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THE HON JUSTICE G T PAGONE[*]
[Lawyers are taught to appreciate the value of certainty in the law. In the field of taxation, however, the law is often far from certain. This article examines some of the causes of uncertainty within tax law, including the inherent uncertainty of language, the mismatch between the lawyer’s tools of statutory interpretation and a tax statute drafted using an economic or accounting understanding of tax concepts, differing judicial constructions of tax statutes, and the intentional uncertainty in the drafting of tax statutes to allow for discretion or to prevent tax avoidance. It is argued that community consultation and bodies such as a specialist tax tribunal may reduce uncertainty and allow the community to make an informed choice as to the desired level of uncertainty within tax law.]
CONTENTS
Whoever hopes a faultless tax to see,
Hopes what ne’er was, or is, or e’er shall
be[1]1
At some point in a law course, every law student is taught about the importance of certainty in the law. At some point in a lawyer’s career, every lawyer in every area of legal practice comes to appreciate the necessity of certainty in the law. Certainty is the foundation of the lawyer’s craft and is, perhaps, the only contribution that makes us useful to clients and society. It is the lawyer’s ability to predict the application of the law that helps us organise relations between people in their personal affairs, business relations and dealings with government. Without a reliable degree of certainty, contracts would be worthless and ongoing ordinary relations and dealings would be at risk of whim and fancy. Certainty in the law is fundamental to the rule of law, which holds that law ‘should be clear, easily accessible, comprehensible, prospective rather than retrospective, and relatively stable.’[2] It is with that frame of mind that I turn to taxation.
There is a curious entry, some may say a curiously candid entry, under the heading ‘Taxation’ in The Oxford Companion to Law.[3] The first two and the last two sentences describe taxation as follows:
Traditionally the principal way in which the ruling classes in organized communities have oppressed, fleeced, and expropriated some of their subjects. It has been known from very early times, and from the earliest times the tax-gatherer has been an object of public fear, hatred, and execration. …
Not the least evil features of the modern tax system are the army of unproductive civil servants concerned with the assessing and collecting of taxes, the enormous volume and constantly changing detail of the chaotic and largely incomprehensible body of verbiage called the law of taxation, the incomprehensible and frequently incorrect assessments, and the utterly irrational nature of the whole topic. In the law of taxation justice has no place at all.[4]
Some may think this an extreme view. Perhaps it is, but it gives us a context in which to evaluate the role of certainty in tax law. Tax falls upon us in the ordinary course of our activities as a compulsory taking[5] from us of something that we, by definition, have earned or owned. How and when that may happen should be clear, predictable and free from whim, caprice or chance. Below, I reflect upon some causes of uncertainty in tax law and whether this uncertainty is desirable or deliberate. In doing so I should make it clear that I hold no hope for certainty in tax law in the future. Ten years ago, the Review of Business Taxation, in A Tax System Redesigned: More Certain, Equitable and Durable — Report (‘Ralph Report’), recommended that reform to the anti-avoidance provisions ‘be based around a clear articulation of the underlying policy of a restructured tax law’.[6] A few years before that we lived through the partial and incomplete rewriting of the Income Tax Assessment Act 1936 (Cth) (commonly known as the ‘1936 Act’) as the result of what was optimistically called the ‘Tax Law Improvement Project’. Forty years ago, at the First National Convention of the Taxation Institute of Australia in May 1969, a Mr R F Hughes wrote:
Some not very scientific, and probably far from complete, research has disclosed that, in the last eight years in Australia, at least two hundred separate articles in professional or business journals and papers presented at professional conventions or congresses have been concerned with taxation reform in one way or another. One wonders whether, therefore, anything further may usefully be said on this topic, or, if said, whether we will ever see reform.[7]
At the same conference the then Second Commissioner of Taxation, Mr P J Lanigan, began his paper by recalling the four basic canons laid down by Adam Smith in 1776.[8]
The second canon was:
The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.[9]
And yet stubborn uncertainty stubbornly remains. The more things change, as
the French adage goes, the more things remain the
same.[10] I doubt that we can do
much more than gain some small insight into why that may be so.
Uncertainty
may in part be an inevitable feature of language. Words are frequently capable
of many meanings, some of which were not,
or at least may not have been,
intended when used in a particular context. One such example may be seen in
Bourne (Inspector of Taxes) v Norwich
Crematorium Ltd[11] in
the context of a United Kingdom statute where the tax fell by reference to
whether a building or structure was for the ‘manufacture
of goods or
materials or the subjection of goods or materials to any
process’.[12] A narrow
question raised in that case was whether goods and materials subject to a
process included the cremated remains of human
bodies. Stamp J said of this:
In my judgment it would be a distortion of the English language to describe the living or the dead as goods or materials. The argument, of course, goes on inevitably to this: that just as ‘goods and maeterials’ [sic] is wide enough to embrace, and does embrace, all things animate and inanimate, and so includes the dead human body, so that other words to which a meaning must be given, namely ‘subjection’ and ‘process’, are words of the widest import. Parliament cannot, so the argument as I understood it runs, have intended to exclude from the definition a process whereby refuse or waste material is destroyed or consumed by fire and, putting it crudely, for it can only be put crudely, the consumption by fire of the human body is a process. I protest against subjecting the English language, and more particularly a simply English phrase, to this kind of process of philology and semasiology. English words derive colour from those which surround them. Sentences are not mere collections of words to be taken out of the sentence, defined separately by reference to the dictionary or decided cases, and then put back again into the sentence with the meaning which you have assigned to them as separate words, so as to give the sentence or phrase a meaning which as a sentence or phrase it cannot bear without distortion of the English language. That one must construe a word or phrase in a section of an Act of Parliament with all the assistance one can from decided cases and, if one will, from the dictionary, is not in doubt; but having obtained all that assistance, one must not at the end of the day distort that which has to be construed and give it a meaning which in its context one does not think it can possibly bear. What has to be decided here is whether what is done by the taxpayer, viz, the consumption or destruction by fire of the dead body of the human being, is within the phrase, ‘the subjection of goods or materials to any process’. I can only say that, having given the matter the best attention that I can, I conclude that the consumption by fire of the mortal remains of homo sapiens is not the subjection of goods or materials to a process within the definition of ‘industrial building or structure’ contained in s 271(1)(c) of the Income Tax Act, 1952.[13]
To the inherent ambiguity in language one may also add determined
obfuscation,[14] nurtured, perhaps,
by self-interest or institutional objective.
Another cause of uncertainty may
be a mismatch between the underlying objectives expressed in statute and the
potentially distorting
tools used by lawyers to determine the meaning of the
words used and their application. This mismatch may be seen in many contexts
of
tax law. The reason for the mismatch is essentially that the tools used by the
law to discern or apply meaning may not reflect
the non-lawyer’s intention
or meaning when the words were used or adopted. Take for example the distinction
between capital
and income, upon which our system of taxation so heavily
depends. Whether a receipt or an outgoing has the character of capital or
income
will usually be obvious enough and the legal answer may well accord with the
economic or accounting outcome which the statutory
words were intended to
express. However, that will not always be so, and one reason for this is that
the lawyer’s tools to
determine the characterisation are different from
those of an accountant or an economist.
