Bywater Investments Ltd &Ors(Appellants) v Commissioner of Taxation

• Jurisdiction: Australia Federal only
• Judge: French CJ,Kiefel,Bell,Nettle JJ,Gordon J
• Judgment Date: 16 November 2016
• Neutral Citation: [2016] HCA 45
• Docket Number: S134/2016 & S135/2016
• Court: High Court
• Date: 16 November 2016

Bywater Investments Limited & Ors

Appellants

and

Commissioner of Taxation

Respondent

Hua Wang Bank Berhad

Appellant

and

Commissioner of Taxation

Respondent

[2016] HCA 45

French CJ, Kiefel, Bell, Nettle AND Gordon JJ

S134/2016 & S135/2016

HIGH COURT OF AUSTRALIA

Taxation — Income tax — Residence of company — Income Tax Assessment Act 1936 (Cth), s 6(1) — Where directors of appellant companies resident abroad — Where meetings of directors of appellants ostensibly held abroad — Where directors acted at direction of Australian resident who controlled appellants and made decisions then implemented by directors — Whether appellants residents of Australia for income tax purposes — Whether ‘central management and control’ of appellants located abroad in place where boards of directors met — Whether, as question of fact and degree, real business and operations of appellants controlled and directed from Australia — Whether functions of appellants' boards of directors usurped — Effect of Esquire Nominees Ltd v Federal Commissioner of Taxation (1972) 129 CLR 177.

Taxation — Income tax — Residence of company — Double taxation agreements — Tie-breaker provisions — Whether appellants entitled to protection from Australian income tax under relevant double taxation agreements — Whether ‘place of effective management’ of appellant companies other than in Australia.

Words and phrases — ‘Australian resident’, ‘central management and control’, ‘company's constitutional organs’, ‘corporate residence’, ‘formal organs’, ‘place of effective management’, ‘real business’, ‘residency’, ‘rubber-stamp’, ‘superior or directing authority’, ‘usurp’.

Income Tax Assessment Act 1936 (Cth), ss 6(1), 25A, Pt X.

Income Tax Assessment Act 1997 (Cth), ss 6–5, 995–1.

International Tax Agreements Act 1953 (Cth), Scheds 1, 15.

Representation

A J Myers QC and F D O'Loughlin with T L Bagley for the appellants in S134/2016 (instructed by Henry Davis York)

N C Hutley SC with T H J Hyde Page for the appellant in S135/2016 (instructed by Henry Davis York)

A H Slater QC with K A Stern SC and J E Jaques for the respondent in both matters (instructed by Australian Government Solicitor)

ORDER

Matter No S134/2016

Appeal dismissed with costs.

Matter No S135/2016

• 1. The respondent's summons filed on 2 June 2016 be dismissed.

• 2. Appeal dismissed with costs.

1 French CJ, Kiefel, Bell AND Nettle JJ. These are appeals from a judgment of the Full Court of the Federal Court of Australia ( Robertson, Pagone and Davies JJ) upholding a decision of Perram J that the central management and control of each of the appellant companies (‘Bywater’, ‘Chemical Trustee’, ‘Derrin’ and ‘HWB’) was exercised in Australia and, therefore, that they were each resident in Australia for income tax purposes.

2 In substance, the appellants contend that, because Perram J found that the directors of each appellant were resident abroad, and because meetings of those directors were held abroad, Perram J and the Full Court were bound to hold that the central management and control of each company was exercised abroad, and, therefore, that the appellants were not residents of Australia for income tax purposes.

3 For the reasons which follow, that contention should be rejected and the appeals should be dismissed.

The history of the litigation

4 Each of Bywater, Chemical Trustee and Derrin claimed that, at relevant times, its central management and control was exercised in Switzerland and, as a result, that it was not resident in Australia within the meaning of s 6(1) of the Income Tax Assessment Act 1936 (Cth) (‘the 1936 Act’). It followed, it was said, that a liability to tax in Australia, within the meaning of s 6–5, read with the relevant definitions in s 995–1, of the Income Tax Assessment Act 1997 (Cth) (‘the 1997 Act’), did not arise in respect of income derived from sources outside Australia, nor in respect of income derived from sources within Australia, either because of the operation of Australia's double taxation agreement with Switzerland at the relevant time 1, or alternatively, in the case of Chemical Trustee and Derrin, because of the operation of Australia's double taxation agreement with the United Kingdom 2, those companies having been incorporated in the United Kingdom.

5 HWB contended that, at relevant times, its central management and control was exercised in Samoa and, as a result, that it was not resident in Australia within the meaning of s 6(1) of the 1936 Act. It followed, it claimed, that it was not liable to tax in Australia on income derived from sources outside Australia within the meaning of s 6–5 of the 1997 Act. HWB did not contend that it was exempt from tax in Australia on ordinary income derived from sources within Australia.

