Isolated speculative ventures undertaken for business or commercial purposes constitute 'enterprises' under Article 7 of double taxation agreements, and the narrow meaning of 'carrying on' from domestic tax law does not apply to the Agreement when determining the Australian tax liability of foreign residents.
Later decisions that cite Thiel v Federal Commissioner of Taxation
Decisions cited by Thiel v Federal Commissioner of Taxation
THIEL v. FEDERAL COMMISSIONER OF TAXATION [1990] HCA 37; (1990) 171 CLR 338
F.C. 90/034
Income Tax (Cth)
[1990] HCA 37; (1990) 21 ATR 531
High Court of Australia
Mason C.J. (1), Brennan(1), Dawson(2), Gaudron(1) and McHugh(3) JJ.
CATCHWORDS
Income Tax (Cth) - Double taxation relief - International agreement - Profits of an enterprise of a Contracting State - Enterprise carried on by a resident of a particular State - Swiss resident subscribing for units in Australian unit trust - Units sold for allotment of public company shares - Methodical sale of shares when company listed on Australian Stock Exchange - Whether enterprise of Switzerland - Whether carried on through permanent establishment in Australia - Income Tax (International Agreements) Act 1953 (Cth), s. 11E, Sched. 15 Arts. 3(1) (f), (2),7.
HEARING
1990, April 3; August 22. 22:8:1990DECISION
MASON C.J., BRENNAN AND GAUDRON JJ. The facts and the relevant provisions of the agreement made between Australia and Switzerland for the avoidance of double taxation with respect to taxes on income ("the Agreement") are set out in the reasons for judgment of McHugh J.2. The central question in the appeal concerns the interpretation to be given by an Australian court to the words "profits of an enterprise of one of the Contracting States" in Art.7 of the Agreement.
3. The key terms "profits" and "enterprise" are not defined in the Agreement,
although Art.3(1)(f) defines "enterprise of one of
the Contracting States" to
mean "an enterprise carried on by a resident" of Australia or Switzerland, as
the context requires. Further,
Art.3(2) states:
"In the application of this Agreement by one of the
Contracting States, any term not otherwise defined shall,
unless the context otherwise requires, have the meaning
which it has under the laws of that Contracting State
relating to the taxes to which this Agreement applies."
income tax: Art.2(1)(a).
4. Article 3(2) provides no assistance in ascertaining the meaning of the words "enterprise" or "profits" because these words have no particular or established meaning under the laws relating to Australian income tax which is relevant to the outcome of the question for decision. That question must be resolved by reference to the Agreement itself and any extrinsic materials which may properly be considered.
5. Outside of Art.3(1)(f), the expressions "carried on" and "carries on" are used only in association with the word "business", which bears its own connotations and is not used in Art.3(1)(f). In Art.3(1)(f), the word "enterprise" is associated with the words "carried on". The expressions "enterprise" on the one hand and "carried on" on the other hand are each "terms" for the purposes of Art.3(2), though they must be read together in order to achieve the correct interpretation of Arts 3(1)(f) and 7.
6. In one sense, the words "carried on" have a particular meaning in Australian income tax law, as the Full Court of the Federal Court held, signifying repetitive or recurrent, rather than isolated, activity. Indeed, that particular meaning of "carried on" in Australian income tax law was critical to the Federal Court decision that Art.7 had no application to the present case.
7. However, the meaning of "carried on" in Australian income tax law has been influenced by the fact that the Income Tax Assessment Act 1936 (Cth) uses in juxtaposition both expressions "carrying on" and "carrying out" and that a distinction has been drawn between them, the former meaning "the habitual pursuit of a course of conduct" and the latter meaning "the carrying into execution of a plan or venture which does not involve repetition or system": see, for example, Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [1933] HCA 51; (1933) 50 CLR 268 at pp 297-298. Decisions as to the meaning of expressions such as "carrying on the business of a skin dealer" (see Smith v. Capewell (1979) 14[1905] HCA 20; 2 CLR 509 at pp 514-515, 517-518) are not strictly part of the law relating to Australian income tax and are therefore not made relevant by Art.3(2). In any case, the use of the term "business" distinguishes such phrases from that presently under consideration. If Australian income tax law does not ascribe a particular meaning to "carry on" otherwise than by reference to its association with "carry out", then it provides no assistance in ascertaining the meaning of "carry on" in the context of the Agreement, because those words are not used in association with "carry out" in the Agreement (cf. the expression "the carrying out of international conventions" in Art.22(3)).
8. In these circumstances, it is safer to look to the context of the Agreement itself. In that context, the term "carried on" in Art.3(1)(f) is no more than a linking expression used to explain the connection between an enterprise and a Contracting State which the expression "enterprise of one of the Contracting States" imports. Accordingly, no element of repetition or system should be attributed to that expression by reference to the use of the words "carried on".
