Bywater Investments Ltd v Commissioner of Taxation; Hua Wang Bank Berhad v Commissioner of Taxation

The High Court has heard two appeal against a decision of the Full Federal Court on corporate residency for the purposes of tax assessments. Section 6(1) of the Income Tax Assessment Act 1936 (Cth) provides that a company is resident in Australia for tax purposes if it is either incorporated in Australia or if it carries on business in Australia and has either its central management and control in Australia or its voting power controlled by shareholders who are Australian residents. The appellant companies were all incorporated outside of Australia and ultimately owned by two Cayman Islands companies. Borgas, a businessman based in Switzerland, was the sole shareholder in the Cayman Islands holding companies and a director of each of the appellant companies, and was presented as the owner of the companies. The Commissioner challenged the companies’ claims that they were not residents in Australia for tax purposes. The primary judge found that Gould, a Sydney-based accountant, was the true owner of one of the Cayman Island companies and its appointor, holding the power to appoint additional shareholders or directors, and to remove shareholders, and consequently the companies were resident in Australia for tax purposes. The FCAFC unanimously upheld the findings and holding of the primary judge. Before the High Court, the appellants sought to argue that because the primary judge found that the directors were resident abroad and held meetings abroad, his Honour was bound to hold that central management and control was exercised abroad, and thus that the appellant companies were not Australian residents for tax purposes (see at [29]ff).

The High Court unanimously dismissed the appeal. The plurality (French CJ, Kiefel, Bell and Nettle JJ) held that while a company is usually resident wherever the meetings of its board are conducted, that does not follow where the board abrogates its decision-making power in favour of an outsider, and where the board merely acts as a ‘puppet or cypher’ that merely implements the decisions made by the outsider as if they were board decisions (at [41]). Given the primary judge’s findings on Gould’s role as appointer and the ultimate real decision-maker, that the boards were located abroad was not sufficient to locate their residence for tax purposes abroad (at [41]). The plurality noted that this conclusion was supported by the authorities leading up to Esquire Nominees Ltd v Federal Commissioner of Taxation [1973] HCA 67, and examined that line of authority in detail (see at [42]–[77]). The plurality rejected the appellants’ contention that these authorities stood for the principle that the ‘real business’ or ‘superior directing authority’ of a company are a matter of fact to be answered by examining where the board holds its meetings, even if those meetings record decisions actually made elsewhere, and even if the purpose of holding those meetings abroad ‘is to ground a claim that the company is not resident in Australia for tax purposes’ (at [65]), and also rejected the contentions that this view was supported by recent UK case law (see at [70]ff). The plurality then rejected the appellants’ policy argument that a formalistic approach should be used in construing the residence requirement for reasons of providing certainty to companies and advisors, and to avoid increased litigation (at [78]), holding that the formalistic approach did not find any support in the case law, and that concerns over uncertainty or excessive litigation were exaggerated (at [79]ff). Finally, the plurality rejected HWB’s alternative argument that its ‘very simple business model’ of decision-making should be seen as the exercise of central management and control of that business: the primary judge’s findings made it clear that Gould exercised complete control over its operations, and that the directors did not exercise any measure of judgment over the company’s transactions or policy (at [85]–[87]).

Gordon J also dismissed the appeals. In relation to HWB’s appeal, Gordon J rejected HWB’s contention that it was not resident in Australia because its real business was carried out in Samoa because Gould controlled it: its arguments that the location of the organs of the company determined residency found no support in the text definition of resident, the case law or commercial reality (at [111]ff). Turning to Bywater, Chemical Trustee and Derrin, Gordon J focused on the impact of double taxation agreements between the UK and Australia, and between Switzerland and Australia. Because their income had an Australian source, even if each of these companies were foreign residents, unless relief was available to each of them under a double tax agreement, then each would be liable to tax on its Australian income under s 6-5(3) of the Income tax Assessment Act 1997 (Cth): at [134]. The double tax agreements provide two avenues of relief: first, if the company is resident only in the UK or Switzerland for the purposes of the tax laws in those nations, or secondly if the company is resident both in the UK or Switzerland as well as Australia, but its ‘place of effective management’ is in the UK or Switzerland and not Australia (see at [138]). In all instances, the first avenue was closed off because, as the primary judge found, the central management and control of these companies was exercised by Gould in Australia, and therefore each was resident of Australia (see at [158]ff). Turning to the second avenue, the ‘place of effective management’ was neither the UK nor Switzerland but again Australia: the location of the organs cannot be determinative, and it was Gould who truly effectively managed the companies from Australia (see at [161]–[185]).

High Court Judgment [2016] HCA 45 16 November 2016
Result Appeals dismissed
High Court Documents Bywater Investments
Hua Wang Bank Berhad
Full Court Hearings [2016] HCATrans 184 25 August 2016
[2016] HCATrans 183 24 August 2016
Special Leave Hearing [2016] HCATrans 100 5 May 2016
Appeal from FCAFC [2015] FCAFC 176 11 December 2015
Trial Judgments, FCA
[2015] FCA 454 15 May 2015

[2014] FCA 1392 19 December 2014
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About Martin Clark

Martin Clark is a PhD Candidate and Judge Dame Rosalyn Higgins Scholar at the London School of Economics and Political Science and Research Fellow at Melbourne Law School. He holds honours degrees in law, history and philosophy from the University of Melbourne, and an MPhil in Law from MLS. While at MLS, he worked as a researcher for several senior faculty members, was a 2012 Editor of the Melbourne Journal of International Law, tutor at MLS and various colleges, a Jessie Legatt Scholar, and attended the Center for Transnational Legal Studies Program.