In this context, the courts have frequently said that what is income and what
are allowable as deductions are matters for legal analysis
rather than matters
for determination by accountants or
economists,[15] notwithstanding that
the legal measure adopted in the statute might be thought to have been the
expression of the accounting or economic
concept by reference to which profit
and loss were traditionally determined applying ordinary concepts. An example of
the difference
in approach may be seen in the decision in Federal
Commissioner of Taxation v McNeil
(‘McNeil’),[16]
which concerned the taxability as ‘income’ of a receipt by a
shareholder of $514 from the sale on her behalf of rights
to sell shares in St
George Bank. Mrs McNeil had previously held 5450 shares in the Bank from which,
over the years, she derived
dividends upon which she paid tax in the ordinary
way.[17] In January 2001, the Bank
announced its intention to buy back about 5 per cent of its issued share capital
at a fixed price of $16.50
per share. Mrs McNeil thus came to have 272 rights to
require the Bank to buy her
shares.[18] These rights were
separately listed for trading on the Australian Stock Exchange and, at the time
in question, had a value of $1.89
each.[19] Mrs McNeil took no steps
to exercise her rights with the consequence, under the transaction documents,
that they were transferred
to a merchant bank, which sold them back to St George
at $2.12 each (for a total of
$576.64).[20] Part of that receipt
was treated as a capital gain, but the bulk, $514, was treated by the Federal
Commissioner of Taxation (‘Commissioner’)
as ordinary income under
general principles.[21]
The
occasion by which Mrs McNeil came to have the rights was, from the
company’s point of view, a partial return of capital
to its shareholders.
Mrs McNeil, as a shareholder and from an accounting and economic point of
view, could be seen to be receiving
a part of the capital value of her
shareholding upon the sale of the sell-back rights. The High Court of Australia,
by a 4:1 majority,
held otherwise, focusing upon Mrs McNeil’s individual
receipt of the money and upon a finding that her shareholding remained
unchanged
as a matter of legal analysis. The law treated the receipt as income, though in
economic terms her capital wealth as a
shareholder in the Bank before and after
the transaction had not changed (except, of course, that it was reduced by
reason of the
tax she had to pay).
The majority judgment in McNeil
began its consideration of the issues by recalling that the character of the
sell-back rights had to be determined from the point
of view of the taxpayer
(the recipient) and not from the point of view of the Bank (the
payer).[22] Their Honours next
reasoned that ‘a gain derived from property has the character of
income’, including a gain to an owner
who receives the gain
passively.[23] An important inquiry
relevant to the ultimate issue was, therefore, whether the gain was derived from
property which the taxpayer
continued to hold in contrast to a receipt in
exchange for a disposal of part of the capital. This led their Honours to
consider
whether the rights enjoyed by Mrs McNeil ‘arose and were severed
from, and were a product of, her shareholding in [the Bank],
which she
retained’:[24] in short, was
the capital severed or did it remain intact? Was the receipt in exchange for
what was severed or did it proceed from
capital which remained whole? Critical
to their Honours’ conclusion that the receipt was a product of (and not in
exchange
for a part of) the capital was their Honours’ holding that Mrs
McNeil’s shareholding in the Bank, as a matter of legal
analysis,
‘remained
untouched’.[25] Callinan J
reached the contrary conclusion, placing significance on the impact upon Mrs
McNeil as a shareholder when considering,
as his Honour said, the
‘transaction as a
whole’.[26]
The most
significant point in the conclusion of the majority judgment was that Mrs
McNeil’s shareholding in the Bank ‘remained
untouched’.[27] An accountant
or an economist may have analysed the transaction quite differently and may have
seen the transaction from Mrs McNeil’s
point of view as an affair wholly
on capital account (as did Callinan
J).[28] On such an analysis, Mrs
McNeil, as a shareholder, had a number of shares and came to receive part of
their value in cash in consequence
of her capacity as a shareholder. The number
of shares she held before and after her receipt of cash remained the same, but
part
of the economic value of her investment in those shares was returned to her
(in her capacity as a shareholder) without her doing
anything and for no other
reason than because she was a shareholder. From her point of view, the
accounting and economic consequence
of the receipt upon the sale of the rights
was that her shareholding was, in economic and accounting terms, reduced in
value by the
amount she received in cash. On that analysis, a portion of
the value of her shareholding was ‘severed’ from the
worth of the whole of her shareholding and paid to her in cash. That appears
to
have been the view adopted by Callinan J when his Honour concluded that if
one were
to look only to what [Mrs McNeil] had in her hands, … [s]he was left with a sum of money … representing a contingent entitlement to the capital of [the Bank] reduced by reason of the expenditure of some of [the capital] to buy back its shares. The money that [Mrs McNeil] received was … the result of a reorganisation of the capital of the company which effectively gave shareholders access to a component of [capital] that they would not otherwise have had.[29]
Similar differences between the lawyer’s tools and the meaning of
taxation concepts for economists and accountants may be seen
on the deduction
side of the distinction between capital and income. Capital losses and outgoings
are not usually deductible against
income receipts, and the character of a loss
or outgoing as being either on revenue account or on capital account can have
profound
consequences for fiscal outcomes. The legislative amendments and line
of litigation involving convertible notes and instruments with
a component of
deductible outgoings illustrate
this.[30]
The cases involving
finance companies raising Tier 1
capital[31] through instruments with
an obligation to pay an interest component also illustrate the tensions between
the lawyer’s analysis
of tax law and the economic view of transactions.
The raising of capital, whether by a financier or any other taxpayer, carries
with
it a cost: investors buying shares expect a return on their investment and
lenders who have lent money similarly require an economic
return on the funds
advanced. From the point of view of the taxpayer raising funds, there is a cost
by reason of the impact of tax
whichever way the funds are raised, but the
amount of the cost will differ depending upon whether the funds are obtained as
loans
or as contributions to equity. Similarly, from the point of view of the
provider of funds (whether as investor or as lender) there
will be an
expectation of preserving capital as well as an economic return upon the
capital, but there will be a difference in expected
risk and return depending
upon whether the funds are provided as investor or as lender. The parties
regulate their dealings to share
or minimise risks and share returns by the
type, form and detail of the transactions into which they enter. Transactions
differ in
the nature of the risk exposure undertaken by the provider of the
funds and the degree to which a company is willing to share the
rewards of its
risks and endeavours with those who have provided the funds that make this
possible. How much risk each will take
and how much of the reward each may enjoy
are part of the economics of the bargain finally made. Embedded (indeed,
inevitably embedded)
in those dealings, and governing the shape of the
transactions and the outcomes agreed to, is the fiscal treatment of different
transactions.
These differences may be of interest to accountants and
economists, but they are critical to the tax adviser because of the fiscal
consequences which flow from the different legal character ascribed to each kind
of transaction. The investor risks capital into
a corporate venture and
generally has no legal right to require repayment of the capital as such. In
return for the investment risk,
the investor will generally be entitled to share
in the fruits of the venture through dividends (that is, through a distribution
and division of profits amongst shareholders). The lender, on the other hand,
assumes a different risk to that of an investor and
will generally have a legal
entitlement to require repayment of the moneys lent. However, it will generally
be entitled only to a
financier’s return on capital without reference to
the profitability of the use to which the funds have been put. The cost
to the
person obtaining the funds (whether by share issue or as a borrowing) will be
treated either as an affair of capital or as
an affair of revenue, with an
important consequence for the cost of the funds obtained and for the public
revenue. If the cost be
on capital account, it will generally not be deductible
and, therefore, it will, to that extent, be more expensive than if the outgoing
were deductible.