9. The meaning of "enterprise" can then be ascertained from the Agreement
construed in the light of such extrinsic materials as
may be relevant. As the
English and German texts of the Agreement were agreed to be equally
authoritative, the meaning of "enterprise"
might have been illuminated by
evidence of the meaning of the corresponding German text, but no such evidence
was given and the parties
before this Court were unable to agree upon a
translation of the German text. However, for the reasons given by McHugh J.,
it is
appropriate to consider the OECD Model Convention and the associated
Commentaries. Importantly, the Commentary on Art.3 states:
"4. The question whether an activity is performed withinThis statement plainly recognizes that an activity, as well as a framework within which activities are engaged in, may constitute an "enterprise" for the purposes of the Agreement.
the framework of an enterprise or is deemed to constitute in
itself an enterprise has always been interpreted according
to the provisions of the domestic laws of the Contracting
States ..."
10. Moreover, we agree with Sheppard J. in thinking that an enterprise "may consist of an activity or activities and be comprised of one or more transactions provided they were entered into for business or commercial purposes": (1988) 21 FCR 122 at p 146. Article 7, especially the heading "Business Profits", supports the notion that one or more transactions entered into for business or commercial purposes is an enterprise for the purposes of the Agreement. The result is that the activities of the taxpayer in this case constituted an enterprise and were an "enterprise of one of the Contracting States" for the purposes of Art.7. Indeed, it might be thought that the taxpayer's activities possessed the attributes necessary even to meet a more restrictive requirement of recurrence.
11. Once an activity is held to constitute an enterprise, the heading "Business Profits" in Art.7 imports no additional limitation. Ex hypothesi, the activity is undertaken for some business or commercial purpose. The Article speaks of "The profits" (our emphasis) of such an enterprise and in describing such profits as "Business Profits" the heading is accurate.
12. In the result we would allow the appeal.
DAWSON J. On 25 January 1984, the appellant, who is a resident of
Switzerland, acquired four units for $12,500 each in an Australian
trust known
as the Energy Research Group Unit Trust. On 25 May 1984, he acquired a
further two units for $50,000 each. On 22 October
1984, Energy Research Group
Australia Ltd. ("ERG") was incorporated. On 9 November 1984, the appellant
sold his six units in the
Trust to ERG for $50,000 per unit to be satisfied by
the allotment to him in respect of each unit of 100,000 fully paid ordinary
shares in the capital of ERG. The shares were issued to the appellant and
when they were listed on the stock exchange he began to
sell them. Between 7
February 1985 and 6 March 1985 he sold 252,000 of the shares through Perth
stockbrokers for $566,307.30. But
for the respondent's claim upon the
proceeds, the appellant would have sold all the shares. The respondent,
relying upon s.26AAA
of the Income Tax Assessment Act 1936 (Cth), assessed the
appellant for the year ended 30 June 1985 as liable to tax in the sum of
$346,220.50 based upon an assessable
income calculated as follows:
"Energy Research Unit Trust
Feb 84 acquired 4 Units for $ 50,000
June 84 acquired 2 Units for $100,000
6 Units Cost $150,000
23.11.84 Sold 6 Units for 600,000
x 50c shares in Energy Research
Group Australia Ltd
Valued at par = $300,000
Profit caught by Section 26AAA = $150,000
Feb/Mar 85 Sold 252,000
shares for $566,307.30
Cost price
(252000 x 50c) $126,000.00
Profit vide Section 26AAA = $440,307.30
Total Assessable profit = $590,307"
2. The appellant objected to the assessment and unsuccessfully appealed to
the Supreme Court of Western Australia and, subsequently,
to the Full Court of
the Federal Court upon the basis that the profits derived from the transaction
in question were exempt from
taxation under the Agreement between Australia
and Switzerland for the Avoidance of Double Taxation with respect to Taxes on
Income
("the Swiss Agreement"). Under s.11E(1) of the Income Tax
(International Agreements) Act 1953 (Cth) that agreement is deemed to
have the
force of law. The appellant bases his claim upon Art.7(1) and, in the
alternative, Art.13(3) of the Swiss Agreement. Article
7(1) is as follows:
"Business ProfitsArticle 13(3), so far as is relevant, is as follows:
(1) The profits of an enterprise of one of the
Contracting States shall be taxable only in that State
unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated
therein. If the enterprise carries on business as
aforesaid, the profits of the enterprise may be taxed in the
other State, but only so much of them as is attributable to
that permanent establishment."
"Alienation of PropertyArticle 3(1)(f) of the Swiss Agreement defines the terms "enterprise of one of the Contracting States" and "enterprise of the other Contracting State" as meaning "an enterprise carried on by a resident of Australia or an enterprise carried on by a resident of Switzerland, as the context requires". Incorporating those definitions, the first sentence of Art.7(1) provides that the profits of an enterprise carried on by a resident of Switzerland shall be taxable only in Switzerland unless that enterprise carries on business in Australia through a permanent establishment situated therein. Similarly, Art.13(3) provides that income from the alienation of capital assets of an enterprise carried on by a resident of Switzerland shall be taxable only in Switzerland, but, where those assets form part of the business property of a permanent establishment situated in Australia, such income may be taxed in Australia.
...
(3) ... income from the alienation of capital assets of
an enterprise of one of the Contracting States shall be
taxable only in that Contracting State, but, where those
assets form part of the business property of a permanent
establishment situated in the other Contracting State, such
income may be taxed in that other State."
