
rights
common directors and shareholders of both Thorpe Nominees and
Collaroy Holdings, but the solicitor was the solicitor forunder the deeds. Not only were there
the option both companies and Mr. Thorpe. The solicitor prepared the deed of settlement and the deeds poll.
On 10 April 1974 an accountant ("the accountant") who
was a friend of junior counsel who had advised on the
transaction, but was not the accountant of Mr. Thorpe and of the companies associated with him, was appointed agent for
Nawor Investments Pty. Limited ("Nawor"), company a
incorporated in New South Wales on 19 February 1974, the directors of which were Mr. and Mrs. Thorpe. The accountant was appointed as Nawor's agent "to negotiate for and execute
on its behalf in [blank left for place of negotiation and
execution] such Agreements and documents as you may hereafter
be directed by the said [Nawor]". This instrument of
appointment was typed in the solicitor's office. The
solicitor said in evidence before the Board of Review that "Switzerland" should have been inserted in it as the place
where the confirmed that this was the intention
agreements
would
be executed.
The
accountant
of the parties. He
said that he was given the deeds poll by the solicitor to take to Switzerland.
Another company must be mentioned: Vaucraft (NO. 10)
Pty. Limited ("Vaucraft") which was also incorporated in New
South Wales. On 19 April 1974 Mr. Thorpe and the accountant
of Mr. Thorpe and the companies associa .ted with him ( "Mr.
Thorpe's accountant") were appointed additional directors of
Vaucraft. The directors of Vaucraft prior to that date were junior counsel who advised in the transaction and two other
persons. The directors onwards were Mr. Thorpe, Mr. Thorpe's accountant, the junior
and shareholders
from
that
date
counsel and two other persons.
On 18 April 1974 the directors of Thorpe Nominees (Mr.
and Mrs. Thorpe) resolved by telephone that Thorpe Nominees
retire as trustee of the trust and that Vaucraft be appointed in its place.
On 19 April 1974 there were present in Zurich at the
offices of Swiss attorneys the senior and junior counsel, Mr. Thorpe, Mr. Thorpe's accountant and the other two directors
of Vaucraft. The other accountant was also present as
Nawor's representative, having brought with him the deeds poll which he deposited with the Swiss attorneys. Most of the relevant documentation was typed in Switzerland on or just before 19 April 1974.
On 19 April 1974 the following events took place in
Switzerland and at the times indicated: 11.50 am Vaucraft resolved to register a branch office in
the Canton of Glarus, Switzerland;4.30 pm
Vaucraft was appointed trustee of the Duncan Trust in place of Thorpe Nominees and Vaucraft resolved to appoint Mr. Thorpe to negotiate
on
its behalf with Nawor and with another company
for the sale by Vaucraft of the right to be nominated to exercise the options granted on 18
February 1974 in such terms and for such consideration as Mr. Thorpe might determine. The total consideration for the sale of the right to
be nominated under the five options was to be at least $500,000. 4.40 pm a written offer was made by the accountant as agent for Nawor to purchase from Vaucraft for a
consideration of $280,000 ($20,000 payable by 30
June 1974 and the balance by 30 June 1976) the right to be nominated as the person to exercise
the option granted to Thorpe Nominees in respect
of the land at Hay.
4.45 pm Vaucraft resolved to authorise a Swiss attorney or such other persons as Hr. Thorpe thereafter nominated, to accept the offer from Nawor, "such
acceptance to be made only in Switzerland and only after the registration of a Branch of this company in the Canton of Glarus, Switzerland, and for that purpose to sign and exchange form of
that Agreement". Vaucraft further resolved to
authorise the Swiss attorney "to deliver in Switzerland to a duly authorised representative
of Nawor the form of nomination referred to in
paragraph 1 of the aforesaid Agreement after exchange of counterparts of the said Agreement".
5.10 pm A written offer was made by the accountant as
agent for Nawor, with aform of agreement
attached, to purchase from Vaucraft for a
consideration of $130,000 (payable by 30 June
1974) the right to be nominated as the person to
exercise the option granted to Thorpe Nominees in
respect of the Broke land.
5.15 pm Vaucraft resolved to authorise the Swiss attorney
to accept that offer in Switzerland, the minute having the same wording as did the minute of
Vaucraft mentioned above passed at 4.45 pm.
