Journal of Australian Taxation
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IN SEARCH OF A PURPOSE
TO OUR TAX LAWS:
CAN WE TRUST THE JUDICIARY?
By Justin Dabner[*]
We face a dilemma. Comprehensive tax legislation designed to minimise avoidance opportunities results in complexity and specific anti-avoidance rules that are inevitably sidestepped. On the other hand, general anti-avoidance rules (“GAARs”) invariably lack guidance as to their scope of operation and add a further layer of complexity. History demonstrates that ultimately the GAAR is narrowly interpreted, legislation becomes more complex and the tax system loses credibility.
A departure from the classical principles of interpretation and the traditional style of legalistic drafting is necessary. In this new environment the judiciary would be instructed to interpret tax legislation with a view to its objects and, where necessary, to make tax policy. Parliament would fully particularise the objects to which provisions are directed and access by the courts to explanatory material would be permitted without fetter. A Tax Policy Committee, comprising stakeholder representatives, would have the mandate to elaborate on legislative policy, rule on whether revenue rulings infringe this policy and/or recommend amendments to clarify legislation. The penalties regime would be receptive to the reality that the search for the “true” meaning of legislation is illusory.
(The purposive approach) ... is an approach proper, in my respectful view, to the relationship between modem democratically elected legislatures and the independent courts. The price that will be exacted for spurning the legislative instruction to give effect to the purpose of legislation is increasingly complex and detailed statutory provisions, difficult for citizens to understand and for the courts to construe.[1]
In a previous article[2] the author identified the tensions within tax legislation generated by the equilibrium or compromise between general anti-avoidance rules (“GAARs”) and the fundamental principle that taxpayers are free to choose to order their affairs to minimise the amount of tax they pay (in Australia known as the “Duke of Westminster” principle).[3] As most jurisdictions attempt to apply a GAAR within the framework of this principle, inevitably limits are placed upon the GAAR.
In response to the limitations imposed on the former Australian GAAR,[4] Pt IVA of the Income Tax Assessment Act 1936 (Cth) (“ITAA36”), was drafted broadly with limited exclusions. Thus if the “dominant purpose” of a “scheme” is to derive a “tax benefit”, with all these terms widely defined, then the transaction is caught. Whilst the rule contains a choice principle, it is restricted to where the legislation provides an express election.[5]
For many years it was assumed that Pt IVA contained an inherent exclusion for commercial transactions albeit that they contained tax effective elements. This assumption was supported by comments in the Second Reading Speech upon the introduction of Pt IVA into Parliament. In this speech the then Treasurer suggested that Pt IVA applied to “blatant, artificial and contrived schemes” but not “normal business or family dealings”.[6] This dichotomy was also taken up in the Explanatory Memorandum to the Bill and itself derived from a distinction drawn by the Privy Council in Newton v FC of T.[7] That case is generally considered as having stated a “predication test” upon which Pt IVA was founded.[8]
However the High Court in FC of T v Spotless Services Ltd[9] rejected the existence of a commercial transaction exception to Pt IVA. The result was that the equilibrium between the Australian GAAR and the Duke of Westminster principle was fundamentally altered. There is now considerable uncertainty as to what extent tax minimisation is acceptable. There must also be uncertainty as to the future of Pt IVA.
This uncertainty may partly be the impetus for the following observation by the Ralph Review of Business Taxation:
In other countries, the problem of tax avoidance has been left to a greater degree to the judiciary. In the context of tax legislation, drafted on the basis of fundamental and transparent principles, Australia may wish to consider such a possibility. Australian courts, at the moment do not generally undertake this role, because the anti-avoidance rules are specifically legislated and because no underlying principles are discernable from the current legislation.[10]
It is proposed in this article to consider the possibility of the problem of tax avoidance being left to the judiciary in the form of an instruction to interpret the tax laws in such a way as to further the purpose of these laws (“purposive interpretation”).
In recent years there have increasingly been calls for structural reform to the tax system as a means of tackling tax avoidance rather than the enactment of more anti-avoidance rules. In recognition of the political reality that comprehensive structural reform is unlikely, these reform proposals are often allied with a recommendation that the Courts be required to adopt a purposive interpretation.[11] That is, in the event of legislative ambiguity the Courts should seek to give effect to an interpretation of the legislation that furthers the legislative purpose.
Whilst this approach to statutory interpretation is not new, traditionally tax laws have been interpreted literally.[12] That is, the words of the legislation are given their normal meaning with whatever result this entails.[13] The rationale for this has variously been traced to the rule of law and need for certainty, the Constitution,[14] that tax is akin to a penalty on the citizens of society and that taxpayers have no inherent obligation to pay tax.[15] In this light it can be seen that the rule complements the Duke of Westminster principle.
These rationales can be challenged. To suggest that an approach that adopts the “normal” meaning of words in interpreting legislation rather than seeking to further its underlying purpose provides greater certainty is to ignore the semantic difficulties inherent in language. Furthermore, if we accept that a societal existence carries with it an obligation on all citizens to pay a fair amount of tax for the public goods they enjoy, then another basis for the literal rule is also questionable.[16]
One effect of both the literal rule and the Duke of Westminster principle has been to encourage lengthy and complicated legislation that seeks to pre-empt avoidance opportunities and counter a narrow interpretation of the legislation. Such legislation, in fact, adds to the uncertainty, the prevention of which is meant to be a rationale for the literal approach. It certainly is inconceivable that complex legislation reduces litigation. In fact, the contrary could be expected.
It is for these reasons that the purposive approach to interpreting tax legislation, albeit in various guises,[17] has received support.[18]
However in Australia, at least, difficulties with the application of this approach exist. It is proposed to explore these difficulties with a view to identifying possible solutions.
In Australia, prior to 1981 a literal approach dominated the interpretation of tax statutes. However, in that year the High Court in Cooper Brookes (Wollongong) Pty Ltd v FC of T[19] endorsed the view that the literal meaning of a provision could be departed from where the result was otherwise irrational. In such circumstances the function of the Court is to uphold the purpose of the legislation.
Whilst there have been some Australian decisions which have supported such an approach, examples of literalism remain abundant.[20] In fact the Australian judiciary is tending to resist any principle that fetters its right to choose which approach to adopt. However this creates a worst-case scenario in terms of the search for certainty.
This is illustrated by the recent High Court decision in FC of T v Ryan.[21] At issue was whether a refund notice, which specified that the taxpayer’s income was nil and that no tax was payable, commenced time running for the purposes of the time limit on amending assessments in s 170 of the ITAA36.
A majority of the High Court rejected the view of the Federal Court, both at first instance and on appeal, that a nil assessment could amount to a valid assessment for these purposes. The High Court focused on the literal meaning of the words in s 170 that stated that time began to run from when “tax became due and payable”. Their Honours concluded that it could not be said that tax had become “due and payable” on a particular date in circumstances where the Australian Taxation Office (“ATO”) had issued a document informing the taxpayer that no amount of tax was payable.
The majority refused to accept an argument that this interpretation was unjust, absurd and contrary to a policy of certainty and finality that was arguably promoted by the tax laws. In any event, their Honours doubted that the tax laws reflected any such general policy. In contrast, Kirby J in dissent accepted this policy argument and interpreted the legislation to further its purpose.
This decision results in the absurd scenario that if a taxpayer in Ryan’s circumstances is assessed to $1 of tax, they could not be re-assessed after the expiration of the relevant time interval but a taxpayer who has been advised that nothing is owing remains liable to re-assessment without any time limit. This result is achieved because the literal approach prevailed at the High Court level. However, it is notable that of the nine judges that heard the case, a majority of five adopted the purposive approach.
Thus a system that provides the judiciary with flexibility to adopt either interpretative approach has not only resulted in a perverse decision, but in considerable litigation and cost to the parties and uncertainty for the future. Had a purposive approach been mandated then a sensible result and some certainty would have been achieved. In fact, the matter may never have proceeded to litigation.
Is the appropriate legislative approach to such judicial ambivalence to, therefore, mandate in legislation that the Courts embrace a purposive approach?
In fact, such an instruction to the judiciary does exist. Thus the judicial ambivalence to adopting a purposive interpretation of the tax laws is even more surprising given that the Australian Parliament and, notably, the Parliaments of Canada and New Zealand have mandated in their Acts interpretation legislation a purposive approach to statutory interpretation.[22] Indeed the impetus for the enactment of this provision in Australia was the public opprobrium at the literal approach to the interpretation of tax avoidance legislation during the 1970s.[23]
Why then do the Australian Courts continue to sometimes adopt a literal approach?
Section 15AA of the Acts Interpretation Act 1901 (Cth) provides:
In the interpretation of the provision of an Act, a construction that would promote the purpose or object underlying the Act (whether that purpose or object is expressly stated in the Act or not) shall be preferred to a construction that would not support that purpose or object.
This is supported by s 15AB which allows reference to extrinsic material where there is, for example, some ambiguity in the wording of a provision.[24]
Whilst s 15AB has frequently been considered by the Courts in tax cases, s 15AA has been largely ignored by the Australian judiciary, as has its New Zealand counterpart.[25]
Where it has been considered it has been read down. Thus in the High Court decision in Chugg v Pacific Dunlop it was held that the application of s 15AA was limited to where a choice existed between a construction that would promote the purpose of the Act and one that would not promote that purpose. It had no application where there was a choice between two constructions that might promote that purpose.[26]
Furthermore, whilst the effect of s 15AA is to override the Common Law rules as to the literal and purposive approaches to interpretation,[27] it has been suggested that there are no cases in which s 15AA has been applied that have led to a result that is different from that which would have been achieved under the common law purposive rule.[28] Nevertheless s 15AA is broader than the Common Law as it does not require ambiguity nor inconsistency for application.[29] Therefore, conceivably, an objects clause might be referred to support an interpretation inconsistent with the clear literal meaning of a provision. In this event it has been held that the interpretation must be precisely identifiable with that which is necessary to effect those purposes and it must be consistent with the words otherwise adopted. It is not permissible to re-write a provision in the light of its purposes.[30]
This restrictive approach was applied to tax legislation in Trevisan v FC of T.[31] At issue was whether an investment in a property trust by a superannuation fund was an investment in an associate of the employer sponsor where the employer sponsor was also the trustee of the property trust. If so this would render the investment an in-house asset as defined. The difficulty was, however, that an investment in a trust could not be characterised as an investment in the trustee of that trust. Nevertheless, the Tribunal at first instance had concluded that it was the clear intention of Parliament that this investment be treated as an in-house asset and relied on s 15AA to interpret the definition accordingly.
