Federal Commissioner of Taxation v Commonwealth Aluminium Corporation Ltd; Commonwealth Aluminium Corporation Ltd v Federal Commissioner of Taxation [1979] FCA 19; (1979) 38 FLR 19 (1 May 1979)

FEDERAL COURT OF AUSTRALIA

FEDERAL COMMISSIONER OF TAXATION v. COMMONWEALTH ALUMINIUM CORPORATION LTD.;
COMMONWEALTH ALUMINIUM CORPORATION LTD. v. FEDERAL COMMISSIONER OF TAXATION.
(1979) 38 FLR 19
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
Brennan(1), Deane(2) and Fisher(3) JJ.

CATCHWORDS

Income Tax - Australian business controlled abroad - Controlling company incorporated in Australia - Control traceable through various companies to non-residents - Whether business controlled principally by non-residents - Corporate veil - Income Tax Assessment Act 1936 (Cth.), s. 136. The commissioner assessed the taxpayer on the basis that s. 136 of the Income Tax Assessment Act applied to it. The commissioner argued that the section applied to the taxpayer because it was a company controlled principally by non-residents. The taxpayer was incorporated in Australia. Almost all the shares in it were held by Comalco Ltd., a company also incorporated in Australia. Forty-five per cent of the shares in Comalco were held by a non-resident company. Another forty-five per cent of the shares in Comalco were held by C.R.A. Ltd., a company incorporated in Australia. If the ownership of C.R.A. were traced back through at least one other company incorporated in Australia, then a majority of its shares was owned by non-residents. The commissioner assessed the taxpayer on the basis of these tracing exercises.

Held, that the taxpayer was controlled by a company which was not a non-resident and therefore could not be assessed on the basis of s. 136 which referred to direct control, and did not involve tracing back of shareholdings.

Observations on situations where s. 136(a) would apply, for example, where a taxpayer carried on business in Australia as agent for a non-resident principal.

HEARING

Sydney, 1978, October 31; November 1; 1979 May 1. 1:5:1979
APPEALS.

The taxpayer appealed against a decision of the Supreme Court of Victoria (Jenkinson J.) upholding an assessment for one year on the basis of s. 136 (a) of the Income Tax Assessment Act. The commissioner appealed against the decision not upholding assessment for three other years.

R.H. Searby Q.C. and N.J. Webb, for the Commonwealth Aluminium Corporation.

P.A. Liddell Q.C. and Dr. I.C.F. Spry, for the commissioner.
Cur. adv. vult.

Solicitors for the Commonwealth Aluminium Corporation Ltd.: Arthur Robinson

& Co.

Solicitor for the commissioner: Alan R. Neaves (Commonwealth Crown Solicitor).

J.H. TELFER

DECISION

May 1.

The following judgments were delivered.
BRENNAN J. I have had the advantage of reading the judgment prepared by my

brother Deane. I concur in that judgment. (at p20)

DEANE J. These appeals involve the liability to income tax of the taxpayer, Commonwealth Aluminium Corporation Ltd., in respect of the taxpayer's 1967, 1969, 1970 and 1971 tax years ("the tax years"). (at p20)

2. The commissioner assessed the taxpayer, in respect of each of the tax years, on the basis that the provisions of s. 136 of the Income Tax Assessment Act 1936 ("the Act") were applicable to it. The taxpayer objected to the assessment in each case and, upon the objection being disallowed, the commissioner, at the request of the taxpayer, referred his decision to disallow the objection to a board of review. By majority, the board of review reduced each assessment to nil. The commissioner appealed to the Supreme Court of Victoria against the decision of the board in respect of each of the tax years. The Supreme Court (Jenkinson J.) dismissed the appeal in respect of the 1969, 1970 and 1971 assessments but upheld the appeal in respect of the 1967 assessment and ordered that that matter be remitted to the board of review for further hearing. The taxpayer, by leave, appeals to this Court from his Honour's decision in respect of the 1967 tax year. The commissioner, by leave, appeals against his Honour's decision in respect of the other three tax years. (at p20)

3. Section 136 constitutes divn 13 of Pt III of the Act. That division is headed "Australian Business Controlled Abroad". The section reads:

"Where any business carried on in Australia -

(a) is controlled principally by non-residents;

(b) is carried on by a company a majority of the shares in
which is held by or on behalf of non-residents; or

(c) is carried on by a company which holds or on behalf of
which other persons hold a majority of the shares in a
non-resident company,

and it appears to the Commissioner that the business produces either no taxable income or less than the amount of taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall, notwithstanding any other provision of this Act, be liable to pay income tax on a taxable income of such amount of the total receipts (whether cash or credit) of the business as the Commissioner determines." (at p20)