Also on 19 April 1 974 the instruments of nomination were
executed on behalf of Thorpe Nominees. They were addressed to Collaroy Holdings, and Nawor was nominated as the party having the right to exe rcise the options.
On 24 April 1974 Vaucraft applied to the Reserve Bank of
Australia for approval to open its branch in Switzerland and for the Swiss attorney to be the sole representative of the company in Switzerland. On 29 April 1974 the Reserve Bank granted this approval.
On 10 June 1974 Vaucraft was registered in the Canton of
Glarus, Switzerland; "the purpose of business" as shown on the Commercial Register was "[tlaking over and administration o f Trusts arising from any agreements, trust declarations or any other deeds in the capacity as trustee".
On 12 June 1974 some of the same people were again
present at the offices of the Swiss attorneys in Zurich
including the accountant and senior counsel, but not Mr. Thorpe or junior counsel. On that day the offers by Nawor to be nominated as the grantee under the options were accepted
by Vaucraft and agreement was reached as to payment for the
nomination rights.
Also on 12 June 1974, at two meetings of directors of
Nawor held in Sydney, the solicitor, who was also a
shareholder in NawOr, and his wife resolved to appoint Mr.
Thorpe as agent of the company for the purpose of exercising the options to purchase the land at Hay and Broke.
On 14 June 1974 Mr. and Mrs. Thorpe, as directors of
Collaroy Holdings resolved to affix the common seal of that
agreements for exercising the options were signed the sale of the land. Notices
company to by Nr. Thorpe on behalf of
Nawor that day.
. 11.
In Switzerland on 12 June 1974 the amounts
accordance
with
the
two
agreements
reached
In
of $130,000 and
$280,000, being amounts payable for the sales of the
respective nomination rights, were paid as described below.
The payments were made by two round robins of cheques; one in late June 1974 and the other in late June 1976. Temporary bank finance was obtained.
On 28 June 1974 Nawor resolved to accept an offer by
Vaucraft to lend $150,000 to NaWOr and also resolved to make
the payments of $130,000 and $20,000 to Vaucraft. On 3 July
1974 the directors of Vaucraft noted the receipt of $150,000 from Nawor and confirmed the loan of $150,000 to Nawor. On
23 June 1976 the directors of Nawor resolved to pay Vaucraft $260,000 being the balance due under the Agreement of 12 June
1974 in respect of the nomination rights in relation to the
option over the Hay land and also to accept the offer of Vaucraft to lend $260,000 to Nawor. On 30 June 1976 a sum
which included the amount of $260,000 was lent by Vaucraft to Nawor and Nawor paid Vaucraft a sum which Included the amount
of $260,000.
Thus, the sum of $130,000 in respect of the Broke land
was paid by Nawor to Vaucraft on 20 June 1974. In relation
to the Hay land, $20,000 of the total sum of $280,000 was paid by Nawor to Vaucraft on 20 June 1974 and the balance of $260,000 was paid by Nawor to Vaucraft on 30 June 1976. This explains the amounts of $150,000 and $260,000 which were the
. 12.
subject of the S. 99 assessments for the years ended 30 June 1974 and 1976.
On 20 March 1978 Vaucraft retired as trustee of the
Duncan Trust and appointed Thorpe Nominees in its place.
Mr. Thorpe was a director of Vaucraft, Nawor and
Collaroy Holdings and his wife was the secretary of Collaroy
Holdings. The solicitor and Nr. Thorpe's accountant acted as solicitor and accountant respectively for Hr. Thorpe, his
family and all relevant companies. The solicitor was also a director of and shareholder in Nawor.
It was at all relevant times understood that the events
relating to the sale of the nomination rights would occur outside Australia, but it had been thought initially that
this would be done in Hong Kong or some other part of Asia.
In due course Switzerland was selected.
The various events that ook place which I have
described were admitted to be for the purpose of reducing income tax. Findings of the Supreme Court and the Board of Review
Two of the three members of the Board of Review
(Mr. McCarthy dissenting) relevant income of Thorpe Nominees was within Australia.
held
that
he
source of the
. 13.