3. Article 3(2) of the Swiss Agreement provides that any term not otherwise defined shall, unless the context otherwise requires, have the meaning which it has under the laws of that Contracting State relating to the taxes to which the Agreement applies. This provision is, however, of no assistance because, as will be seen, the case turns upon the meaning of the term "enterprise" and that term has no established meaning in Australian tax law. It is from the Agreement itself that the meaning of the term must be deduced.
4. The respondent argues that neither Art.7(1) nor Art.13(3) is applicable because the profits which he seeks to tax arose from an isolated adventure on the part of the appellant which, as it had no continued operation, did not constitute an enterprise carried on by him. The respondent points to the words "carried on" which are contained in the definition of an enterprise in Art.3(1) and says that they require continuing or repeated business activities. He relies upon those cases which deal with the ordinary meaning of the expression "carrying on business".
5. In Smith v. Anderson (1880) 15 ChD 247 at pp 277-278, Brett LJ. said: "The expression 'carrying on' (business) implies a repetition of acts, and excludes the case of an association formed for doing one particular act which is never to be repeated." In Kirkwood v. Gadd (1910) AC 422 Lord Atkinson cited this passage with approval (at p 431) and Lord Loreburn LC. said, at p 423: "What is carrying on business? It imports a series or repetition of acts." And in Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [1933] HCA 51; (1933) 50 CLR 268 at p 297, Dixon J. gave consideration to the words "profit arising ... from the carrying on or carrying out of any profit-making undertaking or scheme" which now appear in more than one place in the Income Tax Assessment Act. Whilst that phrase does not refer to the carrying on of business, the juxtaposition of "carrying on" with "carrying out" led Dixon J. to conclude that "carrying on", by way of contradistinction, involved a degree of repetition. He said (at p 298) of those words: "The alternative 'carrying on or carrying out' appears to cover, on the one hand, the habitual pursuit of a course of conduct, and, on the other, the carrying into execution of a plan or venture which does not involve repetition or system". In Smith v. Capewell [1979] HCA 48; (1979) 142 CLR 509, Gibbs J. referred to these cases and said, at p 517: "The expression 'carry on business', in its ordinary meaning, signifies a course of conduct involving the performance of a succession of acts, and not simply the effecting of one solitary transaction." In these cases the expression "carrying on" takes its colour from its context which is that of a business or its equivalent. In none of them is any attention given to the use of the expression in conjunction with the equivocal word "enterprise".
6. The respondent submits that not only must an enterprise within the meaning of the Swiss Agreement have a sufficient continuity to enable it to be said that it is carried on rather than carried out, but that it must operate through a vehicle which is capable of carrying on business (Arts 7(1) and 5(1)) and thus must amount to something more than a single adventure. The respondent argues that an enterprise must be capable of having "a permanent establishment" (Art.5), of carrying on activities (Art.5(4)), of participating in the management, control or capital of another enterprise (Art.9), of having not only profits (Art.7) but also capital assets (Art.13(3)). These requirements, the respondent submits, point to some identifiable entity as the means of carrying on business.
7. At first instance, the appellant sought to establish that his activities in Australia were part of a wider enterprise which he carried on in Switzerland. However, the learned trial judge rejected this submission and found that his Australian activities constituted "an isolated transaction of a speculative nature". The trial judge found that the evidence went "no further than to show that the appellant invested in the units with the clear purpose and intention of selling all of them and or the shares into which they might be converted for profit upon the planned public float whatever its form might be". It is upon the basis of these findings that the respondent contends that the appellant did not carry on any enterprise in Australia.
8. The Swiss Agreement is one of a number of bilateral agreements, or treaties, concluded between Australia and other countries based upon a model convention, known as the 1977 OECD Model Convention for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, which was adopted by the Organisation for Economic Co-operation and Development. The Model Convention is accompanied by official Commentaries. Australia is a member of the OECD as is Switzerland, although both are included among the countries which have recorded reservations to some of the articles of the Model Convention. In at least one case (Sun Life Assurance Co. of Canada v. Pearson (1986) 59 TC 250 at p 331), the Model Convention and Commentaries have been used in the construction of a double taxation agreement. This is, I think, permissible under the Vienna Convention on the Law of Treaties. Switzerland is not a party to the Vienna Convention (although Australia is) but the relevant rules which it lays down are applicable, being no more than an indorsement or confirmation of existing practice: The Commonwealth v. Tasmania (The Tasmanian Dam Case) [1983] HCA 21; (1983) 158 CLR 1 at pp 93-94, 222; Fothergill v. Monarch Airlines Ltd. [1980] UKHL 6; (1981) AC 251 at pp 276, 282. Moreover, as Lord Radcliffe observed in Ostime v. Australian Mutual Provident Society (1960) AC 459 at p 480, an expression such as the word "enterprise" may have no exact counterpart in domestic tax laws, being part of an "international tax language".
9. Article 31 of the Vienna Convention provides that a treaty is to be interpreted "in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose". The context includes, in addition to the text, any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. For my part, I do not see why the OECD Model Convention and Commentaries should not be regarded as having been made in connection with and accepted by the parties to a bilateral treaty subsequently concluded in accordance with the framework of the Model. However, some doubts have been expressed about the applicability, as a matter of language, of Art.31 to the Commentaries in the case of a bilateral treaty such as a double taxation agreement: see Jones et al., "The Interpretation of Tax Treaties with Particular Reference to Article 3(2) of the OECD Model - II", (1984) British Tax Review 90 at p 92.