Burchett J considered this an impermissible re-drafting of the definition. It was not merely a stretching of the language but an unprincipled attempt to extend the language to a case that the definition could have covered had Parliament thought of it. This was inappropriate as its effect would be to bring other cases within the scope of the definition and possibly upset the balance in objectives that the legislation sought to achieve. There was no mandate in s 15AA to read words into an Act. Rather it was simply an instruction to prefer one construction over another where two exist.
Thus his Honour interpreted the in-house asset definition literally such that the investment in the property trust was not viewed as an investment in the trustee of the trust.[32]
Notwithstanding these restrictive interpretations of s 15AA[33] it has been suggested that the provision would permit the reading of words into a section where they have been inadvertently omitted.[34] However with this possible caveat it would appear that the provision has limited application as currently interpreted.
A further potential problem with s 15AA is that it refers to the purpose of the “Act”. Waincymer argues that the proper approach must be to consider the purpose of a particular provision as it is meaningless to talk about the purpose of legislation the size and complexity of the Income Tax Assessment Acts.[35] This does not necessarily avoid all the difficulties however as often a provision will be directed at achieving a compromise between an overriding purpose and other considerations. In such a case should a Court interpret the provision to further one purpose then this may have the effect of upsetting the compromise.[36]
The drafting limitations with s 15AA may, therefore, explain its impotence. However these problems may be surmountable. For example, s 14A of the Acts Interpretation Act 1954 (Qld) provides that the interpretation be that which “will best achieve the purpose of the Act” rather than merely “promote the purpose of the Act”. This was in response to the limitations in the drafting of s 15AA exposed by the High Court in Chugg.
Furthermore, a possible means of more acutely drawing to the judiciary’s attention the mandate in s 15AA would be to replicate it in the tax legislation. Indeed, the New Zealand Parliament’s response has been to insert a provision mandating a purposive interpretation into their re-written Income Tax Act 1994.[37] In addition, in the process of re-writing the legislation, objects clauses have been added wherever possible. These developments are discussed below.
The now stalled Australian simplification project has not followed the New Zealand lead by including in the Income Tax Assessment Act 1997 (Cth) (“ITAA97”) a requirement to adopt a purposive interpretation even though an Australian precedent for the replication of s 15AA existed in s 109H of the Corporations Law.[38] Discussions with members of the project team have indicated that the team considered that the existence of s 15AA was sufficient to induce the judiciary to adopt a purposive analysis. However the limited judicial reference to s 15AA in tax cases and the lingering reliance on a literal approach to interpretation suggests that a restatement of the mandate contained in s 15AA may be valuable. It is notable that the ITAA97 does contain “guides” that often contain statements of purpose. Furthermore, the Ralph Review recommended further statements of objects, in particular, the inclusion of an objects clause in Pt IVA, itself emphasising the significance of the objects of the legislation.[39] This amendment might have the effect of introducing a purposive element into the Part.[40] This raises the question of whether the GAAR is an appropriate mechanism by which to mandate that the judiciary adopt a purposive approach.
Indeed an approach adopted by some countries is to include a purposive element in their GAAR.[41] In an earlier article the author advocates that if a GAAR is to be enacted then a purposive approach should be the principle upon which it is founded.[42]
A particular problem with stating the purposive rule within the GAAR is that it tends to be emasculated within detailed legislation with the potential to be less effective.[43] The current Australian GAAR with its reference to schemes, tax benefits and dominant purpose, arguably obscures what should be the ultimate issue, namely whether the taxpayer is seeking to act contrary to Parliament’s prescription. It should not matter as to the nature of the transaction, the way in which the tax saving is achieved or even what was motivating the taxpayer. If the judiciary concludes that Parliament’s intent was that a particular scenario should have certain tax consequences then that should be the result. Whether the taxpayer intended to gain the tax advantage or it was achieved inadvertently is a consideration that is relevant solely to the imposition of penalties.
Accordingly the author prefers the alternative of replacing the GAAR with an express provision in the tax legislation mandating a purposive interpretation.[44]
This view has its critics. Waincymer suggests that whilst it may be impossible to make a distinction between a purposive approach and the proper application of a GAAR itself this does not necessarily mean that a GAAR should not be included in legislation as a safety precaution or as a direction to the judiciary to apply a purposive analysis at every stage. Yet the difficulty is, as he acknowledges elsewhere in his article, a detailed and poorly drafted GAAR can detract from a clear interpretation of the substantive provisions and can contribute to poor drafting techniques.[45] A further criticism of complicated anti-avoidance legislation is that it can actually make the task of the courts in ascertaining the purpose of legislation more difficult.[46]
There is a view that any judicial anti-avoidance doctrines should be supplemented with a statutory GAAR as the judiciary is likely to be inconsistent.[47] However, it is to be doubted whether a GAAR will provide much protection from judicial inconsistency given that by nature these provisions are broad and subject to interpretation. Furthermore there is some evidence that the existence of a GAAR can operate as break on judicial creativity. This has indeed occurred in both Canada and Australia where the existence of a GAAR has resulted in the rejection of judicial anti-avoidance rules.[48]
Certainly there is much support for the view that if a purposive approach is adopted by the judiciary then a GAAR is unnecessary if not undesirable. Such an argument has been advanced in relation to Pt IVA,[49] in relation to the Canadian GAAR[50] and in the United Kingdom.[51]
If it is accepted that we need an express statement in our tax legislation that the judiciary should adopt a purposive approach and that this statement is better removed from and adopted in lieu of a GAAR nevertheless problems remain with the adoption of a purposive approach. These are documented by Waincymer who argues that whilst the legislative prescription of a purposive approach is premised on restoring some consistency and reducing the scope for judicial discretion, simply requiring the judiciary to adopt a purposive interpretation limits their choices but does not remove them. The initial factual determinations and application of private law principles can dictate the result achieved as much as any express choice. Furthermore, decisions as to whether to follow or distinguish precedent also involve inherent choices. Finally, judges may still need to decide whether the necessary ambiguity exists to justify a purposive analysis and will then have to identify the purpose of the provision.[52]
The identification of the purpose of complex tax legislation can be particularly problematic. One possible legislative response is the insertion of objects clauses. It has been suggested that such clauses may be inserted in one of three ways:
• as the primary provision with specific illustrative sections appended to it,
• as a precursor to a comprehensive detailed provision, or
• as an addition to a provision that otherwise attempts to exhaustively define its scope.[53]
The first type is the paradigm. The second type probably achieves nothing other than permitting the possibility of conflict between the general statement of purpose and the detailed rules. The third type is problematic and such objects clauses tend to be ignored by the judiciary.[54]
Certainly the insertion of objects clauses overshadowing detailed provisions cannot be relied upon to compensate for poorly drafted provisions or those lacking a sound policy base. An example of such an approach may be the recommendation of the Ralph Review to insert an objects clause in to Pt IVA.[55] It is unlikely that the judiciary will give much weight to an objects clause subsequently included with a provision that exhibits little regard to the terms of the provision or relevant extrinsic material. Such an approach of attempting to amend legislation by the inclusion of objects clauses is likely to result in such clauses being read down or ignored and a corruption of the whole process.
A further possible example of an objects clause contributing to sloppy drafting may be the result achieved in the GAAR contained in Div 165 of A New Tax System (Goods and Services) Act 1999 (Cth). The explanatory note to the Div in s 165-1 states that it is aimed at artificial or contrived schemes, yet but for this simple statement it is difficult to identify any such limitation contained within the detailed terms of the provision. It is, thus, problematic whether the division has an application to ordinary business transactions.
One aspect of Div 165 is that s 165(1)(c) instructs the Courts to have regard to the purpose of the legislation when considering whether the dominant purpose or principle effect of a scheme was to achieve a GST benefit as defined. One can speculate as to what significance the Courts will give this instruction. It might be interpreted as mandating a purposive interpretation of the GST legislation. Such uncertainty supports the argument for the adoption of an express mandate rather than the utilisation of a GAAR.[56]
In the discussion paper issued by the Ralph Review,[57] the absence of clear statements of policy and purpose or basic principles underlying tax legislation was identified.[58] Thus it was suggested that the legislation should be re-drafted to clarify and disclose the policy, purpose and basic principles behind the legislation.
Subsequently in its report the Ralph Review proposed the enactment of an integrated tax code and illustrated its proposal with draft legislation.[59] The discussion paper had suggested that the statements of principle might, in appropriate cases, be an operative part of the Act and not merely a statement of purpose to assist in interpretation. It is presumably on this basis that the draft legislation contains both generic “objects” clauses and more detailed “guides”.[60] These guides adopt the current approach of the ITAA97 in providing an overview of a division that often specifies its purpose.
The draft legislation repeats s 950-150(2) of the ITAA97 and provides that:
Guides form part of this Act, but they are kept separate from the operative provisions. In interpreting an operative provision, a guide may only be considered:
(a) in determining the purpose or object underlying the provision; or
(b) to confirm that the provision’s meaning is the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision; or
(c) in determining the provision’s meaning if the provision is ambiguous or obscure; or
(d) in determining the provision’s meaning, if the ordinary meaning conveyed by its text, taking into account its context in the Act and the purpose or object underlying the provision, leads to a result that is manifestly absurd or unreasonable.[61]
This substantially reproduces s 15AB of the Acts Interpretation Act with the addition of paragraph (a). It is difficult to appreciate the significance of this paragraph and its relationship with the other paragraphs. Given that a purposive interpretation is mandated by s 15AA does it mean that the guides may be referred to irrespective of whether the provision is ambiguous or its ordinary meaning is absurd? Paragraphs (b) and (d) appear to acknowledge that a purposive interpretation will have been adopted even though subsequently it is necessary to refer to the guides. However, one would have suspected that the guides would have already been referred to in seeking to ascertain the purpose of the provision.