On appeal to the Supreme Court Enderby J. held that the
relevant profits were derived from an Australian source. In
reaching this conclusion his Honour found, amongst other
things, that the relevant steps taken in Switzerland were the fulfilment of what his Honour described as "the shopping list" which had been prepared in Australia in advance on
advice from Australian counsel. It was conceded both in the Board of Review and before Enderby J. that the scheme was "pre-ordained". Submissions The submissions of counsel before us may be briefly
stated. Counsel for Thorpe Nominees submitted that it is the proximate, not the ultimate, source
of
income which is
the
test to be applied in determining the source of the income in
question. Reliance was placed upon the judgment of Stephen
J. in Esquire Nominees Limited v Federal Commissioner of
Taxation (1973) 129 CLR 177 especially at 225. The profit
derived by Thorpe Nominees was from the sale of the
nomination rights under the option agreement executed and
completed in Switzerland. It was argued that, although the
value of those rights was referable to the value of land situated in Australia, that was too remote to deduce that the
profit came from an Australian source; and that the element of planning which had led to the apparent derivation of the income from Switzerland was irrelevant.
It was argued by counsel for the Commissioner that the
source of income is a matter of fact, the questlon being as
to what a practical person would regard as the real source of income. Switzerland was merely the stage where the actors
played out their parts following the script written in Sydney . The plan of action, pursuant which o the transactions were carried out, was designed in Australia; and the real subject of the nomination rights was the ability to
purchase land in Australia. It was submitted that no real decisions were made in Switzerland.
Counsel for the Commissioner argued, in the alternative,
that 6 . 260 of the Assessment Act applied to avoid the
arrangement to the extent that it avoided income tax. It was also argued that notwithstanding the decision of a Full Court of this Court in Oakey Abattoir Pty. Limited v Federal Commissioner of Taxation (1984) 84 ATC 4719, the doctrine of fiscal nullity applied and that the doctrine's application
led to the conclusion that there was an Australian source of income. Statutory Provisions
The relevant statutory provisions are to be found in
Div. 6 of Part I11 of the Assessment Act, which prior to an amendment by Act NO. 12 of 1979, was titled "Trustees". The
general scheme of Division 6 has been discussed in many
cases, notably Tindal v Federal Commissioner of Taxation
(1946) 72 CLR 608 per Latham C.J. at 618; Federal Commissioner of Taxation v Belford (1952) 88 CLR 589 per
Dixon C.J. at 596-8 and per Taylor J. at 606-7; and Union Fidelity Trustee Co. of Australia Limited (supra) per Barwick C.J. at 179-182. Latham C.J. observed in Tindal's Case at 618 that ss. 95-99 were designed:
"to secure payment of tax on the whole of the net
income of a trust estate, ither f om a
beneficiary or the trustee, whether or not that
income is paid over to or on account of the beneficiary".
The provisions of Division 6 apply only where there is
income of a trust estate as defined in S. 95, in the form
which the section took prior to amendment by Act NO. 12 of 1979. Section 95 then defines "the net income of a trust .e
estate", for the purposes of Division 6 , as meaning:
"the total assessable income of the trust estate calculated under this Act as if the trustee were a
taxpayer in respect o f that income, less all
allowable deductions, except he concessional deductions and deductions under Division 16C and
except also, in respect of any beneficiary who hasno beneficial interest in the corpus of the trust
estate, or in respect of any life tenant, the
deductions allowable under section 80 or section
BOAA in respect of such of the losses of previous
years as are required to be met out of corpus." The purpose of Div. 6 is to tax trust income in the year
of income in which it is derived by the trustee and it
apportions liability to tax between the trustee and the
beneficiaries according to whether and to what extent the
beneficiary is presently entitled to receive the income. In the Union Fidelity Case Barwick C.J. said at 182 that the
"purpose of these three sections in Div 6, ss. 97,
98 and 99, it seems to me, is to anticipate the receipt by a beneficiary of the share of the trust
income upon the receipt of which ... he would be liable to tax: and to bring the share of that
income to tax before it is received by a beneficiary."
At 183 the Chief Justice added:
"The scheme of the Act therefore seems to me to be that tax which would be payable by a beneficiary
... at the time of receipt of the share of the income of a trust estate will be exacted at the earlier point of time, namely, in the year of tax
in which the beneficiary is entitled to ... a share of that income."