10. I turn, therefore, to Art.32 of the Vienna Convention which allows recourse to be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of Art.31, or to determine the meaning when the interpretation according to Art.31 leaves the meaning ambiguous or obscure or leads to a result which is manifestly absurd or unreasonable. Whilst the Model Convention and Commentaries may not strictly amount to work preparatory to the double taxation agreement between Australia and Switzerland, they are documents which form the basis for the conclusion of bilateral double taxation agreements of the kind in question and, as with treaties in pari materia, provide a guide to the current usage of terms by the parties. They are, therefore, a supplementary means of interpretation to which recourse may be had under Art.32 of the Vienna Convention.
11. Curiously, recourse to the Commentary upon the "definition" of the term
"enterprise" in Art.3 of the Model Convention, which
is the same as Art.3 of
the Swiss Agreement, serves at first sight to confirm rather than remove its
ambiguity. The Commentary merely
observes:
"The question whether an activity is performed withinBut that comment makes it plain that, as far as the Swiss Agreement itself is concerned, the term "enterprise" may cover both an activity itself and the means by which an activity is engaged in. Thus, when Art.7(1) speaks of "an enterprise of one of the Contracting States", it is not necessarily referring to anything more than an activity and the reference to an enterprise being "carried on" in Art.3(1) is not a reference to anything in the nature of a business which requires continuity or repetition. The words "carries on" and "business" combine in the expression "carries on business" in Art.7(1) to convey a meaning which involves a series or repetition of acts and that is why in the cases those words have been so interpreted. But that is merely to give the words their ordinary meaning; they have no special meaning given to them by law. The carrying on of an enterprise involves no similar notion of continuity; an enterprise, if it is merely an activity and not a business, is carried on when it is undertaken.
the framework of an enterprise or is deemed to constitute in
itself an enterprise has always been interpreted according
to the provisions of the domestic laws of the Contracting
States. No definition, properly speaking, of the term
'enterprise' has therefore been attempted in this Article."
12. The Commentary upon Art.7(1) of the Swiss Agreement confirms this
construction. It commences as follows:
"This paragraph is concerned with two questions. First,
it restates the generally accepted principle of double
taxation conventions that an enterprise of one State shall
not be taxed in the other State unless it carries on
business in that other State through a permanent
establishment situated therein. It is hardly necessary to
argue here the merits of this principle. It is perhaps
sufficient to say that it has come to be accepted in
international fiscal matters that until an enterprise of one
State sets up a permanent establishment in another State it
should not properly be regarded as participating in the
economic life of that other State to such an extent that it
comes within the jurisdiction of that other State's taxing
rights."
13. The reference in Art.7(1) to an enterprise which carries on business in
the other Contracting State is, of course, entirely
appropriate since it is a
reference made in the context of an enterprise with a permanent establishment.
An enterprise making profits
through a permanent establishment may properly be
described as carrying on business. And in setting out the principles to be
employed
in determining whether an enterprise has a permanent establishment,
Art.5 of the Swiss Agreement naturally speaks of the ordinary
attributes of
business. Similarly, it is appropriate in Art.9 to speak of one enterprise
participating in the management, control
or capital of another enterprise and
in Art.13 of the capital assets of an enterprise, because the term
"enterprise" may cover an
entity or framework through which an activity is
carried on, for which those concepts are appropriate, as well as an activity
itself.
The need to acknowledge isolated profit-making activities as well as
continuing commercial conduct, both of which can be subsumed
under the term
"enterprise", is recognized by s.3(2) of the Income Tax (International
Agreements) Act which provides:
"For the purposes of this Act and the Assessment Act,
a reference in an agreement to profits of an activity or
business shall, in relation to Australian tax, be read,
where the context so permits, as a reference to taxable
income derived from that activity or business."
14. Article 7 is headed "Business Profits" and, as that heading indicates, it deals with business profits. But once it is recognized that "enterprise" includes an isolated activity as well as a business, business profits cannot be confined to profits (or taxable income) derived from the carrying on of a business but must embrace any profit of a business nature or commercial character. Profit from a single transaction may amount to a business profit rather than something in the nature of a capital gain even if it does not involve the carrying on of a business. Of course, the repetition of a transaction may constitute the carrying on of a business and so confirm its business character, but a single transaction may amount to a business dealing so as to characterize the profit derived from it as a business profit. If it were not so, Art.7(1) would have the capricious result of denying relief from double taxation simply because the same transaction was not repeated a sufficient number of times. I should add that it is far from clear that the appellant's activity amounted to a single transaction involving no element of repetition or continuity. But the finding of the trial judge that the appellant "invested in the units with the clear purpose and intention of selling all of them and or the shares into which they might be converted for profit" confirms that what he did was by way of an adventure of trade and was of the requisite business character: cf. Minister of National Revenue v. Tara Exploration and Development Co. Ltd. (1972) 28 DLR (3d) 135.
15. This conclusion makes it apparent that the applicable article of the Swiss Agreement is Art.7 rather than Art.13. Having regard to the nature of the appellant's activity, it would clearly be inappropriate to regard his gain as being by way of income from the alienation of capital assets. Necessarily, the nature of the enterprise upon which the appellant was engaged did not involve the acquisition of capital assets.