Proposed s 950-150(2) is not a good example of simplified drafting if all it is stating is that the operative provisions are to have primacy over the guides for interpretative purposes. Thus, whilst the use of objects clauses in tax legislation, whether in the guise of “guides” or otherwise, would now appear to be accepted practice in Australia these only appear as precursors or additions to comprehensive legislation and there permitted use as an interpretative aid may be limited. Furthermore, to the extent that they tend to contain extremely broad statements they may be of little interpretative value.
The New Zealand Parliament has been the most adventurous in mandating a purposive approach to interpreting tax laws and in utilising objects clauses.
The use of objects clauses in New Zealand tax legislation has its origins in a 1989 Law Commission report.[62] The Valahb Committee[63] and the Working party on the Reorganisation of the Income Tax Act 1976[64] also both supported the use of objects clauses but were vague as to their role. In particular, the Valahb Committee was concerned that objects clauses could possibly be used against a taxpayer notwithstanding compliance with the detailed provisions. Thus it was suggested that such clauses were best used as an aid to interpretation only where ambiguity existed.[65]
The income tax laws were redrafted in a more coherent form as the Income Tax Act 1994. Section AA 1 specifies the main purposes of the Act. The explanatory note to the Act explains that this provision only refers to the main purposes of the Act and not to subsidiary purposes because if the list of other purposes were not exhaustive there would be a risk of elevating the significance of some purposes relative to others. Furthermore, it was difficult to obtain consensus on what were the other purposes of the Act. Thus it is unlikely that this most general of purpose provisions will be useful as an interpretative aid.
The real risk is that these comments can apply with equal force to the other objects clauses in the legislation. Nevertheless with the changes to the Income Tax Act 1994 brought about by the Taxation (Core Provisions) Act 1996, the use of objects clauses became entrenched.[66] In addition s AA 3(1) was inserted. It reads:
The meaning of a provision of this Act is found by reading the words in context and particularly in light of the purpose provisions, the core provisions and the way in which the Act is organised.
Thus whilst a general instruction to the judiciary to adopt a purposive approach existed in s 5(j) of the Acts Interpretation Act 1924[67] it was nevertheless considered appropriate to enact a specific interpretation provision within the Income Tax Act. This was justified on the basis that it was “the most complex, the longest and the most amended Act on the Statute Book”.[68] The intent was to ensure a consistent approach to interpreting the Act.[69]
It has been suggested that the significance of s AA 3 is unclear. In particular does the provision require the purpose provisions to be read as overriding the treatment apparently prescribed by a specific provision where there is a conflict? Also how is it to be reconciled with common law principles that, whilst they support a purposive interpretation, still permit the possibility of an interpretation restricted to the words of a provision.[70]
Furthermore, whilst the inclusion of ss AA 1 and AA 3 was apparently intended to oblige the courts to adopt a purposive approach there is a view they will not achieve their object in the absence of a more specific directory provision than s AA 3 and more specific objects clauses. However the functional, non-thematic, structure of the Income Tax Act 1994 renders it impossible for the draftsmen to compose meaningful objects clauses.[71]
Similarly a Government sponsored review committee into tax compliance has concluded that it was unclear what was intended to be achieved by ss AA 1 and AA 3. In particular the evidence before it was that the provisions were intended to achieve something less than mandating a purposive interpretation of tax legislation.[72]
The Committee also noted that s 5(j) of the Acts Interpretation Act 1924, whilst of little effect on New Zealand Courts in relation to interpreting tax legislation,[73] was potentially at conflict with ss AA 1 and AA 3.
Thus the Committee recommended that the Government reconsider these provisions, especially their relationship with the other statutory rules of interpretation. There was a difference of opinion within the Committee as to whether a change to a purposive approach was desirable and, in any event, it was doubted whether the judiciary would respond to an instruction to adopt a purposive approach.[74]
The Committee also observed that the objects clauses were too general and recommended the use of more specific provisions.[75]
Discussions with members of the New Zealand re-write team confirmed this doubt as to the effectiveness of s AA 3. It was suggested that the provision is simply seeking to restore some equilibrium between the literal and purposive approaches to interpretation.
The re-write team also acknowledged the difficulties of specifying the purpose of a provision in other than any general way and, therefore, it had been decided to only include an objects clause where something meaningful could be stated. The impetus for this approach may possibly be attributed to the draftsmen who apparently consider it a failure on their part to resort to the use of an objects clause.
From this review of the Australian and New Zealand experience with objects clauses it can be appreciated that whilst such clauses may be of some assistance in ascertaining legislative intent they will not provide an interpretative panacea in all cases. In particular, the insertion of objects clauses into detailed legislation may simply
create confusion especially where the legislative instruction as to their relevance is ambiguous. There must also be real doubt as to whether very general objects clauses are of value.
An appreciation that objects clauses on their own will be of limited value in divining the legislative intent behind complex tax legislation has led to a movement to adopt a drafting style that is simpler and more clearly expresses legislative purpose.
Proponents of this new approach argue that the main inhibitor of the purposive approach to interpretation is the absence of coherent general principles in tax legislation. Thus the interpretation achieved under the purposive approach will often be dictated by the philosophical position of the judge with the result that decisions will differ from judge to judge. This stems from the great paradox. Parliament is pre-occupied with detail and the judiciary with attempting to identify general principles. It should be the reverse. Thus for the purposive approach to interpretation to be effective it is argued that a new approach to drafting tax legislation is required.[76]
Thus the issues of whether legislation should contain objects clauses and whether the Courts should have unfettered access to extrinsic material are part of a larger debate over whether legislation ought to be rule based or principle based.
During the last decade this debate has raged in the United Kingdom.[77] Those in support of principle based legislation (“purposive legislation”) argue that rule based drafting has created great complexity and uncertainty and has taken Parliament’s focus away from policy.[78]
The genesis of the debate was a paper by Beighton in 1994[79] in which he proposed that the Courts should adopt a purposive approach to construing taxation legislation with such legislation to focus more on defining the purpose of the legislation rather than complex rules. In addition there would be more ready access to secondary material such as explanatory memoranda.
It must be questioned whether purposive legislation achieves anything if the result is simply that the detail is relocated to secondary legislation. In fact this could result in greater uncertainty if drafting rigors are not as readily observed in the preparation of the secondary material. In the absence of express instruction in the legislation, difficulties may also arise in reconciling and prioritising the various sources of “legislation”.
However, Avery Jones would criticise these arguments as reflecting a jaundiced view of purposive legislation. His proposal was that the legislation embrace general principles followed by less detailed rules, with these rules being interpreted in a manner that is consistent with the principles and explanatory memoranda. There would be no detailed legislation either primary or secondary. The predictability arising from the use of principles would generate the requisite certainty.[80]
In fact, most arguments against purposive legislation focus on the uncertainty it would allegedly generate. For example, the Hansard Commission recommended against the use of principled drafting of tax laws on the basis that it would result in increased litigation and less certainty.[81]
Similarly, Smith cautions against purposive legislation where relative certainty is preferred over legislation that is more flexible and durable. He warns that the realities of the legislative process are that it is unlikely that sufficient time can be devoted to making purposive legislation sufficiently rigorous. Furthermore, there is a chance that the principles and purposes associated with legislation will be corrupted in a policy compromise as it proceeds through the parliamentary process.[82]
The Tax Law Review Committee, in its Final Report on Tax Legislation, acknowledged the possible benefits of both purposive drafting and the introduction of a provision mandating a purposive interpretation but fell short of recommending that such a radical new approach be adopted.[83] Rather it recommended the insertion of objects clauses, although conceding that they were not essential, and the use of explanatory memoranda, which could be referred to by the judiciary in difficult cases.
Subsequently in its report on tax avoidance the Committee reaffirmed support for a purposive approach to interpreting tax legislation.[84] However the primary response to avoidance was to propose the enactment of a GAAR. Given the haphazard development of the judicial anti-avoidance rule in the United Kingdom it is, perhaps, not surprising that the Committee preferred a detailed statutory rule rather than merely a mandate for the Courts to adopt a purposive interpretation of the tax laws.[85]
Ultimately the Inland Revenue issued a discussion paper illustrating five variants of purposive legislation.[86] After reviewing the responses to this paper the approach that has been adopted for the re-write of the tax laws is a compromise. The traditional detailed rule approach will continue but coupled with statements of purpose where the legal effect of a provision is clear and there is no risk of altering the law or introducing ambiguity. Furthermore there is likely to be access to some form of explanatory memoranda.[87] Whether a purposive interpretation is to be mandated remains to be seen.[88]
Effectively this is an adoption of the Australian and New Zealand approach of simply superimposing statements of purpose on the re-written provisions.
This has not pleased proponents of the purposive approach who have argued that resources should be redirected away from the re-write of the existing legislation to the development of a purposive approach to new legislation.[89] The author shares this disappointment. This was an opportunity lost to embark on a brave new experiment.
By way of an aside it must be acknowledged that there is a view that purposive tax legislation is an impossibility because there simply are no taxation law principles. In particular, Prebble argues that income tax law is ectopic. That is, it is dislocated from its subject matter because it depends upon the artificial and indefinable concept of income. Furthermore it necessitates arbitrary rules as to time intervals, residence and source. Accordingly it cannot support any robust principles that could form the basis of purposive legislation.[90]
Prebble also sees problems with the resolution of conflicts between principles in the absence of even higher level principles. The solutions must be detailed rules defining which principle is to prevail. Whilst ultimately Prebble does concede a role for “principles and purpose” drafting it is only to support detailed rule base legislation.[91]
Others have argued on a similar theme that the debate as to the drafting of tax legislation fails to address the real cause of complexity, namely complex tax policy.[92] In this regard it is disappointing that in two of the three of jurisdictions attempting to simplify their taxation laws only minimal tax policy changes have been authorised.[93] Effective purposive drafting must, in the author’s opinion, permit some policy reconsideration where it is concluded that the laws cannot be sensibly expressed or result in absurd complexities.