Section 97, which was again amended by Act NO. 12 of
1979, at the relevant time imposed liability to tax on the
beneficiary in respect of the share of the net income of thetrust estate to which he was presently entitled, provided the
beneficiary was under no legal disability. Where the
beneficiary was presently entitled but under alegal disability, for example, infancy, bankruptcy or lunacy, S. 98
imposed the liability to tax in respect of the beneficiary's share separately on the trustee. Sections 99 and 99A in the
form which was in force at the relevant time, imposed
liability to tax on the trustee in respect of any balance of the net income not allocated either to the presently entitled
beneficiary under S. 97 or to the trustee under S . 98. This may be the whole or part only of the net income of the trust.
The liability of the trustee under S . 98 is in hls capacity as trustee for the presently entitled beneficiary; but under S. 99 or b. 99A the trustee's liability is as representative
of the trust estate. Any part of the "net income" of the
trust estate as defined in S. 95 which is not liable to tax under S. 97 or 98 is attributed to the trustee under S. 99 or S. 99A. Findings
The crucial question in the case is whether the income
derived by Thorpe Nominees was from sources within Australia
or from Switzerland. In the present case the meaning of "source" arises under Div. 6 of Part I11 of the Assessment
- Act and in particular in relation to ss. 95 and 99 of that Act in the form which those sections took during the relevant
years of income. The word "source" is not defined in the
Assessment Act; but its meaning has been frequently
considered in judgments of Australian courts, in particular the High Court. Sometimes the discussion has occurred in the context of the taxation of dividends paid to a taxpayer by a
company out of profits derived by it from sources in or outside Australia under S . 44 of the Assessment Act. See,
for example, Nathan v Federal Commissioner of Taxation (1918)
25 CLR 183 and Esquire Nominees Limited Federal v Commissioner of Taxation (supra). But the discussion has not
been confined to the context of dividends, and It has taken
place in a wider framework: see, for example, Federal
Commissioner of Taxation v Mitchum (1965) 113 CLR 401; Cliffs International Inc. v Federal Commissioner of Taxation (1985) 85 ATC 4374 and Federal Commissioner of Taxation v
Efstathakis (1979) 79 ATC 4256.
.
The cases which discuss the meaning of "source" with
the context of S. 44 which provides that the assessable income of assessability of dividends do so in the
respect to
a shareholder in a company, if he is a resident, includes
dividends paid to him by the company out of profits derived by it from any source, and, if he is non-resident, includes dividends paid to him by the company to the extent to which
they are paid out of profits derived by it from sources in
Australia. Thus the 'source" for S. 44 purposes is the
source of the company's profits from which dividends are
paid. The dividend cases are of considerable assistance in
determining the meaning of "source" generally for the
purposes of the Assessment Act, though subject to the cautionary note that the question of the source of the
profits of a company from which the dividends are paid for the purpose of S. 44 is not the same question as the source
of a taxpayer's income. In Nathan's Case (supra) it was said at 189-190 in the judgment of the High Court read by Isaacs J., with reference to ss. 10 and 14(b) of the Income Tax Assessment Act 1915 (Cth) as to the source of dividends:
"The Legislature in using the word 'source' meant,
not a legal concept, but something which a
practical man would regard as a real source of income. Legal concepts must, of course, enter
into the question when we have to consider to whom
a given source belongs. But the ascertainment of
the actual source of given a income is a practical, hard matter of fact."
The passage from the judgment of the High Court in
Nathan's Case which I cited above has been clted as
authoritative in a number of cases including judgments of the High Court in Studebaker Corporation of Australasia Limited v
Commissioner of Taxation (NSW) (1921) 29 CLR 225 at 233;
Mitchum's Case (supra) per Barwick C.J. at 406 and Esquire Nominees (supra) per Gibbs J. at 192.
The phrase "practical, hard matter of fact" appears in
many of the reported cases where the meaning of the word "source" was discussed including cases earlier than Nathan's
Case. The use of the word "hard" renders the meaning of the phrase a little opaque, a difficulty adverted to in some of
the cases including Commissioner of Taxation (N.S.W.) v Freeman (1956) 30 ALJR 42 at 48.
It must now be taken as accepted that the phrase
"practical, hard matter of fact" embodies the notion that the
question must be decided "in accordance with the practical
realities of the situation without giving undue weight to matters of form, and not by the application of absolute rules
of law": per Gibbs J. in Esquire Nominees (supra) at 192.
Although Gibbs J. was reversed, his Honour's analysis of the
authorities on the question of "source" was expressly approved by Barwick C.J. on appeal at 213 and by Menzles J.
at 221.