4. It is common ground between the parties that neither the circumstances described in s. 136(b) nor the circumstances described in s. 136(c) existed, in respect of the taxpayer, in any of the four tax years. The issue between the taxpayer and the commissioner is whether the circumstances described in s. 136(a) existed in respect of any of those years. The primary question involved in that issue is whether, during all or any of the tax years, the taxpayer carried on in Australia a business controlled principally by non-residents. If the answer to that question, in respect of any tax year, is in the affirmative, questions will arise concerning whether the assessment which the commissioner issued in respect of that tax year was justified under the operative provisions of s. 136. If the answer to that question, in respect of any tax year, is in the negative, the assessment which the commissioner issued cannot be justified. If the answer to that question is in the affirmative in respect of part of a particular tax year and in the negative in respect of another part of that tax year, a question will arise as to whether, and if so how, the section can properly be applied to those circumstances. (at p21)

5. The taxpayer was incorporated in Australia. With the exception of some insignificant nominal shareholdings, all of the issued shares in its capital were, at relevant times, beneficially held by Comalco Ltd. (formerly Comalco Industries Pty. Ltd.). Comalco Ltd. ("Comalco") was also incorporated in Australia. (at p21)

6. Section 6 of the Act provides that, in the absence of contrary intention, the word "resident" or the phrase "resident of Australia" when used in the Act means, in the case of company, a company which is incorporated in Australia or which, not being incorporated in Australia, carried on business in Australia and has either its central management and control in Australia or its voting power controlled by shareholders who are residents of Australia. The section defines "non-resident" as meaning "a person who is not a resident of Australia". Plainly, the phrase "resident of Australia" in the definition of "non-resident" has its defined sense. In the absence of a contrary intention, a company which is incorporated in Australia is a "resident" and not a "non-resident" for the purposes of the Act. No contrary intention is to be drawn from the provisions or context of s. 136(a). For the purposes of those provisions, the taxpayer was, during the tax year, a resident company in which, ignoring insignificant nominal shareholdings, all of the issued shares were beneficially held by another resident. (at p21)

7. During the tax years, the taxpayer owned and carried on in Australia a business of mining and selling bauxite. It is to that business - and that business alone - that the commissioner points to justify his contention that, during the tax years, the taxpayer carried on in Australia a business that was, for the purposes of s. 136, "controlled principally by non-residents". The evidence establishes that the taxpayer controlled that business at least in the primary sense of not being subject to direct outside interference. The commissioner did not dispute that this was so. Indeed, that primary control by the taxpayer of its business constituted the first link of a chain of control which, so the commissioner argued, lay ultimately in the hands of nonresidents. In essence, the commissioner's argument was that one does not, for the purpose of answering the question posed by s. 136(a), stop at the taxpayer's control of the business which it carried on but that, in view of the fact that the taxpayer is a company, it is necessary to trace back shareholding in the taxpayer through Comalco and beyond to ensure that the stage is never reached where, by permutation and combination, it is possible to discern theoretical indirect control of a majority of the issued shares in Comalco as lying in the hands of non-residents. Ignoring shares held by members of the public as a result of a public issue in Australia (ten per cent of the issued shares), the shares in Comalco Ltd. were held in equal numbers by an American corporation, Kaiser Aluminium and Chemical Corporation, and, subject to some minor variations during the 1970 tax year, Conzinc Riotinto of Australia Ltd. (C.R.A.) which was incorporated in Australia. The commissioner's identification of non-resident control involved, inter alia, a tracing back from the taxpayer, through the resident Comalco, through the resident C.R.A. and through at least one other interposed resident company, until one finally reaches, on the C.R.A. side, a company incorporated in the United Kingdom and not in Australia. (at p22)

8. It can be seen that, at the heart of the primary question in dispute between the commissioner and the taxpayer, there lies a preliminary point of interpretation which falls within narrow confines. That point is whether the reference to "controlled principally" in s. 136(a) requires, in a case where a business is owned, carried on and, at least in the primary sense, controlled by a company, investigation beyond the corporate veil to determine the identity of those who control the company or of those through whom the company exercises its control of its business. If, as the taxpayer argues, s. 136(a) does not, in such a case, require investigation beyond the company's control of its business, that will be the end of the present appeals. If, on the other hand, s. 136(a) requires, as the commissioner argues, that one goes beyond the control which the company exercises over its business, the dispute moves to another level. At that level, the commissioner would contend, as has been indicated, that the identification of the relevant control is to be made through tracing shareholdings while the taxpayer would contend that the identification of the relevant control is to be determined by identifying those through whom the company exercises the control of its business. (at p22)

9. The commissioner supported his approach to the construction of s. 136 of the Act by reference to the decision of the High Court of Australia in The Texas Co. (Australasia) Ltd. v. Federal Commissioner of Taxation [1940] HCA 9; (1940) 63 CLR 382 . Examination of the terms of the agreed facts in that case (1940) 63 CLR, at p 389 discloses, however, that it was expressly admitted that the business carried on by that taxpayer was at all material times controlled by persons resident outside Australia. The point of interpretation now under consideration did not arise for decision in that case. The judgements of the members of the court, when read in that context, do not, in my respectful view, assist in the resolution of the question presently under consideration. (at p23)