There are many observations in the decided cases which
explain why in law the form of a transaction is important and why it may be
difficult to rely upon broader notions of substance to determine the fiscal
outcomes.[32] On the other hand, a
mere interpretation of a transaction by reference to its form may say nothing
about its nature. In Lomax (HM Inspector of
Taxes) v Peter Dixon & Son
Ltd, Lord Greene MR observed:
In many cases … mere interpretation of the contract leads nowhere. If A lends B 100l on the terms that B will pay him 110l at the expiration of two years, interpretation of the contract tells us that B’s obligation is to make this payment. It tells us nothing more.[33]
The 10l difference between the payments could be accretion to capital
or it could be in the nature of interest return upon the capital. In
cases like
Macquarie Finance Ltd v Federal
Commissioner of
Taxation[34] and St
George Bank
Ltd v Federal Commissioner of Taxation
(‘St George
Bank’)[35] there were considerable
fiscal and commercial consequences flowing from a determination of whether the
payment of an obligation described
as interest was to be seen as on capital
account: that is, as a return upon the capital provided rather than as a cost
incurred in
the derivation of income. One economic consequence of allowing
deductibility of the ‘interest’ component of the payment
under a
perpetual Tier 1 instrument is that the economic cost to the taxpayer of its
capital is reduced by the tax effect of the
deduction. Another economic
consequence of allowing a deduction is to shift from the shareholders to the
public revenue the economic
burden of that amount of the cost of capital raising
that is effectively part of the economic return to the shareholder/lender for
the risking of funds. In other words, an economic consequence of allowing
deductions for such payments is that the ‘interest’
component has
the economic effect of becoming similar to a tax deductible dividend by the
company making the payment. In Macquarie Finance Ltd
v Federal Commissioner of Taxation, Hill J,
at first instance[36] and the Full Court of the
Federal Court of Australia, on appeal[37]
sought to determine the substance of the transaction by the legal rights created
rather than by reference to an economic or accounting
analysis. In other words,
the outcome of the case was not governed by the broader economic or accounting
realities of the transactions,
but by the lawyer’s tools of analysing and
classifying the legal rights between the parties. Even so, recourse to
lawyers’
tools of analysis will not always guarantee the same reasoning
process, as a comparison of the reasoning of the Full Courts in Macquarie
Finance Ltd v Federal Commissioner
of Taxation, on the one hand, and St George
Bank[38] on the other, shows.
Some
uncertainty also arises from the ordinary development and rearticulation of
principles fundamental to tax. The High Court held
in Federal
Commissioner of Taxation v Stone
(‘Stone’) that the hallmark of a revenue receipt by an
athlete was ‘that she had turned her sporting ability to account for
money’.[39] The decision was
applied by the Federal Court at first instance in
Spriggs v Federal Commissioner of
Taxation[40] and
Riddell v Federal Commissioner of
Taxation[41] to allow
deductions.[42] These cases, like
McNeil,[43] effectively
applied the dicta in Federal Commissioner of
Taxation v Montgomery (‘Montgomery’)
that
income is often (but not always) a product of exploitation of capital; income is often (but not always) recurrent or periodical; receipts from carrying on a business are mostly (but not always) income.[44]
The concept that an income receipt may flow from the exploitation of capital
is not novel and lies at the heart of many of the decided
cases. What
Stone highlighted, however, was the importance of the link between a
receipt and the exploitation of the capital. It was the exploitation
of the
capital that made the receipts assessable as
income.[45] However, that basal
principle, articulated again in McNeil, appeared in a different light
upon its application in that case.
The critical concept in both Stone
and Montgomery may have been thought to be the emphasis placed by the
Court upon the finding of ‘use’, ‘exploitation’ or
‘bringing to account’ of the capital. In Montgomery, for
example, the Court explained its application of the dicta from Eisner
v Macomber by saying that ‘the firm used or exploited its
capital … to obtain the inducement
amounts.’[46] So understood,
what mattered was not just that the capital had not been severed but, rather,
that the resultant receipt was a product
of activity which stamped the receipt
with some profit-making purpose. In that regard the decision is illustrative of
the dicta in
Federal Commissioner of Taxation
v Myer Emporium Ltd:
Generally speaking … it may be said that if the circumstances are such as to give rise to the inference that the taxpayer’s intention or purpose in entering into the transaction was to make a profit or gain, the profit or gain will be income, notwithstanding that the transaction was extraordinary judged by reference to the ordinary course of the taxpayer’s business. … The authorities establish that a profit or gain [made in a ‘one-off’ transaction] will constitute income if the property generating the profit or gain was acquired in a business operation or commercial transaction for the purpose of profit-making by the means giving rise to the profit.[47]
What McNeil may add to that analysis, however, is that the
circumstance of the capital having remained intact may be sufficient to provide
the
finding that the receipt had the character of income without the need to
find that the circumstances of the receipt had the characteristics
of income
earning activity. In Montgomery and Stone it was the
exploitation of the (intact) capital that stamped a profit-making purpose
upon the receipt but, in McNeil, Mrs McNeil had been entirely passive (a
circumstance pointed out in the majority judgment as being insufficient to deny
a receipt
the character of
income).[48] Taxpayers, and their
professional advisers, may now need to consider many other receipts hitherto not
thought to be brought to tax
as income when lodging returns. Amounts received,
for example, in restraint of trade upon the sale of a business, which many may
have thought taxable only as a capital gain (and perhaps only in the extended
operation of those provisions) may need to be reconsidered
in light of
McNeil.
Recourse to metaphors also carries its share of uncertainty.
One metaphor which has featured prominently at the heart of tax law is
the
metaphor of trees and fruits in explanation of the difference between capital
and income. The metaphor was used by Pitney J in
Eisner v
Macomber,[49] it was accepted
in Montgomery,[50] and it was
endorsed in McNeil.[51] In
Berkey v Third Avenue Railway Co,
Cardozo J warned that ‘[m]etaphors in law are to be narrowly watched, for
starting as devices to liberate thought, they end
often by enslaving
it.’[52]
The metaphor may be helpful when the fiscal issue in dispute depends upon
whether the receipt is made in return for part of the severed
whole (in which
case the receipt can more readily be seen as given in exchange for part of the
corpus) but is less helpful when the
fiscal issue in dispute depends upon the
impact which the circumstances of the receipt have upon its character. In the
latter case,
the fact that the receipt is not given in exchange for a severed
portion of the whole may be taken as a given and the focus of enquiry
shifts
from the nature of its source to the nature of the receiving.
It will not
always be clear to taxpayers, or to their advisers who must lodge returns and
advise upon transactions, when, or how,
a receipt may be said to be severed from
an item of capital as its fruit rather than its body. The payment to a
shareholder of part
of a company’s profits should and will, in the
ordinary course, be treated as income. Such a payment will ordinarily be a
taxable
dividend to the recipient and little further enquiry need be undertaken
to dispose of any question about assessability. The same
answer need not
necessarily be reached, as a matter of fiscal policy, where the receipt does not
proceed from a pool of taxable profits.
Indeed, to treat a payment of a
company’s corpus as taxable — as ordinary income — in the
hands of a shareholder
may present several fiscal anomalies. Such a payment, for
example, would not receive the benefit of company tax imputation (since
no
company tax was paid or payable upon the corpus) and may produce unexpected
capital gains tax outcomes if the shares are eventually
sold (since the receipt
will not be treated as a reduction in the cost base).
Another cause of uncertainty in tax law arises not from the discipline of the
law producing an answer different from other disciplines
but because within the
law there are strongly held, divergent views about the law itself. Countless
examples of this may be given
but it will be sufficient to remember only the
decision in Hepples v Federal Commissioner
of Taxation[53] to see
how this cause of uncertainty may give rise to severe problems in the
application of taxing statutes with no countervailing
public benefit. The facts
and the question involved in the case are easy to convey in general terms, but
the legal analysis that
produced the ultimate outcome is far more complicated.
The question, in general terms, was whether the payment of $40 000 to a
former
employee in consideration of a restraint upon termination of employment
was a deemed disposal for capital gains tax purposes. The
resolution of that
issue reached the High Court by way of a case stated from the Administrative
Appeals Tribunal of Australia (‘AAT’).
The Tribunal Member (that is,
the decision-maker) sought to know whether he should determine that the amount
was taxable as a deemed
disposal under one or other of two subsections, namely,
ss 160M(6) or (7) of the Income Tax Assessment Act
1936 (Cth).[54] If either was
engaged, the receipt would be brought to tax as assessable income through
another provision, namely, s 160ZO. That
section, however, was not itself the
basis of the liability: either s 160M(6) or s 160M(7) had first to be
engaged for s 160ZO to
operate.