In Mitchum's Case Barwick C.J., with whom Menzies and
Owen JJ. concurred, said at 407:
"The conclusion as to the source of income for the
purposes of the Act is a conclusion of fact.
There is no statutory definition of 'source' to beapplied, the matter being judged as one of
practical reality. In each case, the relative
weight to be given to the various factors which
can be taken into consideration is to be
determined by the Tribunal entitled to draw the ultimate conclusion as to source. In my opinion, there are no presumptions and no rules of law
which require that that question be resolved in any particular sense."
See also the observations of Menzies J. in Esquire Nominees at 220-221 and of Stephen J. at 225; and the analysis of the
cases by Bowen C.J. in Federal Commissioner of Taxation v Efstathakis (supra) at 4258-4259. At 4259 his Honour said
that when the question of source is in issue:
' l... the answer is not to be found in the cases, but in the weighing of the relative importance of
the various factors which the cases have shown tobe relevant."
Each of these formulations, though expressed in
different language, is consistent with the other and should be applied in the present case.
It is important to analyse each of the steps taken in
this matter from the date of incorporation of Thorpe Nominees to the exercise of the option in June 1974 and the subsequent receipt of the moneys in question in June 1974 and June 1976;
but it is unreal to sever the relevant events into occurrences in Australia on the one hand and those in
Switzerland on the other. The relevant events must be looked
at as a whole to determine the practical question of the
source from which Thorpe Nominees derived the income in question in this case.
There was a plan or scheme, call it what you like,
devised in Australia for the purpose of avoiding income tax
and to a lesser degree of saving New South Wales stamp duty. The Duncan Trust was established in Australia. All companies
and natural persons relevantly connected with the plan wereAustralian residents, the companies being Thorpe Nominees,
Collaroy Holdings, Vaucraft and Nawor; and the natural
persons being accountant, Mr. Thorpe's accountant,
Mr. and
Mrs.
Thorpe,
the
solicitor,
the
senior and junior
counsel and other directors of Vauccaft. The land subjected
to all the fine tuning was situated in New South Wales and was ultimately sold to persons in New South Wales. Collaroy Holdings granted the options to Thorpe Nominees in Australia.
Although the steps to which I have referred earlier were
taken in Switzerland in particular on 19 April, they were
taken on advice from Australian lawyers and were plainly taken pursuant to a plan pre-arranged in Australia.
Certain of the relevant contracts were signed in
Switzerland, but payments to be made thereunder were made in
Australia. It Switzerland and that approval had not been obtained from the
appears
that
there
were
no
funds
in
Reserve Bank to remit funds from Australia to Switzerland other than the costs of the Swiss attorneys.
The agreements for the sale of the nomination rights
between Vaucraft and Nawor were executed in Switzerland; but Nawor exercised the options in Sydney on 13 and 14 June 1974 and Vaucraft received the purchase price in Australia.
Viewed as a matter of substance rather than form it is
plain, in my opinion, question is Australia
that
the
source
of
the
income
in
not Switzerland. The activities in
Switzerland were obviously part of a pre-arranged plan, which if not pre-arranged in every detail was at least pre-arranged in all important respects with only a few loose ends to be
determined. Switzerland was selected as a place outside
Australia, there being no particular reason for Switzerland as opposed to some other place outside Australia other than
the favourable income tax rates offered by the Canton of Glarus. The Canton of Glarus was selected because of those favourable income tax rates at a time when it appears to have
been thought that the beneficial tax rate afforded by S . 23(q) of the Assessment Act would form the basis of the
scheme. In that sense Switzerland was but an accident in the selection of an international scene for an essential step in the plan. It would give undue weight to matters of form to regard Switzerland as the source of the income in question. Having regard to the practical realities of the sltuation and the substance of the matter, the real source of the income in question was Australia.
It is unnecessary in the circumstances to consider the
arguments advanced with respect to S. 260 and the doctrine of
fiscal nullity.I would dismiss the appeal with costs.
I certify that this and the preceding twenty-two (22) pages are a true copy of the reasons for judgment herein of the Honourable Mr. Justice Lockhart.
