Hua Wang Bank Berhad; Bywater Investments & Ors v Commissioner of Taxation – taxpayers resident; foreign income taxed – foreign directors met overseas but ‘rubber stamped’ decisions made in Australia (by Vanda Gould)

On 16 Nov 2016, the High Court unanimously dismissed appeals by four companies (“the appellants”) from a decision of the Full Court of the Federal Court of Australia.

The High Court held that the appellants were Australian residents for income tax purposes during the relevant years and were thus liable to tax in Australia on income from all sources.

1. All but one of the directors of three appellants: Bywater Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd − were resident in Switzerland.
2. When meetings of directors were held, they took place in Switzerland.
3. Hua Wang Bank Berhad, the other appellant, was incorporated in Samoa and most of its directors were employees of a Samoan international trustee and corporate service provider.
4. In August 2010, the Commissioner of Taxation issued assessments to the appellants in respect of profits derived from the purchase and sale of shares listed on the ASX.
5. The appellants objected to the assessments on the basis, inter alia, that they were not Australian residents under s 6(1) of the Income Tax Assessment Act 1936 (Cth) (“the Act”).
6. Their objections were substantially disallowed by the Commissioner and the appellants appealed to the Federal Court of Australia.
7. The primary judge found that, notwithstanding the overseas location of the formal organs of each company, the real business of the appellants was conducted by an Australian resident, Mr Gould, from Sydney, without the involvement of the directors of the appellants.
8. The primary judge held that the “central management and control” of each appellant therefore was situated in Australia in the terms of s 6(1) of the Act, rendering each appellant liable to tax as an Australian resident.
9. On appeal, the Full Court of the Federal Court rejected the appellants’ argument that their central management and control was situated abroad because the meetings of their boards of directors were held abroad. The Full Court found no reason to doubt the primary judge’s findings of fact, and no error in the conclusion that each appellant was a resident of Australia for income tax purposes.
10. By grant of special leave, the appellants appealed to the High Court.

The Court held that, as a matter of long-established principle, the residence of a company is a question of fact and degree to be answered according to where the central management and control of the company actually abides, and that is to be determined by reference to the course of the company’s business and trading, rather than by reference to the documents establishing its formal structure.

The Court held that the fact that the boards of directors were located abroad was insufficient to locate the residence of the appellants abroad in circumstances where, on the findings of the primary judge, the boards of directors had abrogated their decision-making in favour of Mr Gould and only met to mechanically implement or rubber-stamp decisions made by him in Australia. The Court held that the appellants could not escape liability for income tax in Australia on the basis that they were resident abroad.

Nor could Bywater Investments, Chemical Trustee or Derrin Brothers Properties rely on applicable double taxation agreements on the basis that their “place of effective management” was other than in Australia.

(Bywater Investments Ltd & Ors v FCT [2016] HCA 45, High Court, French CJ, Kiefel, Bell, Nettle and Gordon JJ, 16 November 2016.)

[[2016] HCASum 41] [LTN 222, 16/11/16]

The nature of the income and guiding mind – extract from judgement

89. GORDON J. All deliberative decisions by each appellant company to buy and sell Australian shares on the Australian Securities Exchange (“the ASX”) were made by Mr Vanda Gould, who was based in Sydney. The companies’ officers were outside Australia, but they did no more than “rubber-stamp” the decisions made by Mr Gould in Australia. Is each company liable for Australian income tax because its “central management and control” or “place of effective management” is in Australia? The answer is “yes”. Each appeal should be dismissed with costs.

The history of the litigation – extract from judgement

4. Each of Bywater, Chemical Trustee and Derrin claimed that, at relevant times, its central management and control was exercised in Switzerland and, as a result, that it was not resident in Australia within the meaning of s6(1) of the Income Tax Assessment Act 1936 (Cth) (“the 1936 Act”). It followed, it was said, that a liability to tax in Australia, within the meaning of s 6-5, read with the relevant definitions in s995-1, of the Income Tax Assessment Act 1997 (Cth) (“the 1997 Act”), did not arise in respect of income derived from sources outside Australia, nor in respect of income derived from sources within Australia, either because of the operation of Australia’s double taxation agreement with Switzerland at the relevant time [[1981] ATS 5 International Tax Agreements Act 1953 (Cth), Sched 15], or alternatively, in the case of Chemical Trustee and Derrin, because of the operation of Australia’s double taxation agreement with the United Kingdom [[2003] ATS 22; International Tax Agreements Act 1953 (Cth), Sched 1], those companies having been incorporated in the United Kingdom.
5. HWB contended that, at relevant times, its central management and control was exercised in Samoa and, as a result, that it was not resident in Australia within the meaning of s 6(1) of the 1936 Act. It followed, it claimed, that it was not liable to tax in Australia on income derived from sources outside Australia within the meaning of s 6-5 of the 1997 Act. HWB did not contend that it was exempt from tax in Australia on ordinary income derived from sources within Australia.
6. In the course of argument, it was accepted that, if, in the circumstances of this case, an appellant did have its central management and control in Australia within the meaning of s 6(1) of the 1936 Act, Australia would also be the appellant’s “place of effective management” within the meaning of the applicable double taxation agreement [[1981] ATS 5, Art 4(3); [2003] ATS 22, Art 4(4)], and, therefore, that the appellant would not be entitled to protection from Australian taxation under that agreement. As will become apparent, in view of that concession, which was properly made in the circumstances of this case, it is unnecessary to deal with any issue other than the question of whether each company had its central management and control in Australia within the meaning of s 6(1) of the 1936 Act.

‘Esquire Nominees’ – extract from judgement

65. The appellants argued that, although the place where central management and control of a company actually abides is a question of fact, it is a question of which facts. It was submitted that the decision of Gibbs J in Esquire Nominees [[1973] HCA 67], and the authorities on which that decision was based, mandate that the “real business” or “superior or directing authority” of a company are, as a matter of fact, to be found where the board of the company holds its meetings, even if the only thing done at those meetings is to record decisions actually made elsewhere by an outsider and the only purpose of situating the board in that place is to ground a claim that the company is not resident in Australia for tax purposes.
66. That contention should also be rejected. The authorities on which the decision in Esquire Nominees was based included De Beers [[1906] AC 455], both the first instance [[1940] HCA 33] and Full Court [[1941] HCA 13] decisions in Koitaki, North Australian Pastoral [[1946] HCA 17] and Bullock [[1960] AC 351]. As has been explained, none of those decisions supports the idea that a company is taken to be resident where its board meetings are held even if the meetings are mere window dressing comprised of rubber-stamping decisions actually made elsewhere by others and held in that place in the hope of avoiding tax liability in the place where the decisions are actually made. It is true that Esquire Nominees involved a contrived tax avoidance scheme, and it is also true that the company in that case was held to be resident where its board chose to meet as part of that scheme. But, despite what the appellants described as factual similarities between these appeals and Esquire Nominees, and what was submitted to be the improbability that the Norfolk Island directors in Esquire Nominees exercised any independent judgment, it is clear that Gibbs J found as a fact that the board meetings were held on Norfolk Island and that substantive decisions were made by the board. Admittedly, the directors complied with the advice of Australian accountants. But, as Gibbs J found [[1973] HCA 67, para 28], they did so “because they accepted that it was in the interest of the beneficiaries [of the trust], having regard to the tax position, that they should give effect to the scheme” and, if they had been advised to do something “which they considered improper or inadvisable”, “they would [not] have acted on the instruction”. In contrast to the facts of the present appeals, Esquire Nominees was not a case of a board rubber-stamping decisions made by others.