Putting to one side for a moment the issue of whether the legislation permits the legislative purpose to be identified, the traditional purposive approach to interpretation places limits on the judiciary’s authority to give effect to Parliament’s perceived purpose in any event. It is not permitted to read into legislation words that are not there. Also in the absence of any ambiguity the literal meaning of a provision will typically prevail and no reference to extrinsic explanatory material may be countenanced.[94]
These principles were evident from the discussion of s 15AA of the Acts Interpretation Act 1901 (Cth). In particular it was observed that the Courts generally do not see that provision as giving them a mandate to re-write legislation. Typically it is argued that it is inappropriate for the Courts to speculate as to Parliament’s purpose. Ironically this often results in Parliament having to amend the legislation to override the Court’s decision.[95]
These limitations of the traditional approach are graphically illustrated in the discussion of Trevisan. Another example is the New Zealand Court of Appeal in CIR v Alcan New Zealand Limited.[96] At issue were the grouping provisions of the Income Tax Act 1976, specifically whether non-resident companies could be grouped with New Zealand resident companies. The Alcan Group had achieved a deferment of tax by grouping an Australian resident member. The grouping provisions placed no express qualification on the residency status of a company although the Commissioner argued that it was implicit that the companies had to be New Zealand residents.
The Court of Appeal acknowledged the unusual circumstance that a literal interpretation on the legislation would favour the taxpayer. However upon examination of the authorities[97] it concluded that a purposive approach to interpretation was now favoured in New Zealand (and the United Kingdom). Furthermore this was given statutory force by s 5(j) of the Acts Interpretation Act 1924.
However the Court cautioned against forcing the words of a statute to fit a particular objective where that objective was unclear. Parliament may have in fact tolerated anomalies in the interests of avoiding complexity. In such cases it was argued that the safest guide to meaning was in the actual words of the statute.
The Court then concluded that Parliament had not turned its mind to the question of residency of group members. Accordingly it was inappropriate to read into the words of the statute some implied limitation as that would require speculation as to the legislative intent.
It must be seriously doubted whether Parliament would have been prepared to tolerate this anomaly. Surely had it turned its mind to the question and appreciated the avoidance opportunity that otherwise existed it would have required that the group companies be New Zealand residents. The Court’s perceived limits as to its interpretative power resulted in the Government’s tax policy being frustrated and the need for amending legislation to impose a residency requirement.[98]
Similar results in Canadian cases have been referred to by Brooks to support what he terms a more pragmatic tax analytic approach. He reviews the literature identifying the limits of the traditional approach to tax law interpretation. In particular he refers to criticism of the purposive approach in failing to appreciate that often the legislative purpose cannot be identified or legislation may have a number of (sometimes conflicting) purposes. In such cases the perceived purpose given effect to by the decision is typically coloured by the subjective perspective of the judge.
Rather he proposes that the Courts should explicitly acknowledge their law making role and seek to improve legislative outcomes. That is, they should be more engaged in seeking to give effect to sensible tax policy.[99]
With this the author agrees. But how may these principles be integrated into the current regime?
The starting point is that the response to tax avoidance should be to replace the GAAR with an express direction to the judiciary in the tax legislation to apply a purposive interpretation. Whilst it can be argued that the existence of a GAAR has a deterrent effect this could still be achieved through this alternative device. In fact, the deterrent effect could be enhanced through an express statement that the substantive provisions are to be interpreted in a broad purposive manner to prevent attempts to exploit perceived drafting deficiencies.
The approach that currently has been adopted simply results in tax advisers seeking to “avoid” the GAAR as much as the substantive provisions. That is, typical aggressive tax advice will first explore deficiencies in the substantive provisions followed by an analysis of whether the provisions of the GAAR can be sidestepped. Rather than providing a safety net the GAAR simply fails in the same way as the substantive provisions. However in the process it can encourage less rigorous drafting and create more uncertainty.
The legislative instruction envisaged would be broader than s AA 3(1) of the Income Tax Act 1994 (NZ) and s 15AA of the Acts Interpretation Act 1901 (Cth). The mandates stated in these provisions, especially the latter, are unclear and too restrictive. Rather the judiciary should be expressly instructed to interpret legislation foremost with regard to Parliament’s purpose and not to be constrained by any perceived inadequacies arising from a literal interpretation of the wording of a provision. This may require the reading in of words if necessary to give effect to that purpose.
A definition of insanity is doing the same thing but expecting a different outcome. History has demonstrated that complex and detailed tax laws do not prevent tax avoidance. An attempt to meet further avoidance of these laws with more complicated and detailed legislation surely then must fit this definition.
Therefore the mandate to adopt a purposive interpretation should be allied with purposive legislation. To suggest, as did the Hansard Commission, that such legislation will lead to greater uncertainty and more litigation is to ignore the reality of the current rule based legislation. If the principles are sufficiently predictive and the judiciary disciplined in their approach to resolve and give effect to Parliament’s intention then, arguably, this will create less uncertainty than that currently arising from the detailed legislation and ad hoc judicial approaches.
It is incumbent upon Parliament in this legislation to more clearly express its policy and this is where objects clauses may have an important application. The paradigm is that Parliament expressly state its purpose succinctly in the legislation with elaboration in extrinsic material. This material should be readily available to taxpayers. Furthermore, the ATO must be prepared to provide timely rulings as to their understanding of the purpose of a provision and there needs to be an effective avenue to have these rulings reviewed.[100]
This purposive approach is not merely the traditional formula that the judiciary should attempt to deduce the purpose of a provision from its words and only refer to extrinsic material in the event of ambiguity. This has tended to give the judiciary considerable discretion as to whether it will refer to such material and generated further uncertainty.[101]
Rather the purposive approach advocated by the author would permit the courts to refer to extrinsic material to identify the purpose of legislation irrespective of whether there is any ambiguity in the words of the statute. Unfettered reference to explanatory memoranda and other secondary material must be permitted and, in fact, mandated. The Courts must abandon the rule that Parliament’s purpose is to be found solely in the words of a provision. The Courts must be encouraged to always refer to objects clauses and extrinsic materials to test that their interpretation of the provision is, in fact, consistent with its most likely purpose. Thus, the words will no longer take precedence but be simply the starting point for the judiciary in its quest to identify Parliament’s purpose.
Such an approach raises the issue of which takes priority, the words of the provision or the statement of objects. Typically both will be marching in the same direction. But what if the objects do not appear to be borne out by the words. The difficulty is that the purposive approach requires a search for the purpose of the provision and what better indication of this than the objects clause.
The answer must be that the objects clause is just one consideration in the search for the purpose of a provision. The actual wording of the provision, as well as extrinsic material, must also be taken into account. Ultimately all this material must be weighed up to determine the most likely meaning. For this reason it cannot be categorically stated that the words take precedence over the objects clause or vice versa. Similarly it is not sensible for the draftsman to attempt to amend a provision by simply redefining its objects clause.
Critics of such an approach would refer to the uncertainty that this would create for taxpayers unable to rely on the clear words of a provision. Whilst the author doubts that many cases would arise where the words of a provision are truly “clear” where these words are inconsistent with the perceived object of the provision, justice in such a case could be appropriately achieved through an expanded power in the courts to quantify liability discussed below.
Whilst substance over form is often characterised as a separate doctrine in itself the author views such an analysis as effectively part of the “new” purposive approach advocated. However the inquiry should proceed on the basis of whether the actual transaction was intended to be caught by the provision rather than whether the substance of the transaction was caught by the express words of the provision. This may be only a matter of emphasis as the same conclusion should inevitably follow, namely how did Parliament intend this economic result to be dealt with? Or alternatively, had the draftsman envisaged such an arrangement what would the legislation have provided?[102]
It is a naive and fruitless exercise to expect and require draftsmen to anticipate all the possible ways in which the leagues of gifted legal minds might conjure a legal result. Such an exercise has led to the complexity inherent in the current tax legislation and the necessity to constantly amend the legislation to plug loopholes. We expect draftsmen to be clairvoyant. Better that the judiciary exercise the power of hindsight to judge whether a transaction infringes Parliament’s mandate.
The real difficulties with applying this new purposive approach are likely to arise where a tax expenditure provision is at issue. In such circumstances conflicting purposes often exist. The aim of such provisions is to provide tax concessions to encourage certain behaviour. Thus if a taxpayer engineers the circumstances such that they can access the concession it is difficult for the courts to conclude that the purpose of the provision is not furthered where the desired conduct occurs. This difficulty needs to be identified by Parliament by either dispensing with the tax expenditure device to deliver subsidies or, at least, through the provision of detailed guidance to the judiciary on the policy compromise where such legislation is enacted.
However, ultimately in those difficult cases where the purpose cannot be identified or there are competing purposes enshrined in the legislation, the judiciary must be free to adjudicate on which policy is to predominate in a particular case. That is, the judiciary would be empowered to make tax policy – Brook’s pragmatic tax analytic approach.
In these difficult cases rather than debate semantic niceties the Court should embark upon a policy analysis as to the most appropriate legislative response to the facts before it. This may necessitate seeking further evidence as to the underlying policy behind the legislation or eliciting expert opinion.[103] In this way the Court should make an open and considered policy decision rather than attempt to discern the illusory “true” meaning of the statute.[104]
The Courts should also not be side-tracked into an analysis of whether a transaction had any “business purpose” other than tax avoidance, in the American parlance,[105] or whether the taxpayer had a “dominant (non-commercial) purpose”, in the Australian sense. Such an approach, with its focus on taxpayer motivation, results in the necessity to distinguish between primary and secondary purposes, between various steps or sub-schemes in a transaction, between tax motivated and commercial purposes (a doubtful distinction at best)[106] and obscures the fundamental issue namely what was Parliament’s intention[107] or, if indeterminate, what makes good tax policy. As discussed below, issues as to artificiality and taxpayer motivation should simply be relevant to quantum.