16. It follows that, as the enterprise of the appellant was not carried on through a permanent establishment in Australia, the appellant is entitled to the protection of the relevant double taxation agreement.
17. For these reasons, I would allow the appeal.
McHUGH J. The question in this appeal is whether profits made by a Swiss resident as the result of acquiring two interests in property under a deed of trust, exchanging those interests for shares in a company, and subsequently selling the shares constituted the profits of "an enterprise carried on by a resident of Switzerland" within the meaning of Sched.15 to the Income Tax (International Agreements) Act 1953 (Cth) ("the Agreements Act").
2. By majority, the Full Court of the Federal Court (Sheppard and Lee JJ., Northrop J. dissenting) upheld a decision of Franklyn J. in the Supreme Court of Western Australia which held that the profits were not the profits of an enterprise within the meaning of Sched.15.
3. The appellant, Gunter Thiel, is a resident of Switzerland. In 1969 he commenced business in Switzerland as a distributor of earth-moving equipment. He continued to conduct that business at all relevant times. In 1983 the appellant feared that he would lose a dealership with one of the major suppliers to his business. He began to seek alternative sources of business. He visited Australia in 1983 and examined investment opportunities in Sydney and in Surfers Paradise. The trial judge was not satisfied that at that time the appellant was genuinely interested in investment, or was in a position to invest, in Australia. In January 1984, the appellant came to Perth at the suggestion of a Mr Kristensen, whom he had known for many years. Mr Kristensen was an executive of a Trust which was involved in high technology research and development. The appellant discussed the activities of the Trust with Mr Kristensen and inspected its premises and the prototypes of some of its inventions. He was informed that the Trust planned to make a public offer of either units or shares, which would create an opportunity for profit for those who acquired them.
4. On or about 25 January 1984, the appellant paid $50,000 to acquire an interest, represented by four units, in the trust property established by a deed of trust called the Energy Research Group Unit Trust. On or about 25 May 1984, he paid an additional sum of $100,000 to acquire a further interest, represented by another two units, in the unit trust. Franklyn J. found that about one quarter of the purchase price of the six units was provided from his business account with a Swiss bank and that the remainder of the price was provided by way of loan, interest free, from his parents. The appellant said that the reason for his purchase of the six units was that it was "just the kind of venture I had been dreaming of" and that "it seemed to me like I had a real winner - a winning position at that moment and I jumped in".
5. Energy Research Group Australia Ltd. was incorporated on 22 October 1984. On or about 9 November 1984, the appellant sold his six units in the trust to that company for $300,000 to be satisfied by the allotment to him, or his nominee, of a total of 600,000 fully paid ordinary shares of 50c each in the capital of the company. On 16 January 1985, the appellant's name was entered in the share register of the company as the holder of the shares. As soon as the shares of Energy Research Group Australia Ltd. were listed on the Australian Stock Exchange, the appellant gave instructions to stockbrokers to sell the whole of his shareholding. Between 7 February 1985 and 6 March 1985, he sold 252,000 of his shares. Over 40 sales of shares were made at prices ranging from $2.10 to $2.75 per share. The proceeds of the sale of these shares totalled $566,307.30. The appellant stopped selling the remaining 348,000 shares when the respondent assessed the profits from the sales as assessable income.
6. The respondent assessed the appellant as having made an assessable profit of $590,307 consisting of two separate gains taxable pursuant to s.26AAA of the Income Tax Assessment Act 1936 (Cth). The respondent alleged that the first gain was made when the appellant sold his six units in the trust in consideration of the issue of 600,000 shares to him and that the second gain was made when the appellant sold 252,000 of the shares allotted to him. The appellant does not contest the respondent's calculation of his profit. But he contends that, by reason of the terms of Sched.15 to the Agreements Act, he was not liable to tax on either of his gains. He contends that his activities constituted "an enterprise carried on by a resident of Switzerland" and that the profits which he made are taxable only in Switzerland.
7. Section 11E and Sched.15 of the Agreements Act give effect to an agreement made between Australia and Switzerland for the avoidance of double taxation with respect to taxes on income ("the Agreement"). The provisions of the Agreement, in so far as they affect Australian tax, have the force of law in relation to tax in respect of income earned after 1 July 1979.
8. Article 7 of the Agreement provides:
"Business ProfitsArticle 3(1)(f) defines the term "enterprise of one of the Contracting States" to mean, unless the context otherwise requires, "an enterprise carried on by a resident of Australia or an enterprise carried on by a resident of Switzerland, as the context requires". Article 3(2) provides:
(1) The profits of an enterprise of one of the
Contracting States shall be taxable only in that State
unless the enterprise carries on business in the other
Contracting State through a permanent establishment situated
therein. If the enterprise carries on business as
aforesaid, the profits of the enterprise may be taxed in the
other State, but only so much of them as is attributable to
that permanent establishment."
"In the application of this Agreement by one of the
Contracting States, any term not otherwise defined shall,
unless the context otherwise requires, have the meaning
which it has under the laws of that Contracting State
relating to the taxes to which this Agreement applies."