Associate fi.J;ehd+ - Date: 4 November 1988
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY
) No. NG149 of 1987 1 GENERAL DIVISION 1
On appeal from the Supreme Court of New South Wales Administrative Law Division BETWEEN:
THORPE NOMINEES PTY. LIMITED
Appellant
AND : - THE COMMISSIONER OF TAXATION OF THE
COMMONWEALTH OF AUSTRALIA
Respondent
THE COURT: LOCKHART, SHEPPARD and BURCHETT JJ.
DATE : 4 NOVEMBER 1988
REASONS FOR JUDGMENT
SHEPPARD J.: In this matter I have had the advantage of reading
the judgments to be delivered by the other members of the Court. Subject to one reservation, I agree in their reasons and in their
conclusion that the appeal should be dismissed.
My reservation concerns the question whether the decision of
the Board of Review involved a question of law; see S. 196 of the Income TaX Assessment Act 1936 in the form in which it was at the
relevant time. I shall return to that matter in due course. For the moment I shall assume that a question of law was involved so that the appeal was one which the Supreme Court had jurisdiction
to entertain. Counsel for the appellant focused our attention
. .
2.
upon a dictum from the judgment of Stephen J. in Esquire Nominees Limited v. Federal Commissioner of Taxation (1973) 129 C.L.R. 177 in which his Honour said (p. 225):- I t
sense that 'source' is used. ... it is clear that it is in a locational
Again, as in problems of causation, the
answer to any question as to 'source' or 'origin' must depend upon whether a proximate or a remote, or perhaps ultimate, source or origin is inquired after.
To say that questions of source depend upon
practical matters fact of will not
necessarily assist in determining which of a
range of possible meanings of source is
meant, but context should provide a solution. The context furnished by the proviso to S.
7 ( 1 ) is that of the individual taxpayer and
of his derivation of his income either by his
own acts or from property rights which he
possesses. It is a context unconcerned with the questions of ultimate origin; the source
referred to is that from which income is produced by the taxpayer's own acts of derivation or ownership. All this suggests
that a quite proximate source is being referred to."
Subsection 7(1) of the Act referred to by his Honour was the
section in question in the case. It provided that the Act should
extend to the Territory, inter alia, of Norfolk Island, but was
not to apply to any income derived by a resident of that Territory "from sources" within the Territory.
Later in his judgment (pp. 228-9) Stephen J. referred to a
possible difficulty in reconciling passages from the joint
judgment in Commissioner of Taxation (N.S.W.) v. Freeman (1956)
30 A.L.J. 42 with the joint judgment in Nathan v. Federal
Commissioner of Taxation (1918) 25 C.L.R. 183. Stephen J.
continued (p. 229) : - "Whatever differences may be discerned in
these two decisions, Freiman's Case (1956)
does not, I think, cast any doubt upon the factual character of the investigation into source of income emphasized in Nathan's Case and acknowledged in later cases, including
decisions of this Court subsequent to the
decision in Freeman's Case."
To me what hi6 Honour there said shows that nothing said in
the dictum relied upon by counsel for the appellant here was
intended to indicate any dissent from the test formulated in the joint judgement in Nathan's case, namely:- "The legislature in using the word 'source'
meant, not a legal concept, but something
which a practical man would regard as a real source of income. Legal concepts must, of
course, enter into the question when we have
to consider to whom a given source belongs.But the ascertainment of the actual source of
a given income is a practical, hard matter of fact." See 25 C.L.R. at pp. 189-90.
That passage was approved by Barwick C.J. (p. 213) and
Menzies J. (p. 222). who, together with Stephen J., formed the
majority in the Esquire Nominees case. After referring to Nathan's case, Barwick C.J. said (p. 213) that the source of income was a matter of fact.
The frequently cited passage from the joint ~udgment in
Nathan's case that the actual source of a given income is a
practical, hard matter of fact, if analyzed too closely, may raise a question in some minds about what it really means. For this reason some may question its usefulness as a guide in the
inquiry which has to be made, but, in my respectful opinion, the
judges in Nathan's case said what they did to emphasize the factual nature of the inquiry and that the touchstone was
practical reality. That is the theme which runs through judgments in later cases. Obviously the word "hard" was not used
in the sense of difficult, but as an indication to a person
concerned with making the inquiry that it was necessary to be down-to-earth, practical and hard-headed about the task in hand.