Critically the ATO and, ultimately, the Courts should be authorised to take into account the clarity with which tax policy is expressed in a provision when determining the quantum of liability.[108] Rather than seeking to do justice through spurious interpretations based on questionable logic the judiciary should be encouraged to be frank in acknowledging where real doubt in the interpretation of the tax laws exists. Most obviously penalties may not be applied where a taxpayer has incorrectly interpreted obscure legislation.[109] However in extreme cases of obscurity negative penalties or discounts off the taxpayer’s substantive tax liability might be awarded where the obscurity has been such as to mislead the taxpayer into adopting an interpretation which although understandable, is incorrect or unacceptable from a policy perspective. Depending on the extent to which the taxpayer may have incurred hardship or additional expense due to, for example, poor drafting, lack of accessible explanatory material and/or ATO intransigence, this discount might actually amount to a positive award in favour of the taxpayer through to simply refraining from the entering of a costs order against them.
In this way the charade of attempting to identify the “true” meaning of the words of a provision can be replaced by a recognition of the reality that language is an imperfect tool to communicate ideas and the extent to which it fails is a “cost” to society to be shared. By exposing the truth of the process justice is more likely to be achieved and certainty and taxpayer protection, supposedly the hallmarks of the literal approach, can feature in the new order.
A Tax Policy Committee should also be created comprising stakeholder representatives from, for example, the ATO, Treasury, business and the professional bodies. It would have a role in enunciating the policy behind legislation and ensuring that tax legislation expresses and is consistent with its underlying policy and that ATO rulings reflect this policy. The recently created Board of Taxation might be adapted for this role. In fact its mandate to reduce complexity and unintended consequences will necessitate some enquiry as to whether Government policy is accurately expressed in the legislation.[110]
The final element of this new approach would be a public awareness campaign to the effect that the Duke of Westminster principle no longer reflects society’s expectations and, rather, taxpayers have a moral obligation to pay tax in accordance with Parliament’s perceived intention.
To illustrate how the new purposive approach to interpretation might be used in lieu of the Australian GAAR it is instructive to consider the major Australian cases applying the GAAR. The leading tax avoidance cases in both Canada and New Zealand will also be considered.
For this purpose it will be assumed that the decisions in these cases were “correct”. The aim of this discussion is to illustrate how the decisions may have been arrived at without recourse to the GAAR but simply by giving effect to the perceived purpose of the legislation. However as the reliance on the GAAR emasculated any analysis of the purpose of the particular provisions at issue it is actually conceivable that a different decision may have been reached had an approach that focused on the purpose of the legislation been embraced. Alternatively had the Courts concluded in each case that no clear prevailing purpose could be identified then, on the approach proposed, an analysis as to the preferred tax policy would have been necessary that again may have resulted in a different decision.
In Case W58,[111] the first Pt IVA case, Pt IVA was applied to assess income, derived from the provision of consultancy services by the taxpayer through a corporate trustee, to the taxpayer rather than to the beneficiaries of the trust. The facts indicated that income that would have been derived by the taxpayer had been deflected to the trustee. Arguably had a purposive approach to the interpretation of the constructive receipt provision in s 19 of the ITAA36 been adopted then no reference to Pt IVA would have been necessary. Section 19 was intended to treat as received by a taxpayer amounts received by others on their behalf.[112] Arguably the purpose of s 19 was frustrated by its non-application in the circumstances.[113]
In FC of T v Peabody[114] the substantive issue was whether s 26AAA of the ITAA36 (which operated to assess profit on the sale of property on sale within 12 months of acquisition) applied where rather than disposing of newly acquired shares the value in these shares was shifted to older shares held by a parent company by an amendment to the company’s Constitution that diluted the rights associated with the newly acquired shares. These older shares were then sold seemingly for an enhanced tax-free gain.
Whilst on a literal interpretation of the terms of s 26AAA this scheme was not caught the purpose of the provision was clearly to assess profit generated in such circumstances. Had a purposive approach been adopted then the concept of a “purchase of property” might have been interpreted as encompassing the value/rights shift resulting from the Constitutional amendment. Then the gain on sale of the older shares with their newly acquired value might have been assessable under s 26AAA without recourse to Pt IVA. In fact, Pt IVA was ineffective in assessing the taxpayer in this case as the incorrect taxpayer had been assessed.[115] There was considerable technical analysis of the terms of Pt IVA at each stage of the case’s passage through to the High Court.
In FC of T v Spotless Services Ltd[116] a taxpayer chose to invest in the Cook Islands rather than in Australia even though the interest rate on offer was less. However, the investment made commercial sense given the low rate of tax in the Cook Islands and the tax exemption on the interest when received in Australia.
The High Court applied Pt IVA in what has been viewed by many commentators as a difficult and controversial decision, not so much on its facts but because of its precedential value in rejecting the commercial transactions exception to Pt IVA.[117]
However had the Federal Court[118] adopted a purposive approach to interpreting the source rules for Australian taxation it is likely that the Court would have concluded that the source of the interest was Australia and not the Cook Islands.[119] Then the commercial transactions exception and other difficulties relating to Pt IVA would not have been an issue and the matter would probably not have even proceeded to the High Court.
In the Consolidated Press Holdings litigation Hill J, at first instance,[120] adopted a literal interpretation of the foreign deduction quarantining provision in the then s 79D refusing to read words into it to give effect to Parliament’s clear intention. On appeal the Full Court adopted a purposive approach.[121] This approach left no room for the taxpayer’s argument that an interest deduction was only required to be quarantined where some related foreign source income was derived and was not required to be quarantined where no such income was derived. The object of the relevant legislation was clearly to only permit deductions to be offset against foreign income to which they related and so the deductions had to be carried forward until relevant income was derived.
This view of s 79D then raised the further issue of whether the structure that had been put in place by the taxpayer was to avoid the necessity to quarantine and therefore subject to Pt IVA. The structure was the insertion of a resident company between the borrowing and investing entities. This enabled the taxpayer to argue that the interest deduction to the borrowing entity related to an Australian source investment, namely the investment in the intermediary company.
This argument assumes that it is inappropriate to trace the borrowings through the intermediary company to the foreign investment so as to characterise the interest expense incurred by the borrowing company as a “foreign income deduction” and hence subject to quarantining. This term is defined in s 160AFD of the ITAA36. Whilst there are difficulties applying a literal interpretation of that definition to these facts, on a purposive approach it could be said that the deduction “relates to” any foreign income that might subsequently be derived by the investing entity. Such a view would further the object of s 79D and obviate the need for any reference to Pt IVA.
Thus, as this analysis demonstrates, a purposive approach to the interpretation of the substantive provisions might have had the same result in combating tax avoidance as the application of Pt IVA. However, arguably, this would have been achieved with a less semantic and more robust and transparent analysis. Rather than debate the complexities of Pt IVA the minds of the judiciary would have been more productively focused on the policy behind the substantive provisions. Their insight might have added to the better understanding of the fundamentals of our tax system and have been of considerable value to policy makers. Viewed in this way Pt IVA adds another layer of complexity that detracts from a considered analysis of the critical issues.
This is, perhaps, best illustrated by the difficult Peabody case where Pt IVA was ultimately held to be ineffective in preventing, arguably, unacceptable tax avoidance in circumstances where the author’s purposive approach may have “seen through” the subterfuge. Notably the purposive analysis would have avoided the technical issues on which the application of Pt IVA foundered. In particular liability would have been appropriately assessed to Peabody as there would have been no basis for the argument that the wrong taxpayer was assessed.
By way of illustration of a case in which the application of the purposive approach could be viewed as delivering a decision in favour of the taxpayer reference can be made the leading Canadian case on tax avoidance Stubart Investments v The Queen.[122] With a view to transferring profits from a profitable subsidiary to a loss making subsidiary a parent company sold the business of the profitable company to the loss making company. However there was no real transfer of assets as the profitable company was simply to act as the loss making company’s agent, deriving profit on its behalf.
In rejecting a business purpose test as a means of identifying unacceptable tax avoidance the Supreme Court upheld this transaction notwithstanding that its sole purpose was the avoidance of tax. However notably the decision is authority for a purposive approach to interpreting tax statutes.[123]
On this approach it was held that the transaction did not defeat the object of the loss carry forward rules as there was no indication of a Parliamentary intent to bar such transactions. Furthermore the decision might be viewed as consistent with the purpose of the legislation as whilst at the time the loss carry forward rules did not expressly allow corporate groups to offset losses of one subsidiary against profits of another, branches of a company could.
Alternatively had it been concluded that no discernable Parliamentary intent in relation to this arrangement could be ascertained, then the Court’s decision could have been based on sound tax policy, namely the need to ensure tax neutrality between branches and subsidiary structures. In any event, it is argued that an analysis of the purpose of the legislation or the most desirable tax policy would be a more valuable contribution to the development of the tax laws than an analysis of the semantics of the general deduction provision or the technicalities of the general anti-avoidance provision.
As a final illustration, where a policy analysis by the Courts may have been particularly appropriate, consider the leading New Zealand tax avoidance case of Challenge Corporation Limited v CIR.[124] This decision applied both a GAAR and is New Zealand authority for the traditional purposive approach to interpretation.
The case involved the purchase of a loss company during the year in artificial circumstances. At the time the legislation only required that companies share common ownership at the end of the income year in which a loss was to be grouped.
The litigation at all stages focused on the application of the GAAR and its relationship with the loss and grouping provisions. The Privy Council, in a problematic decision that has largely been ignored by the New Zealand courts,[125] allowed the Inland Revenue’s appeal on the basis that this was unacceptable tax avoidance to be contrasted with acceptable tax mitigation. On the other hand, those judges supporting the taxpayer’s case accepted that there was no evidence that Parliament’s intent was otherwise than to permit the transaction and the specific provisions took priority over the GAAR.
The approach advocated by the author would have the Court focus solely on the purpose of the loss and grouping provisions and not be distracted by the nuances of the GAAR. If no relevant Parliamentary intent could be ascertained from all the publicly available material, or it was ambiguous, then an adjudication based on the most desirable tax policy would be appropriate. Then the extent to which this decision caught the taxpayer by surprise, or it could be concluded the taxpayer’s interpretation of the legislation lacked credibility, would factor into the quantification of liability.