9. In giving his reasons for dismissing the appellant's "appeal" against the
assessment, Franklyn J. said:
"I am not satisfied on the evidence that the taxpayerHis Honour concluded:
entered into the purchase of the shares and units in the
expectation of selling the same for a profit as an activity
of his existing business or by way of diversification or
extension thereof, nor am I satisfied that he did so in the
commencement of a new business venture to make profits.
I find that the transaction does not carry any of the
hallmarks of carrying on business or of business activity
other than that of the intention to make a profit."
"I am satisfied that he purchased the units in the private
trust with the firm and sole intention that the investment
thereby made would enable him, by reason of the carrying
into effect by the trust of its plans to make a 'public
offering', to sell them or whatever it might be that he
would have the opportunity to convert them into, and to
thereby make a profit; that the decision to acquire the
units and in due course the shares was no part of his then
business operations, nor the commencement of a new business
operation, but was an isolated transaction of a speculative
nature, made attractive because of the information gained
from and through Kristensen of the products and plans of the
trust and the perceived profit to arise therefrom despite
the 'high risk' which also attached thereto."
10. These findings of Franklyn J. were unsuccessfully challenged in the
Federal Court. However, Sheppard J. thought that the transactions
"when taken
together did amount to a business deal". His Honour also said that he would
have had little difficulty in regarding
the transactions in question "as the
carrying out of an enterprise". But he thought that both the dictionary and
judicial meanings
of the expression "carrying on" compelled the conclusion
that it referred to an activity which was of indefinite or indeterminate
duration. His Honour said:
"In my opinion, the enterprise in which he engaged had notLee J., the other member of the majority, held that there was no ground for interfering with the finding of Franklyn J. that the transaction did not carry any of the hallmarks of carrying on a business or a business activity other than that of an intention to make a profit. Lee J. concluded that the Agreement made "no provision for an isolated venture in the nature of trade which stands apart from the conduct or carrying on of the business of an enterprise". Northrop J., dissenting, held that the word "enterprise" as used in the Agreement did not "connote the existence of an entity or structure attached to the activities entered into by a person in the execution of a plan or scheme". His Honour held that the activities of the appellant in conceiving and executing his plan to make "a quick profit in Australia" constituted an enterprise within the meaning of Art.7(1).
that element of continuity which is required to constitute
an enterprise carried on by the appellant within the meaning
of the relevant articles of the agreement."
11. The Agreement does not define the terms "enterprise", "profits" and "business profits". Nor does it define the compound expressions "profits of an enterprise" and "enterprise carried on". Moreover, none of these terms or expressions has any settled meaning in Australian income tax law. In s.26(a) (now s.25A) of the Income Tax Assessment Act, income was defined to include any "profit arising ... from the carrying on or carrying out of any profit-making undertaking or scheme". In that context, the words "carrying on" have been read as covering "the habitual pursuit of a course of conduct" and the words "carrying out" have been read as "the carrying into execution of a plan or venture which does not involve repetition or system": Premier Automatic Ticket Issuers Ltd. v. Federal Commissioner of Taxation [1933] HCA 51; (1933) 50 CLR 268 at p 298. But the narrow meaning given to the words "carrying on" in s.26(a) is the product of its juxtaposition with the words "carrying out" in the same paragraph. Judicial decisions on the expression "carrying on" in the context of s.26(a) of the Income Tax Assessment Act, therefore, cannot be regarded as settling the meaning of the expression "carried on" in Art.3(1)(f) or the expression "carries on" in Art.7(1). It follows that, within the meaning of Art.3(2), none of the relevant terms or expressions in the Agreement has any particular or settled meaning in Australian income tax law. The meaning of those terms and expressions must be ascertained from the Agreement.
12. The Agreement is a treaty and is to be interpreted in accordance with the rules of interpretation recognised by international lawyers: Shipping Corporation of India Ltd. v. Gamlen Chemical Co. (A/Asia) Pty. Ltd. [1980] HCA 51; (1980) 147 CLR 142 at p 159. Those rules have now been codified by the Vienna Convention on the Law of Treaties to which Australia, but not Switzerland, is a party. Nevertheless, because the interpretation provisions of the Vienna Convention reflect the customary rules for the interpretation of treaties, it is proper to have regard to the terms of the Convention in interpreting the Agreement, even though Switzerland is not a party to that Convention: Fothergill v. Monarch Airlines Ltd. [1980] UKHL 6; (1981) AC 251 at pp 276, 282, 290; The Commonwealth v. Tasmania (The Tasmanian Dam Case) [1983] HCA 21; (1983) 158 CLR 1 at p 222; Golder Case (1975) 57 ILR 201 at pp 213-214. Article 31 of the Convention requires a treaty to be interpreted in accordance with the ordinary meaning to be given to its terms "in their context and in the light of its object and purpose". The context includes the preamble and annexes to the treaty: Art.31(2). Recourse may also be had to "supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion" to confirm the meaning resulting from the application of Art.31 or to determine the meaning of the treaty when interpretation according to Art.31 leaves its meaning obscure or ambiguous or leads to a result which is manifestly absurd or unreasonable: Art.32.