Four out of the seven Justices of the High
Court decided that the payment was not taxable as a disposal under the first of
the provisions
(s 160M(6)).[55] A
different four Justices held that the amount was not taxable as a disposal under
the other provision (s 160M(7)).[56]
Viewed in that way, there was no majority supporting the proposition that either
of the two subsections was engaged, because there
was no majority view that
there was a deemed disposal. Seen simplistically, the primary decision-maker
would have concluded that
the amount was not taxable because neither of the two
provisions upon which taxability depended were engaged. Unfortunately for the
taxpayer, however, there was a majority which concluded that it was taxable.
That was because three out of the seven Justices had
concluded that it was
taxable as a disposal under s 160M(6) and therefore brought to tax through
s 160ZO,[57] and a different three
Justices out of the seven had concluded that it was taxable as a disposal under
s 160M(7) and therefore brought
to tax through s
160ZO.[58] In all, four out of seven
of their Honours had concluded that, one way or another, the receipt was taxable
through s 160ZO. The order
made by the Court on appeal declared the
majority opinion as to the issue of law, notwithstanding the lack of a majority
about the
foundation upon which that conclusion was
supported.[59] The outcome,
jurisprudentially, can be explained, justified and understood (at least by
lawyers), although if the decision reflected
the reasoning process of the one
individual Member of the AAT who had the unfortunate task of deciding the case
at first instance
(as in a sense it could) it would reveal a deeply troubled and
profoundly unstable mind.
The lawyer’s rules of statutory construction
are, of course, intended in part to remove uncertainties by making the approach
to interpretation predictable. Some of these rules are said to be particular to
tax and, ironically, in their own way have played
their part in producing
uncertainty, especially in the field of tax avoidance. In Anderson
v Commissioner of Taxes (Vic), Latham CJ
adopted with approval[60] a
principle stated in Inland Revenue Commissioners v
Duke of Westminster:
If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.[61]
A literal construction and application of taxing provisions may no longer be in vogue[62] and has given way to a reaffirmation that the task of statutory interpretation must be to discern and apply the intention of Parliament.[63] Whether there is logically much difference between these two approaches may be open to doubt; after all, there is no reason to assume that the purpose of Parliament in enacting fiscal legislation was to impose any more than would be imposed by a literal application of a provision. In Scott v Cawsey, Isaacs J had said:
When it is said that penal Acts or fiscal Acts should receive a strict construction I apprehend it amounts to nothing more than this. Where Parliament has in the public interest thought fit in the one case to restrain private action to a limited extent and penalise a contravention of its directions, and in the other to exact from individuals certain contributions to the general revenue, a Court should be specially careful, in the view of the consequences on both sides, to ascertain and enforce the actual commands of the legislature, not weakening them in favour of private persons to the detriment of the public welfare, nor enlarging them as against the individuals towards whom they are directed.[64]
As this passage shows, the overriding requirement of interpreting legislation by giving effect to the intention of the legislature is consistent with the assumption that the legislature saw fit to impose fiscal obligations strictly in accordance with the limited extent to which they are imposed by the words. In BP Refinery (Westernport) Pty Ltd v Shire of Hastings, the majority of the Privy Council observed that it was a strong thing to read into an Act of Parliament words which were not there and that it was ‘a particularly strong thing to do so when it amounts to modifying, as against the fiscal subject, words which have a plain, natural and ordinary meaning in [the subject’s] favour.’[65] Similarly, in Western Australian Trustee Executor & Agency Co Ltd v Commissioner of State Taxation (WA) Gibbs J observed that a liability to taxation should not be inferred from ambiguous words if the terms of a taxing Act did ‘not reveal a clear intention to do so’.[66]
In any event, the lawyer’s tools of statutory construction may be a
reason for some of the uncertainty in our tax laws. It may
be that the drafting
of some of the provisions has sought to overcome the effect of rules of
construction and that, perhaps, some
uncertainty may have been intended as a
design feature in our system of taxation. I do not stop to ask whether this is a
good thing
but observe that rewards and penalties linked to unpredictable
outcomes are an important part of ordinary economic behaviour in ordinary
life.[67] There are many instances
in tax law of structured uncertainty. There are, for instance, numerous
provisions where the liability of
a taxpayer is made to depend upon the exercise
of a discretion by the Commissioner. The Parliament may constitutionally enact a
law
with respect to taxation by reference to which the amount of tax payable is
made to depend upon the formation by the Commissioner
of an opinion about
whether the application of some provision is unreasonable, even when the basis
of that opinion is in part dependent
upon the Commissioner having a discretion
to take into account ‘such … matters, if any, as he thinks
fit’.[68] Delegated
legislation, if it is found upon its proper construction to be sufficiently
uncertain, may for that reason fall outside
the power of delegation (and
therefore be invalid),[69] but the
duty of a court in relation to Acts of Parliament is to find meaning in the
words and apply them no matter how difficult
they may be to
interpret.[70]
There are many
reasons for discretions to be given in tax legislation notwithstanding the
desirability of clarity, certainty and
predictability.[71]
One of them may be to have a tax outcome depend upon commercial, business or
economic considerations that non-discretionary rules
might not allow. It is not
hard to see the echo of economic criteria as the determinants in transfer
pricing discretions or in the
debt/equity rules. At times — alas, all too
frequently — the complexity of drafting is such that ‘what seem[ed]
obvious at first sight quickly recedes into
obscurity.’[72] The
consolidation provisions[73] may be
one such example, to which one may rapidly add the controlled foreign companies
regime,[74] the foreign investment
funds regime[75] and other
provisions, before the number of additions becomes a flood.
Another reason
for discretions is that they are a response to what may be thought to be the
‘social evil’ of tax
avoidance.[76]
The shape of modern legislation against tax avoidance in Australia may be a
reaction against the way we had previously viewed such
activities.[77] The provisions
directed to preventing tax avoidance — part IVA of the Income
Tax Assessment Act 1936 (Cth) — are steeped in
uncertainty, although the uncertainty embedded in these provisions is
conceptually problematic. It is
problematic because the anti-avoidance
provisions are not intended to apply as primary taxing provisions. They are
intended to apply,
rather, only when the ordinary provisions have failed to
achieve the purpose which, somehow, they were intended to achieve but failed
to
achieve. A moment’s reflection will reveal an obvious tension between the
application of such provisions and a purposive
construction of fiscal
legislation: how can taxing provisions fail to achieve their proper and intended
purpose if they have been
construed and applied according to their
purpose?
In other jurisdictions, typically those which do not have a specific
anti-avoidance provision, a purposive construction of legislation
has been used
as the basis for courts attempting to prevent tax avoidance. In the United
States decision of Helvering v Gregory
(‘Gregory’),[78]
Learned Hand J refused to apply a literal reading of a statute which he
considered to be contrary to the statutory intention. His
Honour said:
Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. … Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition. … [T]he meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create.[79]
A purposive, or non-literal, construction of taxing statutes may, however, be
made more difficult as the statute increases in specificity.
In the same passage
in Gregory, Learned Hand J observed that ‘as the articulation of a
statute increases, the room for interpretation must
contract’.[80]
The courts
have also relied upon principles of statutory interpretation in the United
Kingdom in developing the doctrine of fiscal
nullity to counter tax avoidance.