The author’s vision is an express mandate in the tax legislation to the judiciary to adopt a purposive interpretation of the tax laws and, if necessary, adjudicate on the most appropriate tax policy. This is to be exercised in an environment of legislation less focused on detail and more on principles and the utilisation of objects clauses, unrestricted reference to extrinsic materials, a receptive penalties regime, a review mechanism to ensure that tax policy is clearly expressed and an improved atmosphere of co-operation between the various stakeholders.
The typical retort to mandating a purposive interpretation is that in the vacuum created by Parliament’s failure to clearly enunciate the purpose of its legislation the judiciary will enforce its own social policy. This amounts to, although few commentators admit it,[126] a lack of faith or possibly even a distrust of the judiciary. However it is contrary to our Constitutional foundation to deny the third pillar of government its proper role.
Thus this thesis amounts to the proposition that we should trust the judiciary. However the dilemma is that it is the rules of interpretation invented by the judiciary that have substantially contributed to the mess that our tax laws are in. Should we now trust them given this experience?
The answer is that we must. The current system is, to borrow from Professor Parsons,[127] so completely “decayed” that a holistic new approach is called for.
[*] Associate Professor, School of Law, James Cook University.
[1] FC of T v Ryan 2000 ATC 4079, 4095 (per Kirby J dissenting).
[2] J Dabner. “The Spin of a Coin – in Search of a Workable GAAR” (2000) 3 Journal of Australian Taxation 232.
[3] IR Commissioners v Duke of Westminster [1935] All ER 259.
[4] Income Tax Assessment Act 1936 (Cth) (“ITAA36”), s 260.
[5] Expressed in s 177C(2) and (2A).
[6] See the Second Reading Speech by the Honourable John Howard MP upon the introduction of the Income Tax Laws Amendment Bill (No 2) 1981.
[7] [1958] UKPCHCA 1; (1958) 98 CLR 1.
[8] Namely whether it is possible to predicate from the circumstances that the arrangement was motivated by tax avoidance.
[9] 96 ATC 5201. Discussed in J Passant, “Spotless: Removing the Stain of Tax Avoidance in Australia” [1997] British Tax Review 131.
[10] Ralph Review of Business Taxation, A Strong Foundation – Establishing Objectives, Principles and Processes (1998) para 6.120.
[11] Ralph Review of Business Taxation, A Tax System Redesigned: More Certain, Equitable and Durable (1999) Recommendations 6.1 to 6.5, http://www.rbt.treasury.gov.au/publications/paper4/index.htm; R Krever, “The Ghost of the Duke of Westminster Laid to Rest in Australia?” (1997) 45 Canadian Tax Journal 122, 130; V Krishna, “The Tension Between the Westminster Principle and Abusive Tax Avoidance” (1997) 7 Canadian Current Tax 65; and “The Illusive Interest Deduction” (1998) 8 Canadian Current Tax 89; RA McLeod, “An Economic Approach to Taxation Avoidance” (1996) 2 New Zealand Journal of Taxation Law and Policy 171; NF Orow, “Pt IVA – Seriously Flawed in Principle” [1998] JlATax 6; (1998) 1 Journal of Australian Taxation 57 (“Orow 1”); “The Future of Australia’s General Anti-Avoidance Provision” (1995) 1 New Zealand Journal of Taxation Law and Policy 225 (“Orow 2”); and “Towards a Conceptually Coherent Theory of Tax Avoidance – Parts 1 & 2” (1995) 1 New Zealand Law of Taxation Law and Policy 288, 307; L Muten, “The Swedish Experiment with a General Anti-Avoidance Rule”, 307; J Waincymer. “The Australian Tax Avoidance Experience and Responses: A Critical Review”, 247; CH Gustafson, “The Politics and Practicalities of Checking Tax Avoidance in the United States”, 349; M Brooks and J Head, “Tax Avoidance: In Economics, Law and Public Choice”, 53; M Gammie, “Tax Avoidance and the Rule of Law: the Experience of the UK”, 181; I Richardson, “Reducing Tax Avoidance by Changing Structures, Processes and Drafting”, 327 all in GS Cooper (ed), Tax Avoidance and the Rule of Law (1997).
[12] Other approaches include the golden rule and the mischief rule. Discussed in, for instance, CD Pearce and RS Geddes, Statutory Interpretation in Australia (4th ed, 1996).
[13] See, for instance, Partington v AG (1860) LR 4 (HL) 100, 122.
[14] Discussed in F Vanistendal, “Judicial Interpretation and the Role of Anti-Abuse Provisions in Tax Law” in Cooper, above n 11, 131, 133.
[15] Waincymer canvasses other rationales for the literal approach: Waincymer, above n 11, 266. He is of the view that it is only when a judge can discern no purpose other than that conveyed by the ordinary meaning of the words used that a literal approach is appropriate.
[16] See H Mckay, “Tax Law Review Committee Report on Tax Avoidance” [1998] British Tax Review 86, 87. Waincymer argues that the judiciary has a social responsibility to prevent tax avoidance and apply the purposive approach: above n 11, 266. Richardson acknowledges that a purposive approach to interpretation has a significant role in preventing tax avoidance: I Richardson, “Appellate Court Responsibilities and Tax Avoidance” (1985) 2 Australian Tax Forum 3.
[17] The distinction drawn in this article between the literal and purposive approaches is perhaps over simplistic as there are varying and evolving schools on statutory interpretation which essentially adopt a purposive approach as a foundation but with various refinements: see M Brooks. “The Responsibility of Judges in Interpreting Tax Legislation” in Cooper, above n 11, 93. Indeed the author will add to this development.
[18] See the references in note 11 above. See also BJ Arnold, “Reflections on the Relationship Between Statutory Interpretation and Tax Avoidance” (2001) 49 Canadian Tax Journal 1. The approach has long been adopted in the United States: Gregory v Helvering [1935] USSC 5; 69 F2d 809 (2nd Cir, 1934) as affirmed by the Supreme Court: [1876] USSC 217; 93 US 465 (1935). The US Courts take the view that the legislative intention with respect to a tax statute cannot include an intention to permit the tax to be avoided by a transaction that had no other business purpose (“business purpose doctrine”). It is recognised that this may involve the Court in some form of recharacterisation of a transaction to give effect to its substance rather than form. It would appear that the courts in the United Kingdom are heading in a similar direction: J VanderWolk, “Purposive Interpretation of Tax Statutes: Recent UK Decisions on Tax Avoidance Transactions” (2002) 56(2) Bulletin for International Fiscal Documentation 70. In the UK the purposive approach has predominantly been used in tax cases where anti-avoidance legislation is at issue. It has been suggested that this approach may simply be the application of the presumption against injustice or absurdity. That is, in the event of ambiguity, a construction leading to a more equitable result is to be preferred. See the British Tax Reporter (1996) paras 603-875. For a similar view that the UK’s Ramsay principle (WT Ramsay v IRC [1981] UKHL 1; [1982] AC 300) is merely an application of the purposive approach see P Harris, “Australia’s General Anti-Avoidance Rule: Part IVA has Teeth, but are Some Missing?” [1998] British Tax Review 124, 127-128. Whilst in Canada the US business purpose doctrine has been rejected nevertheless a “modern approach” to interpreting tax statutes has been embraced which permits reference to Parliament’s purpose: Stubart Investments Ltd v The Queen [1984] CTC 294; 84 DTC 6305 (SCC). For Arnold this approach has retained such an emphasis on the literal meaning of the legislation as to allow tax avoidance to continue unchecked and not to be deserving of the description a purposive approach: ibid 1-3 and 7.
[19] [1981] HCA 26; (1981) 147 CLR 297.
[20] The conflict between the two approaches is illustrated by the litigation in FC of T v Consolidated Press Holdings. Hill J at first instance (98 ATC 4983) adopted a literal interpretation of the key provision at issue. On appeal the Full Federal Court overruled this aspect of the decision (99 ATC 4945), adopting a purposive approach. These decisions are discussed further below.
[21] 2000 ATC 4079. It is also illustrated by the Consolidated Press Holdings litigation. The discussion of the rules of statutory interpretation by Hill J (98 ATC 4983) is indicative of the view of the judiciary that it should have a choice as to which approach to adopt depending on the circumstances. However the determination of the appropriate circumstances for one approach or the other is a vexed issue and almost discretionary as the subsequent reversal of the decision by the appellate court (99 ATC 4945) illustrates.
[22] Section 15AA of the Acts Interpretation Act 1901 (Cth); s 12 of the Interpretation Act RSC 1985 CI-21 (Can); and s 5(1) of the Interpretation Act 1999 (NZ). A similar provision existed in Canada as early as 1849 and in New Zealand in 1851. Section 15AA has its origins in the 1969 British Law Commission Report: The Interpretation of Statutes (Report no 21, 1969) although such a provision has not been embraced in the UK. See the discussion in New Zealand Law Commission, A New Interpretation Act: to Avoid “Prolixity and Tautology” (1990) 33-35 (“NZLC Report”). Equivalent provisions are also contained in the Acts Interpretation legislation of most of the Australian States: discussed in AI MacAdam and TM Smith, Statutes (3rd ed, 1993) 341-345. For opposition to such a provision see Northern Territory Law Reform Commission. Report on Statutory Interpretation (Report no 12, 1987).
[23] Discussed in Pearce and Geddes, above n 12, para 2.3.
[24] Contrast NZLC Report, above n 22, paras 100-126, where the New Zealand Law Commission recommended against the use of extrinsic material being regulated by a general statute. This was because the New Zealand Courts had already moved to referring to this material and nothing would be added by a legislative mandate. In fact the Commission saw a danger in that a legislative provision could generate uncertainty as to when the material could be referred to. Also it acknowledged the arguments against using this material and indicated that care must be taken in attributing weight to various types of extrinsic matter. There was also a need to ensure that the legislative history was accessible. On this point the Commission recommended a detailing of this history on the face of the Act: ibid para 115.
[25] This led to some discussion in New Zealand whether the provision warranted retention. Ultimately, the view was taken that the New Zealand provision was useful, although not essential, and should be maintained: see NZLC Report, above n 22, paras 61 and 65. A slight rewording was however considered appropriate: ibid paras 66 to 74.
[26] [1990] HCA 41; (1990) 170 CLR 249, 262 (per Dawson, Toohey and Gaudron JJ).