13. The Agreement is one "for the avoidance of double taxation with respect to taxes on income". Accordingly, it is necessary to interpret the words of the Agreement with that particular purpose in mind. Moreover, the term "enterprise" in Arts 3 and 7 of the Agreement is ambiguous because, on the one hand, it can mean a project or activity undertaken and, on the other hand, it can mean a framework for making and carrying out decisions in respect of activities and projects. Consequently, it is proper to have regard to any "supplementary means of interpretation" in interpreting the Agreement. In this case, the "supplementary means of interpretation" are the 1977 OECD Model Convention for the Avoidance of Double Taxation with respect to Taxes on Income and on Capital, which was the model for the Agreement, and a Commentary issued by the OECD in relation to that Model Convention. But before referring to those two documents, it is necessary to describe the Agreement in more detail.
14. The Agreement applies to persons who are residents of Australia or Switzerland or both. The Agreement uses three methods for avoiding double taxation on the income of a resident of a country who has earned income in another country: (a) it eliminates taxation in the source country; (b) it limits taxation in the source country; and (c) it provides relief for tax paid in the source country. However, the Agreement does not contain any general provision dealing with the incomes of residents of Australia and Switzerland. Instead, the Agreement contains specific provisions concerning the taxation of income derived from real property, shipping and air transport, business profits, dividends, interest, royalties, the alienation of property, directors' fees, pensions and annuities, and remuneration in respect of employment and services rendered in the discharge of governmental functions. It also contains specific provisions concerning the taxation of the income of entertainers, students and dual residents.
15. Thus, although the provisions of the Agreement are far reaching and
provide for relief in one form or another from double taxation
in respect of
most forms of income, the Agreement does not cover the field of taxable
income. Indeed, Art.22 contemplates that some
forms of income will be taxable
in both Australia and Switzerland. It provides for the granting of credits
against Australian tax
for Swiss tax paid in respect of income derived by
residents of Australia from sources in Switzerland and for the exemption of
income
from Swiss tax where residents of Switzerland derive income which, in
accordance with the provisions of the Agreement, may be taxed
in Australia.
Moreover, it is significant that the Agreement contains no counterpart of
Art.21 of the Model Convention which provides:
"1. Items of income of a resident of a Contracting State,Nevertheless, although the Agreement recognises that some income will be subject to double taxation, its purpose requires that, so far as is reasonably possible, the provisions of the Agreement should be construed so as to avoid double taxation.
wherever arising, not dealt with in the foregoing Articles
of this Convention shall be taxable only in that State."
16. The "supplementary means of interpretation" are of assistance in
interpreting the meaning of the expression "an enterprise carried
on". The
Model Convention does not seek to attempt to define that expression, but the
Commentary on Art.3 states:
"4. The question whether an activity is performed within theThus, the Commentary recognises that an isolated activity may be an "enterprise" for the purpose of the Agreement.
framework of an enterprise or is deemed to constitute in
itself an enterprise has always been interpreted according
to the provisions of the domestic laws of the Contracting
States ..."
17. In the Federal Court, Sheppard J. thought that the word "enterprise" should be given a wide meaning. His Honour thought that, on its own, the term "enterprise" could consist of one transaction provided that it was entered into for a business or commercial purpose. However, he pointed out that it was part of the composite expression "enterprise carried on". He thought that the case law on the meaning of the expression "carrying on", as well as its dictionary meaning, required a repetition of acts and excluded the case of a single or isolated activity: see Kirkwood v. Gadd (1910) AC 422 at p 431; Premier Automatic Ticket Issuers Ltd., at p 298; Smith v. Capewell [1979] HCA 48; (1979) 142 CLR 509 at pp 517-518. Consequently, his Honour thought that the appellant's activities lacked the element of continuity which was required to constitute "an enterprise carried on" within the meaning of the Agreement. Lee J., the other member of the majority, held that the Agreement makes "no provision for an isolated venture in the nature of trade which stands apart from the conduct or carrying on of the business of an enterprise".
18. I am unable to agree with their Honours' conclusion that the activities of the appellant did not constitute "an enterprise carried on by a resident of Switzerland". If, as the Commentary acknowledges, an activity may constitute an "enterprise" for the purpose of the Agreement, ex hypothesi, the words "carried on by" cannot require the term "enterprise" to be read as always requiring a repetition of activity. Consequently, the expression "enterprise carried on by" in Art.3(1)(f) does not have any connotation requiring the existence of the enterprise before or after the profit has been earned. Nor does it require that the enterprise exist independently of the activity or activities which earns or earn the profit. The words "carried on by" are used in Art.3(1)(f) to signify the nature of the connection which must exist between the "enterprise" and a resident of one of the Contracting States. As counsel for the appellant pointed out, it would make no difference to the meaning of Art.3(1)(f) if the words "undertaken by" were substituted for the words "carried on by". Moreover, as the term "enterprise" has no technical meaning in Australian law, there is no domestic reason for holding that an activity cannot constitute an "enterprise carried on" within the meaning of Art.3(1)(f). Consequently, the words "enterprise carried on by" in Art.3(1)(f) should be construed as including both an isolated activity and a framework for making and carrying out decisions in relation to activities and projects since that is the construction of that Article which will avoid double taxation to a greater extent than the competing construction which was favoured in the Federal Court.