10. Section 136 of the Act remains in the form in which it was originally enacted. The section was based upon s. 28 (1) of the Income Tax Assessment Act 1922 which, for its part, remained unamended during the life of the 1922 Act. Section 28 (1) provided: "When any business which is carried on in Australia is controlled principally by persons resident outside Australia, and it appears to the Commissioner that the business produces either no taxable income or less than the ordinary taxable income which might be expected to arise from that business, the person carrying on the business in Australia shall be assessable and chargeable with income tax on such percentage of the total receipts (whether cash or credit) of the business, as the Commissioner in his judgment thinks proper." It is apparent that the words "controlled principally by non-residents" in s. 136(a) can be directly traced to the words "controlled principally by persons resident outside Australia" in s. 28 (1) of the 1922 Act. Prima facie, one would expect that "controlled principally" would have the same denotation and connotation in each provision. (at p23)

11. The 1922 Act was not primarily concerned with taxation of companies: corporate taxation was, generally speaking, only imposed in respect of undistributed income or payments made to undisclosed or absentee recipients. The provisions of the 1922 Act relating to companies were, when compared with the provisions of the 1936 Act, quite unsophisticated. In particular, express provisions requiring the piercing of the corporate shell to determine questions of identity and continuity of corporate control which have become common in the 1936 Act were unknown in the 1922 Act. In the context of the 1922 Act and the unqualified acceptance of corporate personality which it embodied, the reference in s. 28 (1) to a business being controlled principally by an entity was, in a case where the business was owned, carried on and controlled by a company, plainly a reference to the company itself. (at p23)

12. The inclusion of cll. (b) and (c) in s. 136 of the Act reinforces the conclusion that the words "controlled principally" when used in cl. (a) of s. 136 are intended, in a case where a business is owned and controlled by a company, to refer to the direct control of its business which that company enjoys. Where such a company is a non-resident, the conditions of cl. (a) will be satisfied without more. Where such a company is a resident, the provisions of cl. (a) are inapplicable and it is necessary to go to the provisions of cll. (b) and (c) and to embark on the inquiries which they prescribe. The specific identification of the exercise for determining control beyond the corporate veil which is contained in cl. (b) clearly confirms that it was not intended by the draftsman that one should find in the provisions of cl. (a) either the same or some more effective and sophisticated inquiry directed at ascertaining control beyond the corporate veil. (at p24)

13. It is not necessary for the purposes of the present matter to form or express any concluded view as to the precise meaning of the word "principally" in s. 136 (a). If the word is interpreted as meaning "in the main", "dominantly" or "predominantly", it adds little to the concept of dominance which is already inherent in the reference to control. The obvious alternative is to read the word as meaning "in the capacity of a principal as distinct from an agent". The context of the 1922 Act provides some support for giving the word this meaning in that one finds in other sections of that Act advertence to the notion of a business being carried on in Australia on behalf of an overseas principal (see, e.g., s. 60). Whatever meaning is given to the word, however, it is, in my view, clear that the business of mining and selling bauxite which was, during the tax years, carried on in Australia by the taxpayer was, for the purposes of s. 136 (a) of the Act, controlled principally by the taxpayer which was not a non-resident. It follows that the provisions of s. 136 were not applicable to the taxpayer in respect of any of the tax years. (at p24)

14. It was submitted on behalf of the commissioner that to hold that a business which was owned, carried on and, at least in the primary sense, controlled by a company was controlled principally by that company for the purposes of s. 136 (a) would deprive the clause of all real utility. In my view, this is simply not so. Section 136 (a) is plainly applicable in a case where a business is carried on in Australia by a taxpayer in the capacity of agent for a non-resident principal. It will also apply in the case where the business is both carried on in Australia and controlled by a non-resident or by a partnership in which a non-resident is a controlling partner. It will apply to a case where a business is carried on in Australia by a resident subsidiary of a non-resident company but in circumstances where the non-resident company so interferes in the conduct of the business that the resident company could not properly be said to exercise control of its own business at all. It may well be that the provisions of cl. (a) are susceptible of ready avoidance. That is, however, scarcely surprising in a context where the provisions of cll. (b) and (c) which were introduced in the 1936 Act to cover the need for inquiring beyond the resident status of a company which controls principally a business carried on in Australia are susceptible of equally ready avoidance. Any undue limitation of the scope of the section may, at least in part, be the result of the link between the section and the definitions of "resident", "resident of Australia" and "non-resident" contained in s. 6 of the Act in that the legislative desire to cast wide the net of taxation which has led to the extended definitions of "resident" and "resident of Australia" has resulted in a correspondingly restricted definition of "non-resident" and a perhaps unintended narrowing of the scope of s. 136. (at p25)

15. The commissioner's appeal in respect of the 1969, 1970 and 1971 tax years should be dismissed. The taxpayer's appeal in respect of the 1967 tax year should be allowed. The order of the Supreme Court of Victoria allowing the appeal from the taxation board of review in respect of the 1967 tax year should be set aside and in lieu thereof it should be ordered that the appeal against the decision and order of the taxation board of review be dismissed. The order in the taxpayer's favour as to costs in the Supreme Court should not be disturbed. The commissioner should be ordered to pay the respondent's costs of the appeal. (at p25)

FISHER J. I have had the benefit of reading the judgment of Deane J. I agree with the order he proposes and with his reasons. (at p25)

ORDER

Orders accordingly.