If one approaches the present problem in this way, one
commences with the fact that there was one overall scheme or
plan. No reasonable analysis of it ought to involve its being broken up into distinct compartments or sections each to be
viewed separately and apart from the others. The scheme
concerned the disposal of land in Australia by Australians. It originated in Australia and eventually came to fruition here.
All that happened in Switzerland was the signing on two occasions
of documents necessary to implement the scheme. The documents
had their origins in Australia and could have just as well beensigned here or elsewhere. In the context of the test which has
to be applied, the fact that the income flowed proximately from
transactions entered into in Switzerland is but one factor to be
taken into account. It was but one step in the carrying out of the overall scheme which practically and realistically should be
viewed as a whole. If that be done, the fact that the scheme
concerned Australians dealing with subject matter situated in Australia in circumstances where Switzerland had no relevant connection with the transactions, becomes of overwhelming weight.
..
5.
The circumstance that the immediate entitlement to income may
have arisen as a consequence of a chose in action coming into
existence as a result of the execution of documents in Switzerland is relevant but not conclusive. In my opinion, the source of the income was Australia and not Switzerland.
I return finally to my reservation about there being a
question of law involved in the decision f the Board of Review.
From time to time that question has been the subject of
consideration by judges of the High Court. In Krew v. Federal
Commissioner of Taxation (1971) 45 A.L.J.R. 3 2 4 Walsh J. said
(pp. 325-6): -
the jurisdiction of this Court under S. 196 "... I have accepted as correct the view that does not depend upon a decision by it that the board of review has made an error of law
which has affected its decision. This is a point on which judicial opinion has not been
unanimous, but I think that the view which I
should accept is that this Court may, and
should, hear an appeal if it is satisfied that a question of law arose for decision by
the board and that it does not matter for
this purpose whether or not this Court holds
that the decision of the board on that
question was right or wrong: see Federal
Commissioner of Taxation v. Sagar (193-r
C.L.R. 421, at p. 423; Federal Commissioner of Taxation v. shaw (19m), 80
C.L.R.
1, at
have reached the conclusion that the auueal is properly before me the consequence id that the whole decision of the board, and not
merelv the question of law, is oven to
revie;: see kuhamah Property Co. Ltd. v .
Federal Commissioner of Taxation (1928), 41
E.L.R. 148, at p. 151."
In the present case there was not involved any question
concerning the legal principles to be applied. Nathan's case and cases which have followed it provided the necessary guides, as
the reasons of the members of the Board of Review disclose. In accordance with the authorities, the Board was concerned solely
with the determination of a question of fact. In those
circumstances I am of opinion that the submission made here by counsel for the Commissioner that no question of law was involved
in the Board's decision was right and should be upheld. My disagreement with the other members of the Court on this
question is of no consequence. If one takes the contrary view,
an examination of the whole of the circumstances of the matter
can lead, in my opinion, to only one conclusion, namely, that thesource of the income was Australia.
In the result I would dismiss the appeal with costs.
I certlfy that this and the 5 precedmg pages are a true copy of the reasons for
judgment herein of The Honourable Mr Justice Sheppard.
.
IN THE FEDERAL COURT OF AUSTRALIA )
NEW SOUTH WALES DISTRICT REGISTRY ) No. G.149 of 1987 1 GENERAL DIVISION
ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES
ADMINISTRATIVE LAW DIVISION
BETWEEN:
THORPE NOMINEES PTY
LIMITED
Appellant
- AND : THE COMMISSIONER OF
TAXATION OF THECOMMONWEALTH OF AUSTRALIA
Respondent
COURT: Lockhart, Sheppard & Burchett JJ. m 4 November 1988 : Sydney
REASONS FOR JUDGMENT
BURCHETT J.
The full statement of the facts and of the terms of the
relevant sections made by Lockhart J., which I gratefully adopt, enables me to come immediately to the core of the case. I agree
with Lockhart J., f o r the reasons he has elaborated, that this involves a question of law. What must be determined is the meaning and application of the principles relating to the source of income for the purposes of the Income Tax Assessment Act 1936
in cases of this kind.
The authorities keep recurring to the proposition which,
f o r example, Menzies J., in Esquire Nominees Limited v. The
L.