The doctrine, first articulated in WT Ramsay Ltd v
Inland Revenue Commissioners
(‘Ramsay’),[81]
was said by Lord Wilberforce to be part of the function of the courts to apply
strictly and correctly the legislation enacted by
Parliament. In that context,
his Lordship said:
To force the courts to adopt, in relation to closely integrated situations, a step by step, dissecting, approach which the parties themselves may have negated, would be a denial rather than an affirmation of the true judicial process.[82]
The question at issue in Ramsay was whether there had been a disposal giving rise to a loss under a taxing statute.[83] The issue of construction was whether the particular transaction came within the intended terms of the statute where the disposal was effected by a series of steps, each of which the parties necessarily intended to be effective according to its terms but the partial legal effect of which had been intentionally cancelled by some other parts of the transaction.[84] The principle adopted in that case was subsequently formulated by Lord Brightman in Furniss (Inspector of Taxes) v Dawson in these terms:
First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (ie business) end. The composite transaction does, in the instant case; it achieved a sale of the shares in the operating companies by the Dawsons to Wood Bastow. It did not in Ramsay. Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax — not ‘no business effect.’ If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied.[85]
The importance, and limitations, of the statutory construction at play as the
foundation and extent of the principle enunciated have
been remarked upon in
subsequent cases[86] and by
commentators.[87] Nonetheless,
whatever its limitations, the foundation for the development of these judicial
attempts to prevent tax avoidance has
been a purposive construction of tax
legislation.
The anti-avoidance provision in Australia, however, must be
applied even when a fully purposive construction of the tax legislation
has
enabled a taxpayer to obtain a tax benefit. In such cases, it is not just that
the ‘literal’ words have failed to
apply but, rather, that the words
in the statute, when properly construed by reference to the legislative
intention, have failed
to secure a fiscal objective which is somehow still
supposed to be evident. Part IVA is not expressed as a provision to allow the
Commissioner or the courts to impose such tax as either might think fit, or as
either
might be minded to impose in the exercise of some uncontrolled discretion
or notion of fiscal equity. A casual observer might be
forgiven, therefore, for
being surprised that the application of part IVA may seem neither certain nor
predictable and that it can operate after a purposive interpretation of the
legislation has permitted
a tax benefit to be obtained. The course of judicial
consideration of the provisions has demonstrated a marked difference in judicial
application of them. In Federal Commissioner of
Taxation v Spotless Services Ltd,
the joint judgment in the High Court adopted a passage from the reasons of the
judgment of Cooper J in the Full Court of the Federal
Court as the foundation
for the opposite conclusion to that which had been reached by his
Honour.[88] In Macquarie
Finance Ltd v Federal Commissioner of
Taxation, Hill J, at first instance, concluded that part IVA applied to a
transaction but said that he did so ‘with some
reluctance’.[89] He doubted
that the legislature would have regarded the relevant scheme as one involving
the application of part IVA when it was enacted in
1981.[90] On appeal, Gyles J had no
doubt that part IVA applied,[91]
whilst French and Hely JJ were of the opposite
view.[92] Similar divergence of
views can be seen in many of the other cases in which part IVA has been
considered by different judges. In Hart v Federal
Commissioner of Taxation, at first instance, Gyles J
concluded that part IVA applied to the transaction in
question[93] but, on appeal, the
Full Federal Court unanimously concluded that it did
not.[94] On further appeal to the
High Court, all five judges concluded that it
did.[95] Differences in
interpretation of the provisions before the High Court decision in Hart
v Federal Commissioner of Taxation
(‘Hart’) might explain the different outcomes reached in the
lower courts and in cases decided before Hart, but that cannot explain
the different conclusions reached by the judges who have decided
Macquarie Finance Ltd v Federal
Commissioner of
Taxation[96] and other cases
after Hart.
It is a reasonable concern of the casual observer that the
differences in application of part IVA reflect a profound uncertainty about
whether or how the anti-avoidance provisions apply to the countless number of
transactions which
are entered into on a daily basis and to the many cases which
various members of the Australian Taxation Office, at varying levels
of
seniority, have to consider. None of the cases which have exhibited such
different conclusions had depended for their different
views upon different
subjective views or discretionary considerations. In each case the judges
applied objective criteria to the
facts as found. The uncertainty, in short, is
embedded in the application of part IVA and acts as a sword of Damocles over the
heads of taxpayers each time a taxable event occurs or a taxable transaction is
entered
into. We have adopted, as the provision of last resort, a provision
which may operate at least in part from fear of the unknown (with
the full
impact of the chilling effect upon commerce and economic activities which that
may bring).
The main feature of part IVA to which the uncertainty may be
attributed is undoubtedly the conclusion which s 177D requires to be reached for
the provisions to apply.[97] The
section requires a conclusion to be drawn that the ‘dominant
purpose’ of a person who entered into or carried out
the
scheme[98] was to obtain a
‘tax benefit’.[99]
Assuming, therefore, the existence of a tax benefit as a precondition, the
enquiry is focused upon the purpose of a person. That
purpose is to be
ascertained not by reference to any actual intention but, rather, by an
objective evaluation of the matters which
s 177D(b) permits to be taken into
account.[100] To that extent, the
analysis is essentially that articulated by the Privy Council in Newton
v Federal Commissioner of
Taxation[101] and accords
with the general statements about ‘blatant, artificial or contrived’
in the Explanatory Memorandum from when
the provision was first introduced into
Parliament.[102] The difficult
issue which remains, however, is that of evaluating the factors permitted by s
177D(b) to be taken into account and determining whether, when those limited
factors are taken into account, and excluding the subjective
purpose or motive
of the taxpayer, the conclusion should be drawn that the dominant purpose of a
person was to obtain the tax benefit.
The joint judgment of Gummow and Hayne JJ
in Hart sought to provide guidance in undertaking that task when their
Honours said:
In the present matters, the respondents would obtain a tax benefit if, in the terms of s 177C(1)(b), had the scheme not been entered into or carried out, the deductions ‘might reasonably be expected not to have been allowable’. When that is read with s 177D(b) it becomes apparent that the inquiry directed by Pt IVA requires comparison between the scheme in question and an alternative postulate. To draw a conclusion about purpose from the eight matters identified in s 177D(b) will require consideration of what other possibilities existed. To say, as Hill J did, that ‘the manner in which the scheme was formulated and thus entered into or carried out is certainly explicable only by the taxation consequences’ assumes that there were other ways in which the borrowing of moneys for two purposes (one private and the other income producing) might have been effected. And it further assumes that those other ways of borrowing would have had less advantageous taxation consequences.[103]
In this way, their Honours sought to inform the fundamental issue upon which the application of the provision depended by drawing attention to the need to compare what was done with something else in order to determine whether the way in which the transaction was entered into was explicable only by taxation consequences.[104] The problem is that, however helpful and correct that analysis may be, the evaluation and judgement required for the application of the statutory provision still appear to be so broad as to permit widely differing conclusions between apparently reasonable people. As such, it leaves much to be desired as an anti-avoidance provision of last resort after a purposive construction of the primary taxing provisions has not brought an item to tax.
Barely ten years ago the Ralph Report recommended streamlining the general anti-avoidance rules as a means of reinforcing the integrity and equity in the taxation system.[105]
The Ralph Report recommended clarification of the
anti-avoidance rules to ensure that those rules are ‘exercised in a manner
consistent with,
and supportive of, the tax policy principles embodied in other
provisions in the tax
law.’[106] One wonders what
has happened to those recommendations and why to date they have not been
adopted. Part of the recommendations called
for an involvement by the Board of
Taxation in reviewing the application of the policy framework and processes
guiding the implementation
of the anti-avoidance provisions. The task envisaged
in the Ralph Report was that the Board of Taxation would consult
with taxpayers on appropriate responses to tax avoidance and monitor the policy
guidelines
adopted by the ATO in applying the
provisions.[107]
There is much
to be said for a greater impact by taxpayers in the implementation of tax at
this level of administration. The point
is not that the Commissioner should not
apply the law but, rather, that an institutional view about what constitutes tax
avoidance
should be informed broadly where there is legitimate room for
difference. The Ralph Report suggested a relatively modest role
for the Board of Taxation in that task but, where there is genuine difference of
views about the
true legal content of tax avoidance, I would have thought it a
strong case for a much greater role to be given to business and other
groups
with an interest in how the tax avoidance provisions should operate in the
Australian economy. Those charged with the administration
of tax laws have, as
they should have, an understandable bias towards raising revenue. Their primary
task is to apply the law, not
to see it weakened or ignored. It is natural and
proper for those charged with the administration of tax laws to favour the
raising
of revenue as a public good and to ensure equity amongst taxpayers. But,
where there is room for doubt about what constitutes tax
avoidance, the task to
be undertaken is not merely that of administration: it is first to form a view
about how the uncertainties
are to be understood and applied. In that task it is
desirable for the decision to be informed by all interests which may bear upon
a
reasonable, responsible and defensible understanding and application of the law
within the limited tolerances of the ambit of uncertainty.
