JOINT SUBMISSION BY. Draft Taxation Ruling - TR 2000/D12 Income tax and capital gains tax: capital gains in pre-cgt tax treaties

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1 JOINT SUBMISSION BY THE TAXATION INSTITUTE OF AUSTRALIA, THE INSTITUTE OF CHARTERED ACCOUNTANTS IN AUSTRALIA, CPA AUSTRALIA, THE TAXPAYERS AUSTRALIA Inc. AND NATIONAL INSTITUTE OF ACCOUNTANTS Draft Taxation Ruling - TR 2000/D12 Income tax and capital gains tax: capital gains in pre-cgt tax treaties This letter represents the input of the Institute of Chartered Accountants, Australian Society of Certified Practicing Accountants and Taxation Institute of Australia (collectively referred to as The Bodies ) to the abovementioned draft ruling ( The draft ruling ) issued by the Australian taxation Office ( ATO ). The Bodies wish the make our submission in a concise manner, because we consider ourselves hampered by lack of access as the present time to the materials claimed by the ATO to support its position. Until we see the quality of the materials we consider it difficult to comment on some of the assertions contained in the draft ruling. We discuss this matter below in more detail. The draft ruling relates to the construction of the following treaties and whether or not they have coverage to capital gains generated by entities where those gains are subject to income tax under Part IIIA (colloquially referred to as capital gains tax ( CGT )) of the Income Tax Assessment Act 1936 ( ITAA ) introduced by Australia in 1985: 1. the treaties referred to as the pre-oecd treaties, that is, the treaties entered into before Australia became a member of the OECD and signatory to the model treaty the treaties involving: pre-cgt treaties : United Kingdom (1967); Japan (1969); Singapore (1969); Germany (1972); New Zealand (1972); 2. The post-oecd and pre-cgt treaties, that is those entered into with France (1976); Netherlands (1976); Belgium (1977); Philippines (1979); Canada (1980); Switzerland (1980); Malaysia (1981); Sweden (1981); Denmark (1981); Italy (1982); Korea (1982); Norway (1982); USA (1983); Ireland (1983); Malta (1984); Finland (1984); and Austria (1986 negotiated and agreed before the Australian CGT although assented to in Australia after the CGT). The draft ruling seeks to distinguish: 1. So-called borderline gains (para 5) which would have been taxable under Australia s income tax laws prior to CGT, which are asserted to be protected under the relevant portfolio of treaties and

2 2. Other gains exposed to CGT which are asserted broadly not to be protected by the relevant treaties. The bodies make the following principal propositions. A. Holistic views of contextual matrices are not proper grounds for a ruling The draft ruling is inexplicable to the bodies, in taking the proposition that the the ATO position is based on a holistic view of the contextual matrix of pre-cgt treaties. It does not rest on any particular point but a number of indicators collectively indicate that capital gains were not covered in pre-cgt treaties (except Austria) and distributive rules in these treaties did not limit taxing rights over capital gains. The bodies suggest that a holistic contextual view is more likely to favour the alternative view expressed by many commentators but perhaps most clearly in the article by example IV Gzell QC, Treaty Protection from Capital Gains Tax, Australian Tax Review, (Vol 29: March 2000) 25. The bodies consider that the analysis of Gzell in that document is to be preferred. This analysis is cited below. More significantly, the bodies consider that a holistic view asserted by the ATO is simply not supported by evidence which is visible to the community at this time. The lack of evidence makes it impossible, we consider, for a Court or the bodies to accept the holistic contextual matrix claimed. B. Assertion that prior silence represents a considered position is irrelevant The draft ruling takes the position that: dealing with capital gains in the pre-cgt treaties. CGT was a contentious domestic issue. Further, (as Australia s post-cgt treaty practice clearly shows) Australia s economic interests were not perceived to align with allocation of taxing rights under the OECD Model s Capital Gains Article. By not dealing with capital gains in pre-cgt treaties, Australia avoided referring to this contentious domestic issue while preserving its freedom of action to subsequently negotiate appropriate taxing rights over capital gains if a CGT was introduced. This assertion is (as we understand it) that, in the context of the administration of a tax law, the Government s and ATO s absence of any demonstrable action on any issue, was manifest proof of its