Commissioner of Taxation of the Commonwealth of Australia (1973) 129 C.L.R. 177 at 222, took from Nathan v. Federal Commissioner
of Taxation (1918) 25 C.L.R. 183 at 189-190:
"The Legislature in using the word 'source'
meant, not a legal concept, but something
which a practical man would regard as a real source of income. Legal concepts must, of course, enter into the question when we have to consider to whom a given source belongs. But the ascertainment of the actual source of
a given income i s a practical, hard matter of fact.
Many of the authorities have emphasized, by reference to this
passage or otherwise, that the search is for the "real source", judged in a practical sense
- see per Barwick
C.J. in Federal
Commissioner of Taxation v. Mitchum (1965) 113 C.L.R. 401 at 406; Federal Commissioner of Taxation v. Efstathakis (1979) 79 A.T.C
4256 at 4258; Federal Commissioner of Taxation v. French (1957
98 C.L.R. 398 at 415, 418, 421.
In James Fenwick and Company Limited v . The Federa
Commissioner of Taxation (1921) 29 C.L.R. 164, which concerned
the source of compensation paid on behalf of the Admiralty for
the use of two tugs, the Heroic and the Heroine, requisitioned
during World War I, and used overseas, the judgment of the High Court (Rnox C.J., Gavan Duffy and Rich JJ.), delivered by Knox C.J., at 168 asserts:
"In that state of facts we think that the real
practical source of this income was the taking of the tugs in Australia."
Similarly, in Tariff Reinsurances Limited v. The Commissioner of Taxes (Victoria) (1938) 59 C.L.R. 194 at 211, Starke J. said:
"In my opinion in this case the real connection of the business operations is with
England. It is where the substance and
essence of the operations were transacted."
In French's case (which was distinguished on the facts
in Hitchum's case, but without criticism of the propositions of law it contains), Williams J. (with whom Dixon C.J. agreed) expressed his conclusion, at 415, by saying:
"(T)he real source of the income in any
practical sense must be the place where this personal exertion takes place."
Kitto J. at 411 said:
"The Australian Act, in such provisions as ss.23(q) and 25, assumes that it is possible to identify, with respect to every amount of income, some activity event or thing which
may properly, though metaphorically, be
described as the source from which that income has been derived; and it is settled by undoubted authority that to select for the description one out of all the many elements which, as a matter of history, have together
culminated in the derivation is a practical
task performed be to substantial on considerations."
Practical reality is not a test so much as an attitude
of mind in which the Court should approach the task of ~udgment. Reality, like beauty, is often in the eye of the beholder. (Cf.
the comments made by J.D. Jackson in an article in 51 Nod. L.R. 549 at 551 et seq.) What the cases require is that the truth of
the matter be sought with an eye focussed on practlcal business affairs, rather than on nice distinctions of the law. For the
word "source", in this context, has no precise or technical
.
4 .
reference. It expresses only a general conception of origin,
leading the mind broadly, by analogy. The true meaning of the
word evokes springs in grottos at Delphi, sooner than the
incidence of taxes. So the exactness which the lawyer is prone to seek must be consciously set aside; indeed, with respect to a choice between various contributing factors, it cannot be attained. The substance of the matter, metaphorically conveyed
when we speak of the source of income, is a large view of the
origin of the income - where it came from - as a businessman would perceive it.
If the matter is approached in this way in the present
case, the substantial considerations point in unison to the
selection, from the elements which culminated in the income being
derived, of the solid facts and circumstances existing in
Australia. The legal acts performed in Switzerland were
ineffective in themselves to achieve anything - they were wholly dependent for their force upon Australian lands and events, and
upon the persons who conceived them in Australia and also
returned to consummate them here. Following the metaphorical guide which is what the Act offers, I see the stream from which
the income was drawn as an Australian stream. It arose in the hills around Broke. Although, like many streams, it followed a tortuous course, and was diverted through Switzerland, what was
there drawn from it had flowed from its Australian source.
I agree that the appeal should be dismissed with costs.
I certify that this and the preceding three ( 3 ) pages are a true copy of the Reasons for Judgment herein of his HOnOUr
Associate
Dated: 4 November, 1988.
Counsel for the Appellant: Mr. D.A. Staff, QC
Mr. B.R. PapeSolicitors for the Appellant: Messrs John Webb, Symons L
CO.Counsel for the Respondent:
M r . D.G. Hil1,QC Mr. A.H. Slater Solicitors for the Respondent:
Australian Government Solicitor Dates of hearing: 11, 13 October 1988.
3
7
0