It is a mistake to
assume that all taxpayers, whether business, corporate or individual, will
favour a weak anti-avoidance rule.
Taxpayers have much to gain from a level
playing field and have a real interest in ensuring that business competition
does not favour,
and personal wealth is not secured by, unacceptable
exploitation of tax law. The Commissioner has adopted an impressive array of
measures to ensure taxpayer representation in his decision-making or
decision-forming internal bodies and in processes such as the
public rulings
panel and the general anti-avoidance rule panel. Such measures are to be
encouraged and confirm a genuine commitment
to informed decision-making; but it
is still decision-making by the administration and is no substitute for an
independent decision-maker.
One solution that attempted to provide certainty
was the enactment of a comprehensive private and public rulings
regime.[108] There are a number of
weaknesses in this regime. First, the strength of rulings depends upon the
precision of the facts upon which
they are based. Secondly, obtaining rulings
depends upon the decisions of the Commissioner, whose statutory tasks and
administrative
duties may weigh against rulings favourable to taxpayers in cases
of genuine doubt. Thirdly, the rulings are difficult to apply to
the
anti-avoidance provisions, where much may depend upon how a scheme is carried
out after any ruling is
obtained.[109] In part, therefore,
a solution designed to provide certainty brings with it its own baggage of
uncertainty.
An alternative solution to reduce uncertainty might be the
creation of a specialist tribunal charged primarily with the development
of
consistent, clear and predictable rules concerning tax law. Whether there should
be a separate Australian tax court was an issue
upon which Justice Michael Kirby
delivered a paper just over two years ago in Sydney. The paper bore the title
‘Hubris Contained:
Why a Separate Australian Tax Court Should Be
Rejected’.[110]
‘Hubris’, I think, is not a friendly word; at least not as used by
his Honour. It is defined as ‘arrogant pride
or presumption’ and, in
relation to Greek tragedy at any rate, as ‘excessive pride towards or
defiance of the Gods, leading
to
nemesis.’[111] With that
definition, and in the light of the title adopted by his Honour, I enter upon
this debate with grave trepidation and fear
of nemesis. Perhaps I should seek
some protection by saying that I am not generally in favour of specialist
courts. Most of the arguments
identified by his Honour against specialist
courts[112]
are ones which I generally embrace. However, I think it a little unfair to assume that the argument in favour of a specialist tax tribunal, whether a court or otherwise, is evidence of ‘hubris’. One can readily accept that the law should be developed by the general courts of law informed by the general application of the law and not by the potentially distorted prism which may come from specialisation in a narrow field of practice. For this purpose I will assume, although I think it wrong in fact, that taxation practitioners do not have as good a grasp of the general law as some other practitioners (indeed, for my part, I am hard pressed to think of any class of legal practitioner other than tax lawyers likely to have a greater need to grasp as broad a range of laws upon which tax law will apply). The point, rather, is that a specialist tax tribunal at first instance might usefully develop principles and practices informed by an understanding of fiscal consequences. Consistency and uniformity may then be achieved with greater certainty and predictability, but always, of course, subject to the review on appeal by the courts of law which are charged with the task of declaring and applying the law. The Taxation Boards of Review used to fulfil some such role without evident ‘hubris’. The expertise and experience their members brought to tax decisions was considerable but, over time, was largely diluted by an overriding imperative for administrative decisions of the AAT to be made by a broader group of decision-makers than the accountants, economists, former tax officials and occasional lawyer who had typically been appointed to the Boards of Review. It seems to me that tax law and practice would gain much from decision-makers bringing their expertise and experience of economic, accounting and business realities when deciding tax cases, within the bounds permitted by the law. The community would also have greater confidence in that level of decision-making, especially in relation to the application of discretionary considerations, including the uncertainties inherent in the anti-avoidance provisions.
Some uncertainty may be inevitable, but some is not. Certainty and uncertainty each come at a cost to the community, and our focus should be on what we gain and what we lose when we enact laws with deliberate uncertainties. We should look hard at who gains, and how much may be lost, from the uncertainty of the application of taxing laws and seriously question in whose interest uncertainty can be maintained. William Pitt is quoted as saying that ‘where law ends, tyranny begins’,[113]
and there are many other variations on that theme. Discretions in law, including tax law, may be necessary, but they should be structured, confined, reviewable[114]
and above all predictable. Laws tend towards tyranny when they are not predictable. The Explanatory Memorandum accompanying the Bill which introduced part IVA said that the
test for application of the new provisions is intended to have the effect that arrangements of a normal business or family kind, including those of a tax planning nature, will be beyond the scope of Part IVA.[115]
However, the lack of predictability of the provisions impacts upon, and potentially distorts, ordinary business or family dealing. In the end, we may decide that it suits us as a community for business transactions and other dealings to be undertaken with an overarching uncertainty about fiscal outcomes. We should be reluctant to accept that, however, without intending that to be so.
[*] BA, Dip Ed, LLB (Monash), LLM (Cantab); Justice of the Supreme Court of Victoria; Professorial Fellow, Melbourne Law School, The University of Melbourne. An earlier version of this article was presented by the author as ‘Tax Uncertainty’ (Speech delivered at the Annual Tax Lecture, The University of Melbourne, 20 August 2009). The style of the author’s oral delivery has been preserved.
[1] Sir Josiah Stamp, The Fundamental Principles of Taxation in the Light of Modern Developments: The Newmarch Lectures for 1919 (1929) 198 (referring to M’Culloch’s adaptation of Pope), quoted in P J Lanigan, ‘Technical Problems Relating to the Objectives and Consequences of Taxation’ in Taxation Institute of Australia (ed), Taxation Now and in the Future: Papers and Commentaries Presented at the First National Convention of the Taxation Institute of Australia (1969) 27, 39.
[2] Sarah Joseph and Melissa Castan, Federal Constitutional Law: A Contemporary View (2nd ed, 2006) 6, citing Joseph Raz, ‘The Rule of Law and Its Virtue’ (1977) 93 Law Quarterly Review 195, 198–202. See also A V Dicey, Introduction to the Study of the Law of the Constitution (10th ed, 1959) ch 4; Butterworths, Halsbury’s Laws of Australia, vol 4 (at 18 August 2009) 80 Civil and Political Rights, ‘1 Introduction’ [80-25].
[3] David M Walker, The Oxford Companion to Law (1980) 1208.
[4] Ibid.
[5] Matthews v Chicory Marketing Board (Vic) [1938] HCA 38; (1938) 60 CLR 263, 276 (Latham CJ).
[6] John Ralph, Rick Allert and Bob Joss, Review of Business Taxation, A Tax System Redesigned: More Certain, Equitable and Durable — Report (1999) 243.
[7] R F Hughes, ‘Taxation Reform’ in Taxation Institute of Australia (ed), Taxation Now and in the Future: Papers and Commentaries Presented at the First National Convention of the Taxation Institute of Australia (1969) 143, 143.
[9] Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (first published 1776, 1849 ed) 371, quoted in ibid.
[10] Or, as Yogi Berra might have said, ‘It’s déjà vu all over again’: Yogi Berra, The Yogi Book (1998) 30.