[27] Pearce and Geddes, above n 12, para 2.9. The golden rule has probably also been overridden.
[28] MacAdam and Smith, above n 22, 343. The common law rule is there termed the “mischief rule”.
[29] Pearce and Geddes, above n 12, para 2.5.
[30] See Mills v Meeking [1990] HCA 6; (1990) 91 ALR 16, 30-31 (per Dawson J).
[31] (1991) 101 ALR 26. See also Jetmaster Fireplaces Pty Ltd v FC of T (1989) 20 ATR 689, 699 (per Einfeld J) where the Commissioner’s argument that certain fireplaces were subject to sales tax as that was the purpose of the legislation was rejected as circuitous and putting the “cart before the horse”.
[32] The definition of in-house asset, now contained in s 71 of the Superannuation Industry (Supervision) Act 1993 (Cth), was amended by No 199 of 1999 to include investments in related trusts and thereby overcome the effect of Trevisan.
[33] Other examples of such an interpretation in a tax context include Marsh v FC of T 85 ATC 4345, 4363 and Case P94 82 ATC 446. Contrast Boral Windows v Industry Research and Development Board 98 ATC 4479.
[34] Pearce and Geddes, above n 12, para 2.5.
[35] Above n 11,260.
[36] See Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315, 326 (per McHugh JA).
[37] Section AA 3(1).
[38] Although this provision was not replicated in the Corporations Act 2001 (Cth).
[39] Above n 10, discussed below.
[40] For a discussion of these amendments see R Puckridge and A Werbik, “An Improved General Anti-Avoidance Rule” ATO Monograph www.ato.gov.au/printcontent.asp?doc=/content/Professionals/GAAR_talk_ 4.html.
[41] Thus Canada permits transactions with a tax minimisation purpose where the transaction is nevertheless consistent with the policy underlying the legislation: s 245 of the Income Tax Act. Comprehensively discussed in BJ Arnold and JR Wilson, “The General Anti-Avoidance Rule – Parts 1, 2 and3” (1988) 36 Canadian Tax Journal 831, 1123 and 1369. The views expressed in these articles are neatly summarized in BJ Arnold, “The Canadian General Anti-Avoidance Rule” [1995] British Tax Review 541.
[42] Dabner, above n 2.
[43] Whilst this has not necessarily been the experience in Canada, where the judiciary has tended to focus on the purposive limb of the GAAR and thus the other elements have been treated as secondary, this is in a context where a purposive approach to interpreting tax legislation has been mandated by the Supreme Court in any event: Stubart [1984] CTC 294; 84 DTC 6305 (SCC).
[44] This view is supported by Richardson who argues that in lieu of a GAAR there should be greater reliance on statements of purpose together with a purposive approach to interpretation: Richardson, above n 11, 327 especially 332 and 338-341.
[45] Above n 11, 260-270 and 283.
[46] See Gammie, above n 11, 181.
[47] Discussed in, for instance, Tax Law Review Committee, Tax Avoidance (Institute for Fiscal Studies, 1997) and A General Anti-Avoidance Rule for Direct Taxes: Consultative Document (Financial Secretary to the Treasurer, HMS0 1998).
[48] Discussed by Cooper, above n 11, 44-46. See the Australian High Court decision in John v FC of T 89 ATC 4101; and the Canadian Supreme Court decision in Stubart [1984] CTC 294; 84 DTC 6305 (SCC).
[49] Orow argues that Pt IVA discloses no clear principle, is uncertain in operation and has no operation if the other tax provisions are interpreted according to their policy and purpose. It should be repealed and the Government require that tax legislation be interpreted according to its policy and purpose with this being clearly stated: Orow 1 and Orow 2, above n 11.
[50] See the discussion by Arnold and Wilson, above n 41, on the possible interpretation of the misuse/abuse exclusion contained in the Canadian GAAR. See also Arnold, above n 18.
[51] Harris, above n 18. Given the absence of a GAAR in the United Kingdom Harris concludes that the greater the purposive approach, the less scope for the application of a GAAR and, at one extreme, the inclusion of a GAAR may simply be viewed as an instruction to the judiciary to take a purposive approach.
[52] Waincymer, above n 11, 260-270.
[53] M Smith, “Should Tax Legislation be Written from a Principles and Purpose Point of View or a Precise and Detailed Point of View?” (1997) 3 New Zealand Journal of Tax Law and Policy 168.
[54] Ibid.
[55] Ralph Review, above n 11, recommendation 6.1. An example of where an objects clause may be valuable is in relation to the very broad and vague dividend stripping rules. These were considered in the Consolidated Press Holdings litigation (98 ATC 4983; 99 ATC 4945) and a purposive interpretation adopted. The issue may never have arisen had the relevant provisions been preceded by an objects clause that particularised that the provisions were intended to prevent the conversion of income to capital in the absence of a corporate re-organisation designed or likely to generate real economic gains and efficiencies. Alternatively, dividend stripping could be prevented by structural changes to the tax laws that remove the incentive for such arrangements.
[56] Problems generally with this provision are discussed in G Hill, “GST Anti-Avoidance Division 165” (1999) 2 Journal of Australian Taxation 295.
[57] Above n 10.
[58] Notwithstanding that ITAA97, the product of the simplification project, utilises “guides”. See ss 2-40 and 950-150.
[59] Ralph Review, above n 11.
[60] Ibid paras 6.105 and 6.106.
[61] Compare A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 182-10(2).
[62] Legislation and its Interpretation, Statutory Publications Bill (Report no 11, 1989). See also NZLC Report, above 22, para 70 and The Format of Legislation, (Report no 27, 1993).
[63] Key Reforms to the Scheme of Tax Legislation (Discussion Paper, 1991) clause 10.2.1, 68 and para 4.8. See generally Consultative Committee on the Taxation of Income from Capital, Consultative Committee on the Taxation of Income from Capital (Final Report, 1992).
[64] In its Second Report (1993) 40 and in Re-Writing the Income Tax Act (1994) para 6.16-6.19.
[65] Above n 63, 41.
[66] New Zealand Law Reform Commission. Legislation Manual, Structure and Style (Report no 35, 1996), provides instruction on how to draft purpose clauses and on the use of interpretation provisions in legislation.
[67] Now s 5(1) of the Interpretation Act 1999. It provides that “the meaning of an enactment must be ascertained from its text and in the light of its purpose”. This amendment was essentially in accordance with the recommendations of the NZLC Report, above n 22, (see s 9(1) of the draft Interpretation Act). Prebble suggests that this dilutes the mandate contained in the earlier section: J Prebble, “The Interpretation Provisions in the New Zealand Income Tax Act 1994” (1999) 30 VUWLR 49. Compare s 12 of the Canadian Interpretation Act RSC 1985 CI-21 (which is similar to the earlier New Zealand provision) that provides that “every enactment is deemed remedial, and shall be given such fair, large and liberal construction and interpretation as best ensures the attainment of its objects”.
[68] A further rationale for the inclusion of s AA 3 was that s 5(j) of the Acts Interpretation Act did not require that special prominence be given to the organisation and structure of the Act, nor to core provisions: discussed in the Report on Submissions on the Taxation (Core Provisions) Bill (19 March 1996). The enactment of the provision may also partly be in response to the fact that the New Zealand GAAR has been restrictively interpreted and would appear to contain a commercial justification exclusion. Whilst in Challenge Corporation Ltd v CIR [1986] 2 NZLR 555 the Privy Council held that the New Zealand GAAR only applied to “tax avoidance” which was to be distinguished from “tax mitigation”, the New Zealand Court of Appeal has largely ignored this decision in favour of applying the Newton v FC of T [1958] UKPCHCA 1; (1958) 98 CLR 1 predication test together with a choice doctrine. See, for example, Miller v CIR (1998) 18 NZTC 13,961.
[69] This provision had its genesis in recommendations of the Valahb Committee (para 10.2.3). See also the Second Report of the Working Party on the Re-Organisation of the Income Tax Act 1976 (1993). For a discussion of s AA 3(1) see K Keith, “The Need to Re-Write Tax Legislation” (1997) 3 New Zealand Journal of Taxation Law and Policy 96, 103.
[70] New Zealand Income Tax Law and Practice (1997) para 5-160.
[71] Prebble, above n 67.
[72] Tax Compliance, Report to the Treasurer and Minister of Revenue by a Committee of Experts on Tax Compliance (1998). Prebble was a member of this committee.
[73] Prebble, above n 67, suggests that this was on the basis that the purpose of the legislation was to raise taxation and such a general proposition has no interpretative value.
[74] Above n 72, ch 2.
[75] Ibid para 2.29.
[76] Richardson, above n 11. He sees such an approach as preferable to the use of a GAAR as means of controlling tax avoidance
[77] The issue was not viewed as significant in Australia possibly because regardless of the drafting technique the prime goal remained the clear statement of Parliament’s intention: P Cowdroy, “Dross into Gloss” (1995) 30 Taxation in Australia (Blue Ed) 186,190-191.
[78] See The Preparation of Legislation (HMSO Cmnd 6053, 1975) (Renton Committee); LJH Beighton, “United Kingdom: the Right Path to Tax Simplification?” [12 February 1996] Tax Notes International 494; LJH Beighton, “The Right Path to Tax Simplification” [1996] British Tax Review 1; JC Pagan and LJH Beighton, “United Kingdom Tax Simplification: a Solution in Sight?” [19 August 1996] Tax Notes International 603; J Avery Jones, “Tax Law: Rules or Principles?” [1996] British Tax Review 580; 63: LJH Beighton, “Simplification of Tax Legislation: How are we Getting on?” [1996] British Tax Review 601; Tax Law Review Committee, Final Report on Tax Legislation (1996); and Smith, above n 53.
[79] LJH Beighton, “The Finance Bill Process: Scope for Reform” [1995] British Tax Review 33. Beighton acknowledges his sources particularly M Gammie, “Legislation for Business: Is It Fit for Public Consumption?” (1994) 3 Fiscal Studies 129. Gammie proposed an approach that clearly states the principles of law as, in his view, the current position is the worst of all worlds as there is a lack of guiding principles yet the detailed legislation is unintelligible: ibid 136. The proposal has been championed and developed by Avery Jones: above n 78. The views of these commentators and others are summarised in Inland Revenue, Tax Law Rewrite. Second Technical Discussion Document – A Purposive Approach to Re-Writing Tax Legislation (1998) paras 3.23 to 3.49. http://www.inlandrevenue.gov.uk/rewrite/tdd/tdd2/menu.htm.