6 In the course of argument, it was accepted that, if, in the circumstances of this case, an appellant did have its central management and control in Australia within the meaning of s 6(1) of the 1936 Act, Australia would also be the appellant's ‘place of effective management’ within the meaning of the applicable double taxation agreement 3, and, therefore, that the appellant would not be entitled to protection from Australian taxation under that agreement. As will become apparent, in view of that concession, which was properly made in the circumstances of this case, it is unnecessary to deal with any issue other than the question of whether each company had its central management and control in Australia within the meaning of s 6(1) of the 1936 Act.

The facts and findings at first instance

7 The facts emerge from the judgment of Perram J. As there appears, the positions of the appellants were not in all respects identical and to some extent require separate consideration.

Chemical Trustee Limited

8 Chemical Trustee was incorporated in the United Kingdom and adopted its present name in 1996 4. During the relevant years of income (2001,

2003–2004, 2006–2007), all of the issued shares in the capital of Chemical Trustee were held by Guardheath Securities Ltd (‘Guardheath’). Guardheath was a nominee company owned by the partners of a London firm of accountants, Lubbock Fine. Guardheath held the shares in Chemical Trustee as nominee for JA Investments Ltd (‘JA Investments’), a company incorporated in the Cayman Islands. JA Investments was described in Chemical Trustee's abbreviated accounts as Chemical Trustee's ultimate parent 5. The sole recorded director and shareholder of JA Investments was Mr Peter Martin Borgas (‘Borgas’) and, at material times, the only recorded directors of Chemical Trustee were Borgas, his wife, Mrs Winny Borgas, and their son, Mr Timothy Borgas. Between 2001 and 2007, the minutes of the meetings of directors of Chemical Trustee recorded that such meetings as there were were held in Neuchâtel, Switzerland and were attended by Borgas and Mrs Borgas 6.

9 Chemical Trustee claimed that, because Borgas resided and operated in Switzerland, Chemical Trustee's central management and control was situated in Switzerland and, therefore, that Chemical Trustee was not resident in Australia for income tax purposes 7. Consequently, Chemical Trustee did not file an Australian income tax return for any of the relevant years of income. Nevertheless, on 12 August 2010, the respondent (‘the Commissioner’) issued assessments (and in one case, subsequently, an amended assessment) in which he assessed Chemical Trustee as liable to tax and penalties in respect of its share trading profits 8. Chemical Trustee objected to the assessments and the objections were disallowed. Chemical Trustee appealed to the Federal Court.

10 Before Perram J, Borgas gave evidence that he was the beneficial owner of the shares in JA Investments, made all the commercial judgments on behalf of Chemical Trustee and exercised all his powers as an appointed director to decide on Chemical Trustee's actions, in Neuchâtel 9. Chemical Trustee also tendered a volume of documents which were said to show that Borgas had made all commercial judgments and decisions on behalf of Chemical Trustee in

Neuchâtel 10. Perram J, however, rejected Borgas' testimony as untruthful and found that the documents had been falsely contrived to appear to corroborate Borgas' testimony 11.

11 Contrary to Borgas' testimony, Perram J concluded 12 that, throughout the relevant years of income, Mr Vanda Russell Gould of Chatswood, New South Wales (‘Gould’) was ‘the Appointor’ under the articles of association of JA Investments and thus that, ‘as a matter of legal theory’, Gould had control of the affairs of JA Investments. That control was effected by Art 3, which enabled Gould to appoint additional members of the company, Art 43, which provided that the members could remove any director, and Art 24, which enabled the members to appoint directors. The legal capacity to control the company was in turn reflected in what Perram J described as the ‘indisputable reality’ of a deed executed between Gould and Offshore Nominees Limited (‘Offshore Nominees’), a company incorporated in the Cayman Islands, which evidenced that JA Investments was Gould's company and that the shares in the company were to be registered in the name of Offshore Nominees ‘acting solely as Nominee’ for Gould and held ‘together with all dividends, bonuses and interests therein on behalf of [Gould] and [dealt with] as [Gould] may from time to time direct’ 13.

12 Based on a detailed analysis of the documentary and oral evidence, Perram J concluded 14 that JA Investments was in truth beneficially owned and controlled by Gould; Gould ‘micromanaged’ Chemical Trustee's reporting and banking; Gould ‘undertook responsibility for Chemical Trustee's compliance with ASX requirements “respecting on-market investments”’; Gould made all other decisions of Chemical Trustee, without the...