[12] Income Tax Act 1952, 15 & 16 Geo 6 & 1 Eliz 2, c 10, s 271(1)(c).
[13] Bourne (Inspector of Taxes) v Norwich Crematorium Ltd [1967] 2 All ER 576, 578 (emphasis added).
[14] Pyneboard Pty Ltd v Trade Practices Commission [1982] FCA 17; (1982) 57 FLR 368, 375 (Northrop, Deane and Fisher JJ).
[15] Commissioner of Taxes (SA) v The Executor Trustee & Agency Co of South Australia Ltd [1938] HCA 69; (1938) 63 CLR 108, 151–2 (Dixon J) (‘Carden’s Case’).
[17] Ibid 660 (Gummow ACJ, Hayne, Heydon and Crennan JJ).
[18] Ibid.
[19] Ibid 661.
[20] Ibid 661–2.
[21] Ibid 662.
[22] Ibid 663.
[23] Ibid.
[24] Ibid.
[25] Ibid 664.
[26] Ibid 672.
[27] Ibid 664 (Gummow ACJ, Hayne, Heydon and Crennan JJ).
[28] See ibid 672.
[29] Ibid. For discussion of this case, see David Bloom, ‘Taxpayer’s Heaven: The Citylink Decision — The Opposite of Heaven: The Decision in McNeil’ (Paper presented at the Taxation Institute of Australia 52nd National Convention, Hobart, 16 March 2007); Justice Richard Edmonds, ‘Recent Tax Litigation: A View from the Bench’ (2008) 37 Australian Tax Review 79, 81.
[30] See, eg, Macquarie Finance Ltd v Federal Commissioner of Taxation (2004) 210 ALR 508 (Federal Court); Macquarie Finance Ltd v Federal Commissioner of Taxation (2005) 146 FCR 77 (Full Court).
[31] See generally Australian Prudential Regulation Authority, Capital Adequacy, Prudential Standard APS 110, January 2008; Australian Prudential Regulation Authority, Capital Adequacy: Measurement of Capital, Prudential Standard APS 111, January 2008, paras 5, 17–22, attachment A.
[32] See, eg, Australia & New Zealand Savings Bank Ltd v Federal Commissioner of Taxation [1993] FCA 282; (1993) 42 FCR 535, 558–60 (Hill J); Reuter v Federal Commissioner of Taxation (1993) 111 ALR 716, 729 (Hill J).
[33] [1943] 1 KB 671, 675.
[34] Macquarie Finance Ltd v Federal Commissioner of Taxation (2004) 210 ALR 508 (Federal Court); Macquarie Finance Ltd v Federal Commissioner of Taxation (2005) 146 FCR 77 (Full Court).
[35] [2009] FCAFC 62; (2009) 176 FCR 424.
[36] See (2004) 210 ALR 508, 522, 525–8.
[37] See (2005) 146 FCR 77, 105–8 (French J), 114, 120–1, 123–6 (Hely J), 140–2 (Gyles J).
[38] [2009] FCAFC 62; (2009) 176 FCR 424, 441–8 (Perram J); see also at 427 (Emmett J), 427 (Stone J).
[39] (2005) 222 CLR 289, 303 (Gleeson CJ, Gummow, Hayne and Heydon JJ). The submission of the Commissioner was put in the following terms: ‘The activities of the taxpayer were commercial arrangements. She was in the business of a professional athlete and turned her undoubted talent to account for money’: at 291 (G T Pagone QC) (during argument).
[40] (2007) 68 ATR 740, 752 (Gordon J).
[41] [2007] FCA 1818; (2007) 68 ATR 757, 766 (Gordon J).
[42] The decisions of Gordon J in both cases were overturned on appeal by a unanimous Full Court (Goldberg, Bennett and Edmonds JJ) in Federal Commissioner of Taxation v Spriggs [2008] FCAFC 150; (2008) 170 FCR 135 but were reinstated by a unanimous High Court (French CJ, Gummow, Heydon, Crennan, Kiefel and Bell JJ) in Spriggs v Federal Commissioner of Taxation [2009] HCA 22; (2009) 239 CLR 1.
[43] (2007) 229 CLR 656, 663–4 (Gummow ACJ, Hayne, Heydon and Crennan JJ).
[44] [1999] HCA 34; (1999) 198 CLR 639, 663 (Gaudron, Gummow, Kirby and Hayne JJ).
[45] See Stone (2005) 222 CLR 289, 303–5 (Gleeson CJ, Gummow, Hayne and Heydon JJ).
[46] [1999] HCA 34; (1999) 198 CLR 639, 678 (Gaudron, Gummow, Kirby and Hayne JJ). At 677, their Honours quoted from Eisner v Macomber[1919] USSC 119; , 252 US 189, 207 (Pitney J for White CJ, McKenna, Holmes, Day, Devanter, Pitney, McReynolds, Brandeis and Clarke JJ) (1920).
[47] [1987] HCA 18; (1986) 163 CLR 199, 209–10 (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ).
[48] (2007) 229 CLR 656, 663 (Gummow ACJ, Hayne, Heydon and Crennan JJ).
[49] [1919] USSC 119; 252 US 189, 206–7 (Pitney J for White CJ, McKenna, Holmes, Day, Devanter, Pitney, McReynolds, Brandeis and Clarke JJ) (1920).
[50] [1999] HCA 34; (1999) 198 CLR 639, 661–3 (Gaudron, Gummow, Kirby and Hayne JJ).
[51] (2007) 229 CLR 656, 663–4 (Gummow ACJ, Hayne, Heydon and Crennan JJ).
[52] 155 NE 58, 61 (Cardozo J for Hiscock CJ, Cardozo, McLaughlin, Andrews and Lehmann JJ) (NY, 1926). See also Edmonds, above n 29, 81.
[53] [1992] HCA 3; (1992) 173 CLR 492.
[54] Ibid 494 (headnote).
[55] Ibid 497–8 (Mason CJ), 515 (Deane J), 527 (Toohey J), 549 (McHugh J).
[56] Ibid 498 (Mason CJ), 508–9 (Brennan J), 516–17 (Deane J), 544 (McHugh J).
[57] Ibid 508–9 (Brennan J), 518 (Dawson J), 528 (Gaudron J).
[58] Ibid 521 (Dawson J), 524 (Toohey J), 528 (Gaudron J).
[59] Ibid 550–3 (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ). This was a separate, further judgment to which all Justices hearing the matter were party.
[60] [1937] HCA 24; (1937) 57 CLR 233, 239.
[61] [1936] AC 1, 24–5 (Lord Russell), quoting Partington v A-G (UK) [1869] UKLawRpHL 8; (1869) LR 4 HL 100, 122 (Lord Cairns).
[62] Sir Anthony Mason, ‘Taxation Policy and the Courts’ (1990) 2(4) CCH Journal of Australian Taxation 40; Justice D Graham Hill, ‘A Judicial Perspective on Tax Law Reform’ (1998) 72 Australian Law Journal 685; Mark Burton, ‘The Rhetoric of Tax Interpretation — Where Talking the Talk Is Not Walking the Walk’ (2005) 1(3) Journal of the Australasian Tax Teachers Association 1. But see Robert C Allerdice, ‘The Swinging Pendulum: Judicial Trends in the Interpretation of Revenue Statutes’ [1996] UNSWLawJl 10; (1996) 19 University of New South Wales Law Journal 162.
[63] Mills v Meeking [1990] HCA 6; (1990) 169 CLR 214, 234–5 (Dawson J); CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384, 408 (Brennan CJ, Dawson, Toohey and Gummow JJ); MLC Ltd v Federal Commissioner of Taxation [2002] FCA 1491; (2002) 126 FCR 37, 47–8 (Hill J).
[64] [1907] HCA 80; (1907) 5 CLR 132, 154–5.
[65] (1977) 180 CLR 266, 280 (Lord Simon for Viscount Dilhorne, Lords Simon and Keith).
