In Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation  HCA 45 (16 November 2016) the High Court has, in a unanimous decision, dismissed the appeals of four companies (the appellants) from a decision of the Full Court of the Federal Court of Australia (see Bywater Investments Limited v Commissioner of Taxation  FCAFC 176 (11 December 2015)). In its decision, the High Court has found that the appellants were Australian residents for the purposes of the income tax laws and during the relevant years were liable to pay income tax in Australia.
Of the three appellants in the case all but one of the directors of those three appellants (namely, Bywater Investments Ltd and Chemical Trustee Ltd and Derrin Brothers Properties Ltd) were found to be resident in Switzerland and that meetings of those directors, when they were held, took place in Switzerland. The third appellant (Hua Wang Bank Berhad), was found to be incorporated in Samoa and most of its directors were found to be employees of an international trustee and corporate service provider located in Samoa.
The Commissioner of Taxation issued assessments (in August 2010) to the appellants. The assessments were in respect of profits derived from the purchase and sale of shares listed on the Australian Stock Exchange (the ASX). Objections to the assessments were lodged by the appellants on the grounds, among other claims made, that, the appellants were not “Australian residents” under the Income Tax Assessment Act 1936 (Cth) (the ITAA 1936) section 6(1) which provides as follows:
resident or resident of Australia means:
(a) a person, other than a company, who resides in Australia and includes a person:
(i) whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia;
(ii) who has actually been in Australia, continuously or intermittently, during more than one half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia; or
(iii) who is:
(A) a member of the superannuation scheme established by deed under the Superannuation Act 1990; or
(B) an eligible employee for the purposes of the Superannuation Act 1976; or
(C) the spouse, or a child under 16, of a person covered by sub‑subparagraph (A) or (B); and
(b) a company which is incorporated in Australia, or which, not being incorporated in Australia, carries 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.
Subsequently, the appellants objections were “substantially disallowed” by the Commissioner of Taxation and the appellants appealed to the Federal Court of Australia (see Hua Wang Bank Berhad v Commissioner of Taxation  FCA 1392 (19 December 2014); and Hua Wang Bank Berhad v Commissioner of Taxation (No 19)  FCA 454 (15 May 2015)).
Justice Perram, the primary judge, found that even though the “formal organs” of each company were located overseas, the real business of the appellants was being conducted by an Australian resident, a Mr Gould, employed by the appellants from Sydney, without the involvement of the directors of the appellants.
Justice Perram therefore held that the "central management and control" of each appellant was, as a result, situated in Australia as required by section 6(1)(b) of the definition of resident in the ITAA 1936, thus making each of the appellants liable to tax as an Australian resident.
On appeal (see Bywater Investments Limited v Commissioner of Taxation  FCAFC 176 (11 December 2015)), the Full Court of the Federal Court of Australia rejected the argument of the appellants' that the “central management and control” of the companies was situated abroad because the meetings of their boards of directors were held abroad. Instead the Full Court found there was:
The appellants were granted special leave and appealed to the High Court.
In its appeal Bywater Investments Limited (S134/2016), stated the following grounds:
In its appeal Hua Wang Bank Berhad (S135/2016), stated the following grounds:
(i) on the findings of fact made by the Primary Judge, the Full Court erred by concluding that the appellant’s central management and control was located in Australia, and that the appellant was a resident of Australia;
(ii) the Full Court endorsed the view of the Primary Judge that the ‘real business’ of a company is located with the person who is the controlling mind of the company. This is not correct. The correct principle is that the ‘real business’ of a company is located at the place where the organs of the company exercise legally effective authority; and
(iii) the Full Court adopted an erroneous view of Esquire Nominees Ltd v Federal Commissioner of Taxation (1973) 129 CLR 177.
In each appeal the Commissioner of Taxation (the respondent) filed a notice of contention, the grounds in which included:
In Hua Wang Bank Berhad (S135/2016) the respondent, also filed a summons, seeking either that the grant of special leave to appeal be revoked or that judgment be given for the respondent, on the basis that even if the appellant Hua Wang were to succeed on its sole ground of appeal, its liability for tax would not change.
The High Court held that, it was a matter of long-established principle that:
The High Court further found that, the fact that the boards of directors were located abroad, was insufficient to locate the residence of the appellants abroad. In the current circumstances, the boards of directors had abrogated their decision-making in favour of Mr Gould and only met to "mechanically implement or rubber-stamp decisions" made by him in Australia.
Finally, the High Court held that the appellants could not escape liability for income tax in Australia on the basis that they were resident abroad - nor could the appellants, Bywater Investments, Chemical Trustee or Derrin Brothers Properties rely on double taxation agreements to avoid liability, on the ground that their "place of effective management" was other than in Australia.
As a result the High Court has unanimously dismissed the appeals.
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Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation  HCA 45 (15 November 2016) and related summaries provided by the High Court
Bywater Investments Limited v Commissioner of Taxation  FCAFC 176 (11 December 2015)
Hua Wang Bank Berhad v Commissioner of Taxation (No 19)  FCA 454 (15 May 2015)
Hua Wang Bank Berhad v Commissioner of Taxation  FCA 1392 (19 December 2014)
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