Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45: Whether Company a Resident

In Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] 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 [2015] 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.

Background

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

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:

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 [2014] FCA 1392 (19 December 2014); and  Hua Wang Bank Berhad v Commissioner of Taxation (No 19) [2015] FCA 454 (15 May 2015)). 

At Trial

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.

Full Federal Court

On appeal (see Bywater Investments Limited v Commissioner of Taxation [2015] 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:

 

Appeal to the High Court

The appellants were granted special leave and appealed to the High Court.  

In its appeal Bywater Investments Limited (S134/2016), stated the following grounds:

• The Full Court erred in failing to overturn the Justice Perram’s finding that each of the appellants failed to discharge their burden of proof to establish that each was not a resident of Australia for tax purposes.
• On the findings of fact made by the Justice Perram, the Full Court should have held that the appellants’ central management and control was in Switzerland or the United Kingdom, that each of the appellants was not a resident of Australia and should have set aside the Primary Judge’s conclusion to the contrary.

In its appeal Hua Wang Bank Berhad (S135/2016), stated the following grounds:

• The Full Court erred by concluding that the Primary Judge identified and applied the correct principles for determining corporate tax residency. In particular:

(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:

• The Court below was bound to follow the decision of Esquire Nominees Ltd v Federal Commissioner of Taxation (1973) 129 CLR 177.

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 Decision

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.

TimeBase is an independent, privately owned Australian legal publisher specialising in the online delivery of accurate, comprehensive and innovative legislation research tools including LawOne and unique Point-in-Time Products.

Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation [2016] HCA 45 (15 November 2016) and related summaries provided by the High Court

Bywater Investments Limited v Commissioner of Taxation [2015] FCAFC 176 (11 December 2015)

Hua Wang Bank Berhad v Commissioner of Taxation (No 19) [2015] FCA 454 (15 May 2015)

Hua Wang Bank Berhad v Commissioner of Taxation  [2014] FCA 1392 (19 December 2014)