19. Cases such as Kirkwood and Smith, to which Sheppard J. referred, deal with the different expression "carrying on any ... business". Those cases hold that an isolated transaction of a business nature does not constitute "carrying on ... a business". But that is because the carrying on of a business requires the habitual pursuit of business activities. For the reasons I have already given, cases on s.26(a) of the Income Tax Assessment Act, to which his Honour referred, also do not assist in resolving the issue in the present case.
20. It follows from the foregoing discussion that the Art.3(1)(f) definition of "enterprise of one of the Contracting States" covers an isolated activity as well as a framework for making and carrying out decisions in relation to projects and activities. The definition in Art.3(1)(f) applies, however, only when the context does not otherwise require. Do the words "the enterprise carries on business" which appear twice in Art.7(1) provide a context sufficient to reject the application of the Art.3(1)(f) definition to the words "profits of an enterprise of one of the Contracting States" which appear in the first line of Art.7(1)? The concept of carrying on of a business requires repetition of activity. Hence, in the expression "the enterprise carries on business", the term "enterprise" must refer to a framework for making and carrying out decisions in relation to activities and projects rather than an isolated activity, and the Art.3(1)(f) definition is inapplicable. If the expression "profits of an enterprise" in the first line of Art.7(1) includes the profits of an isolated activity, then the term "enterprise" appears to have two different meanings in that Article.
21. Nevertheless, I do not think that the context requires the rejection of the application of the Art.3(1)(f) definition to the phrase "enterprise of one of the Contracting States" in the first line of Art.7(1). If the definition in Art.3(1)(f) is applied to the first limb of Art.7(1), Art.7(1) exempts the profits of an isolated activity as well as the profits of a framework for making and carrying out decisions in relation to activities and projects from taxation in Australia unless the enterprise carries on business in Australia through a permanent establishment based in this country. To interpret the words "the enterprise" in the "unless" clause and the succeeding sentence of Art.7(1) as meaning a framework for making and carrying out decisions in relation to activities and projects and not an activity does not, however, contradict the Art.3(1)(f) meaning of the term "an enterprise" in the first limb of Art.7(1). It simply means that the definition does not apply to the term "the enterprise" in Art.7(1) because, in its context, that term refers only to "an enterprise" which has derived its profits by using a framework for making and carrying out decisions in relation to activities or projects.
22. Accordingly, profits derived from an isolated activity may constitute the profits of "an enterprise" within the meaning of Art.7. Indeed, it would be surprising if this was not the case. It is difficult to see any revenue or commercial reason for distinguishing between a Swiss resident who earns profits by constructing a number of buildings while he is in Australia for a few months and a Swiss resident who earns profits by constructing a single building while he is in Australia for a few months.
23. To come within Art.7, however, it is not enough that the carrying on of an enterprise has produced "profits". The heading to Art.7 must be taken into consideration in determining the meaning of that term. Although it is not necessary that the profits referred to in that Article be those of a business, the heading "Business Profits" indicates that, to come within Art.7, the profits of the enterprise must be profits from an adventure in the nature of trade: cf. Minister of National Revenue v. Tara Exploration and Development Co. Ltd. (1972) 28 DLR (3d) 135.
24. With some hesitation I have come to the conclusion that the profits earned by the appellant were within the scope of Art.7. The evidence establishes that the appellant saw his opportunity to invest in the Trust as a venture which, although highly speculative, carried with it the prospect of making a large sum of money when an offering was eventually made to the public. To achieve that profit, he had to raise finance from his bank and parents, acquire an interest in the Trust property and hold the interest until the public offering. He acquired his first interest in the Trust in January 1984. He then acquired a further interest in May 1984. In furtherance of his plan to make a profit, he held those interests until November 1984 when he exchanged them for shares in the recently-formed Energy Research Group Australia Ltd. As soon as the shares of that company were listed on the Australian Stock Exchange, he gave instructions to sell them. There were over 40 separate sales between 7 February 1985 and 6 March 1985. No doubt those sales were deliberately staggered so that the price of the shares would not be depressed. If the respondent had not intervened, all the shares would have been sold. Although Franklyn J. found that the acquisition of interests in the Trust by the appellant was neither part of nor a diversification of his earth-moving equipment business, the fact that he was a businessman is a matter of considerable importance. It gives colour to the whole venture. The appellant's discussions with Mr Kristensen should be seen as discussions between two businessmen who recognised the chance to make large profits from the public float of the Trust. The better conclusion is that the appellant acquired his interests in the Trust as a businessman rather than as a private person. To use the words of Sheppard J., what the appellant did amounted to "a business deal". Accordingly, the profits which the appellant earned were profits from an adventure in the nature of trade and were the profits of an enterprise carried on by a resident of Switzerland.
25. The appeal should be allowed.
ORDER
Appeal allowed with costs.Set aside the orders of the Full Court of the Federal Court and in lieu thereof order that the appeal to that Court be allowed.
Set aside the orders of Franklyn J. and in lieu thereof order that the appeal to the Supreme Court of Western Australia be allowed.
Remit the assessment to the respondent to be varied in accordance with the judgment of this Court.
Liberty to the appellant to apply within fourteen days of this order with respect to the costs of the proceedings in the Supreme Court of Western Australia and the Full Court of the Federal Court.