[66] [1980] HCA 50; (1980) 147 CLR 119, 126.
[67] See generally Philip D Straffin, ‘The Prisoner’s Dilemma’ in Eric Rasmusen (ed), Readings in Games and Information (2001) 5; John von Neumann and Oskar Morgenstern, Theory of Games and Economic Behaviour (60th anniversary ed, 2004).
[68] As, for example, in Income Tax Assessment Act 1936 (Cth) s 99A(3)(c), the validity of which was upheld in Giris Pty Ltd v Federal Commissioner of Taxation [1969] HCA 5; (1969) 119 CLR 365, 373–4 (Barwick CJ), 375–6 (McTiernan J), 378–80 (Kitto J), 381–2 (Menzies J), 384–5 (Windeyer J), 387–9 (Owen J).
[69] See King Gee Clothing Co Pty Ltd v Commonwealth [1945] HCA 23; (1945) 71 CLR 184, 190 (Rich J), 192–3 (Starke J); cf at 194–5 (Dixon J), citing Kruse v Johnson [1898] UKLawRpKQB 101; [1898] 2 QB 91, 108 (Mathew J); Cann’s Pty Ltd v Commonwealth [1946] HCA 5; (1946) 71 CLR 210, 217, 219–21, 223 (Latham CJ), 224, 226 (Starke J), 234–5 (Williams J); cf at 227–8 (Dixon J); TAB Ltd v Racing Victoria Ltd [2009] VSC 338 (Unreported, Davies J, 13 August 2009) [32]–[41].
[70] Brisbane City Council v A-G (Qld) ex rel Isles [1908] HCA 8; (1908) 5 CLR 695, 720 (O’Connor J); Dennis Pearce and Stephen Argument, Delegated Legislation in Australia (3rd ed, 2005) 269; D C Pearce and Robert Geddes, Statutory Interpretation in Australia (6th ed, 2006) 44–5.
[71] G S A Wheatcroft, ‘Taxation by Administrative Discretion’ in Taxation Institute of Australia (ed), Taxation Now and in the Future: Papers and Commentaries Presented at the First National Convention of the Taxation Institute of Australia (1969) 1, 5–11. See generally Kenneth Culp Davis, Discretionary Justice: A Preliminary Inquiry (1969) ch 1.
[72] Inland Revenue Commissioners v Bew Estates Ltd [1956] 1 Ch 407, 413 (Roxburgh J).
[73] Income Tax Assessment Act 1997 (Cth) pt 3-90.
[74] Income Tax Assessment Act 1936 (Cth) pt X.
[75] Income Tax Assessment Act 1936 (Cth) pt XI.
[76] Lanigan, above n 1, 29, 38; see also at 32–3; Ross Parsons, ‘Commentary’ in Taxation Institute of Australia (ed), Taxation Now and in the Future: Papers and Commentaries Presented at the First National Convention of the Taxation Institute of Australia (1969) 45, 47.
[77] See Arie Freiberg, ‘White-Collar Crime Must Be Seen as “Real” Crime’, The Age (Melbourne), 23 September 1982, 12.
[78] [1935] USSC 5; 69 F 2d 809 (2nd Cir, 1934), affd [1935] USSC 5; 293 US 465 (1935).
[79] Gregory[1935] USSC 5; , 69 F 2d 809, 810–11 (Learned Hand J for Learned Hand, Swan and Augustus N Hand JJ) (2nd Cir, 1934) (citations omitted). See also Marvin A Chirelstein, ‘Learned Hand’s Contribution to the Law of Tax Avoidance’ (1968) 77 Yale Law Journal 440, 444–6.
[80] [1935] USSC 5; 69 F 2d 809, 810 (Learned Hand J for Learned Hand, Swan and Augustus N Hand JJ) (2nd Cir, 1934).
[81] [1981] UKHL 1; [1982] AC 300.
[82] Ibid 326.
[83] Ibid 321 (Lord Wilberforce).
[84] Ibid 322–3.
[85] [1983] UKHL 4; [1984] 1 AC 474, 527 (emphasis in original).
[86] See especially Inland Revenue Commissioners v McGuckian [1997] UKHL 22; [1997] 3 All ER 817, 824–5 (Lord Steyn), 829–30 (Lord Cooke); MacNiven (HM Inspector of Taxes) v Westmoreland Investments Ltd [2003] 1 AC 311, 325–7, 334–5 (Lord Hoffmann).
[87] See, eg, Lord Robert Walker, ‘Ramsay 25 Years On: Some Reflections on Tax Avoidance’ (2004) 120 Law Quarterly Review 412, 416, quoting Robert Stevens, The English Judges: Their Role in the Changing Constitution (revised ed, 2005) 24.
[88] [1996] HCA 34; (1996) 186 CLR 404, 422–3 (Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ), quoting Federal Commissioner of Taxation v Spotless Services Ltd (1995) 62 FCR 244, 285 (Cooper J).
[89] (2004) 210 ALR 508, 542. Hill J’s primary conclusion was that a deduction was not possible in the circumstances of the case: at 528, 530. His Honour reasoned in the alternative that, if a deduction had been available, pt IVA would have applied to the transaction: at 530.
[90] Ibid 542.
[91] See Macquarie Finance Ltd v Federal Commissioner of Taxation (2005) 146 FCR 77, 142.
[92] Ibid 108–9 (French J), 139 (Hely J).
[93] [2001] FCA 1547; (2001) 189 ALR 584, 609.
[94] [2002] FCAFC 222; (2002) 121 FCR 206, 228 (Hill J); see also at 229 (Hely J), 231 (Conti J).
[95] Federal Commissioner of Taxation v Hart [2004] HCA 26; (2004) 217 CLR 216, 222, 228 (Gleeson CJ and McHugh J), 244–5 (Gummow and Hayne JJ), 262–3 (Callinan J).
[96] (2004) 210 ALR 508, affd (2005) 146 FCR 77.
[97] Income Tax Assessment Act 1936 (Cth) s 177D.
[98] Income Tax Assessment Act 1936 (Cth) s 177A(5).
[99] Income Tax Assessment Act 1936 (Cth) s 177D(a).
[100] Hart [2004] HCA 26; (2004) 217 CLR 216, 243 (Gummow and Hayne JJ).
[101] [1958] UKPC 14; [1958] AC 450, 465–6 (Lord Denning for Viscount Simonds, Lords Tucker, Keith, Somervell and Denning).
[102] Explanatory Memorandum, Income Tax Laws Amendment Bill (No 2) 1981 (Cth) 2.
[103] [2004] HCA 26; (2004) 217 CLR 216, 243–4.
[104] See ibid.
[105] Ralph Report, above n 6, 241–9.
[106] Ibid 241.
[107] Ibid 244–5.
[108] Taxation Administration Act 1953 (Cth) sch 1 pt 5-5.
[109] Bellinz v Federal Commissioner of Taxation [1998] FCA 615; (1998) 84 FCR 154, 170 (Hill, Sundberg and Goldberg JJ).
[110] Justice Michael Kirby, ‘Hubris Contained: Why a Separate Tax Court Should Be Rejected’ (Speech delivered at the Challis Taxation Discussion Group, Sydney, 3 August 2007) <http://www.hcourt.gov.au/speeches/kirbyj/kirbyj_3aug07.pdf> .
[111] R E Allen (ed), The Concise Oxford Dictionary of Current Speech (8th ed, 1990) 574.
[112] Kirby, above n 110, 9–23.
[113] United Kingdom, Cobbett’s Parliamentary History of England, House of Lords, 9 January 1770, vol 16, 665 (William Pitt, Earl of Chatham). See also Davis, above n 71, 3.
[114] Davis, above n 71, chs 3–5.
[115] Explanatory Memorandum, Income Tax Laws Amendment Bill (No 2) 1981 (Cth) 3.
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