[80] Avery Jones, above n 78, 593.
[81] Hansard Society, Making the Law: The Report of the Hansard Society Commission on the Legislative Process (1993).
[82] Smith, above n 53.
[83] Tax Law Review Committee, above n 78. In its interim report purposive drafting had been emphatically rejected: Interim Report on Tax Legislation (1995).
[84] Tax Law Review Committee, Tax Avoidance (1997). See also Financial Secretary to the Treasurer. A General Anti-Avoidance Rule for Direct Taxes: Consultative Document (1998).
[85] Whilst the United Kingdom Government initially supported the introduction of a GAAR, ultimately it retreated from this proposal in the face of considerable opposition. See the discussion in Dabner. above n 2.
[86] Inland Revenue, above n
79:
http://www.inlandrevenue.gov.uk/rewrite/tdd/tdd2/menu.htm. The debate
on the topic is reviewed in detail in the discussion document. The responses to
the discussion paper are summarised at:
http://www.inlandrevenue.gov.uk/rewrite/tdd/tdd2/response.htm. In
particular see paras 38 and 43.
[87] Such an approach would be supported by W Young, “Principles vs Detailed Tax Drafting” (1997) 3 New Zealand Journal of Taxation Law and Policy 176.
[88] Whilst there are no indications that a provision mandating a purposive interpretation is to be included in the United Kingdom re-write, a general provision to this effect was recommended in a 1969 Law Commission report: The Interpretation of Statutes (Report no 21, 1969).
[89] LJH Beighton, “Current Notes – Tax Law Re-Write: Plans for 1998/99” [1998] British Tax Review 273. Of the types of purposive approach that have been foreshadowed he prefers general legislation with purpose statements supported by explanatory notes and rulings by the Inland Revenue. He specifically rejects the approach taken in Australia and New Zealand.
[90] J Prebble, “Should Tax Legislation be Written from a Principles and Purpose Point of View or a Precise and Detailed Point of View?” [1998] British Tax Review 122. Prebble refers to the difficulties the Courts have experienced with the income capital distinction as a sobering illustration of the way in which the law might have to work if rules were generally replaced with principles. Whilst he does concede that the tax legislation does not specify principles to assist the Courts in resolving this distinction this is because this distinction is unprincipled. See also Gammie, above n 11,204.
[91] For a similar view see Young, above n 87.
[92] S James, A Sawyer and I Wallschutzky, “The Complexities of Tax Simplification: Progress in Australia, New Zealand and the United Kingdom” (1998) 14 Australian Tax Forum 29.
[93] More significant policy changes are permitted under the New Zealand re-write mandate.
[94] The New Zealand Law Commission expresses the traditional view that extrinsic material should not be used to alter the plain meaning of the text of legislation but rather only used as an aid in the reading of the text as enacted. See NZLC Report, above n 22, para 121. See also Cooper Brookes (Wollongong) Pty Ltd v FC of T 81 ATC 4292; and ss 15AA and 15AB of the Acts Interpretation Act 1901 (Cth). A similar position has been achieved at common law in the United Kingdom: Ramsay v IRC [1981] STC 174, 179. The judiciary may have resort to Hansard in order to determine the purpose of legislation but only where the legislation is ambiguous or obscure and the statement referred to is by the promoter of the Bill and clearly discloses the mischief to which the legislation is aimed: Pepper (Inspector of Taxes) v Hart [1992] UKHL 3; [1992] 3 WLR 1032. Ministerial statements relating to other provisions of the same Bill that might have given guidance on the provision in question cannot be used: Melluish v BMI (3) Ltd [1995] STC 964. Neither may official press releases: Elf Enterprise v IRC [1994] STC 785.
[95] However sometimes the Courts treat subsequent amendments as not clarifying the Parliamentary intent but rather as evidencing that the unamended provision had a different meaning. For example, see Challenge [1986] 2 NZLR 513, 529 (High Court).
[96] [1994] NZCA 213; [1994] 3 NZLR 439.
[97] Especially Challenge [1986] 2 NZLR 513; and Pepper [1992] UKHL 3; [1992] 3 WLR 1032.
[98] See New Zealand Master Tax Guide 1999 (1999) paras 9-070 and 18-050.
[99] According to Brooks often the search for the mythical “true” meaning can be a smoke screen for the imposition of the Court’s subjective opinion as to what the law should be. A more open and frank discussion of the various policy options would be preferable to employing some subterfuge. He sees the judiciary as having an equivalent role to Parliament in making tax policy: M Brooks, “The Responsibility of Judges in Interpreting Tax Legislation” in Cooper, above n 11, 93.
[100] See the suggestion below of a Tax Policy Committee.
[101] Note Waincymer, above n 11, 259-261. Although one commentator has described the requirement that the judiciary attempt to identify Parliament’s purpose but with only restricted access to secondary material as requiring a judge to construe legislation with one hand tied behind their back: Avery Jones, above n 78, 588.
[102] This should partly address Waincymer’s comments at the choices available to judges inherent in the initial factual determination and application of private law principles: above n 11, 263-265.
[103] Such as from a Tax Policy Committee, discussed below.
[104] Alternatively, prior to litigation this is an appropriate situation where the provision could be referred to a Tax Policy Committee with the mandate to clarify the issue, discussed below.
[105] The American judicial anti-avoidance doctrines are summarized in BJ Arnold and JR Wilson, “The General Anti-Avoidance Rule – Part 1” (1998) 36 Canadian Tax Journal 831, 880-882. There is no underlying principle supporting these doctrines other than it could not have been Parliament’s intention to permit taxpayers to arrange their affairs to avoid taxing statutes. This has created considerable uncertainty, only ameliorated by extensive technical explanations of the legislation, yet tax avoidance continues to be a problem. Thus the trend appears to be away from reliance on these doctrines with their focus on taxpayer intent to identifying areas of perceived abuse: Gustafson, above n 11. It is surprising therefore that Arnold and Wilson appear to favour a business purposes test over the (traditional) purposive approach especially as they concede that a secondary purposive test is required to support a business purposes test as not all transactions lacking a business purpose infringe taxation laws and some arrangements are multi-purpose: BJ Arnold and JR Wilson, The General Anti-Avoidance Rule – Part 2” (1998) 36 Canadian Tax Journal 1123, 1138-1139 and 1179-1181. The author’s thesis probably only differs in emphasis as it mandates a revised purposive approach with the lack of a business purpose merely relevant as to quantum.
[106] These distinctions, which arise in the application of the Australian anti-avoidance provision, are well illustrated in the most recent Pt IVA litigation: FC of T v Metal Manufactures Ltd 2001 ATC 4152; Eastern Nitrogen Ltd v FC of T 2001 ATC 4164; and Vincent v FC of T [2002] FCA 656.
[107] And could conceivably result in a transaction being struck down which was, in fact, encouraged by Parliament: noted by Estey J in Stubart [1984] CTC 294; 84 DTC 6305 (SCC) as a basis for not adopting the US business purposes rule.
[108 ]On 4 January, 2001 the ATO re-released its Code of Settlement Practice www.ato.gov.au/content.asp?doc=/content/Professionals/Code_Settlement.htm. Whilst this statement of practice is a considered response given the ATO’s perception of its powers there is a general reluctance to settle. Legislative recognition of a power to settle might therefore be helpful in assisting contentious matters to be compromised.
[109] This should currently be the effect of s 284-90 of the Taxation Administration Act 1953 (Cth) in any event.
[110] See the Treasurer’s Press Releases No 74 (11 November 1999) and No 83 (10 August 2000).
[111] 89 ATC 524. The matter was heard by Hartigan J and so has judicial status.
[112] Alternatively the adoption of the purposive approach advocated by the author may have led to the conclusion that as trusts were expressly recognized under the tax laws then the arrangement did not infringe the underlying purpose of the legislation. In the event of conflicting and no prevailing purpose the resolution of the matter would have been decided by reference to an analysis of the most preferable tax policy.
[113] In fact s 19 was raised by the ATO but no argument was addressed to the section. Presumably this was on the basis that the argument may have been viewed as an attempt to apply the Ramsay principle that had not found favour in the Full Federal Court in Oakey Abattoir Pty Ltd v FC T 84 ATC 4718; and was subsequently rejected by the High Court in John 89 ATC 4101.
[114] 94 ATC 4663.
[115] Peabody was a beneficiary of a family trust, the trustee of which sold the older (revalued) shares. However the newly acquired (devalued) shares were acquired and sold by another company and the Court held that it was this company that for the purposes of Pt IVA had received a “tax benefit”.
[116] 96 ATC 5201.
[117] Discussed in Dabner, above n 2.
[118] 95 ATC 4775.
[119] It was clearly the intention of Parliament that the transaction at issue would have been treated as having an Australian source. The negotiations occurred in Australia and, in fact, the funds derived from Australia. However the Federal Court placed emphasis on the place where the contract was concluded. Discussed in M D’Ascenzo, “Substance Versus Form” (1997) 3 Asia-Pacific Tax Bulletin 330, 335-336. The issue of source was not raised on appeal to the High Court as the ATO did not wish to jeopardise a consideration of the Pt IVA issue. Notably one of the structural deficiencies in the legislation that permitted this avoidance transaction (that is the interest exemption) has since been remedied by Parliament.
[120] 98 ATC 4983.
[121] 99 ATC 4945.
[122] [1984] CTC 294; 84 DTC 6305 (SCC).
[123] However see Arnold, above n 18, 1-3 and 7.
[124] [1986] 2 NZLR 513.
[125] See note 68 above.
[126] At least one other commentator is prepared to admit that Parliament does not trust the judges: Gammie, above n 79.
[127] RW Parsons, “Income Taxation – an Institution in Decay” (1986) 3 Australian Tax Forum 233.
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