3 preservation of its freedom to negotiate a better outcome at some future time, and with retrospective effect. The impact is that taxpayers can go about their business for 15 years, and find that the ATO can then come out with an expression of its policy with a 15-year carryback effect, citing as proof of its position that it was silent on the effect of the relevant issue for over 15 years! With respect, we find the assertion that silence was meaningful irrelevant. There is no principle of law that we are aware of, in domestic or private international or public international law, that silence is golden, except perhaps in the area of equitable relief for fundamental mistake. And that is not the position being argued by the ATO. The bodies note that 15 years have elapsed since the introduction of Part IIIA of the ITAA. They submit that as a matter of equity and good administration it is not an acceptable policy for the ATO now to take this position with retrospective effect. The bodies are not suggesting that the ATO s failure to advise the community creates a form of estoppel on the ATO going forward. They suggest that it certainly does not create a positive argument in favour of the Commissioner. Nor is there any evidence of this asserted Government position, as discussed below. C ATO asserts of the intent of Governments without transparent, disclosed, evidence C1 Negotiation of Treaties is not an ATO responsibility The bodies note that several times throughout the draft ruling the writers claim that the Australia, or perhaps the ATO, had a long-standing position in relation to capital gains and their treatment under the pre-cgt treaties. The bodies suggest that clarity is needed here. We consider that: 1. It is not the role of the ATO to negotiate the treaties. That is the role of government including the Foreign Affairs Department, the Attorney-General s Department, presumably the Treasury and of course the ATO. 2. We have not a glimmer of commentary in the draft ruling about the position of the Foreign Affairs Department, the Attorney-General s Department, or the Treasury. 3. We have no evidence or collateral documents from the Foreign Affairs Department, the Attorney- General s Department, or the Treasury.

4 4. We have no acknowledgement of the position asserted by the ATO from the Foreign Affairs Department, the Attorney-General s Department, or the Treasury. C2 Where is the evidence of Government views asserted in the ruling? We note that the draft ruling comments about past governments of both political persuasions and their intentions in the formulation of the relevant treaties, but with no produced evidence of the governments views. We suggest that it is inappropriate for the ATO to make such assertions of government intent in relation to past treaties without some documented proof. In the absence of evidence or proof of the intent of Parliament when the relevant treaties were assented to by Parliament (proof such as Hansard citations or Committee reports or releases by the Government) the bodies submit that Courts would not accept assertions of Government intentions which were never communicated to the public. The bodies note the comparison with the US, the officials of which provided commentary about their intentions and interpretation of various provisions, as cited in the draft ruling. C3 Where is the evidence of the ATO views? Even if the private views of the ATO were paramount, which we doubt, we are concerned about the lack of public expression of these alleged ATO views. The bodies recollect no: ATO rulings ATO speeches in the public arena ATO discussions following the introduction of clear income taxation of capital gains to put the community on notice of these alleged views. C4 This issue requires attention by other arms of Government and at higher levels The bodies consider that this issue of the evidentiary weight to be given to claimed but unknown ATO deliberations, and claimed but unknown Government deliberations, must be considered further from the perspective of public disclosure and public policy, by the Rulings Panel, by the Government and by advisers to the ATO.

5 C5 Without further evidence or proof the ruling s assertions of context are unsupportable Para 43 of the draft ruling states that: (i)n relation to statutory interpretation the current view of the courts has been to consider context in its broadest sense. In Consolidated Press Holdings Ltd & Anor v. FC of T 1 Hill J stated: Although judicial views on the principles of construction of taxation statutes have differed over time (see cases referred to in the article A Judicial Perspective on Tax Law Reform (1998) 72 Australian Law Journal 685), the modern view, at least generally, would seem to be that the task of construing a taxation statute, like the task of construing any other statute, requires the Court to ascertain the meaning of the words used in the context in which they appear and so as to give effect to the purpose of the legislature to be found in the language which it has used, but aided by extrinsic materials to which regard is directed to be had by virtue of s15ab of the Acts Interpretation Act Context is used in a broad sense to encompass such matters as the existing state of the law and the mischief, if any, which the legislature sought to remedy: CIC Insurance Ltd v. Bankstown Football Club Ltd (1997) 187 CLR 384 and see FC of T v. Australia and New Zealand Savings Bank Ltd (1998) 156 ALR 570 at The ATO considers treaty context should be taken in its broadest sense to have regard to the full fabric of matters that may be considered, including the historical and political matrix and the matters referred to in the Avery Jones discussion. In particular the following discussion has regard to: the practices and policies of Australia and the treaty partners in negotiating treaties at that time and subsequently; given the usual treaty object of avoidance of double taxation, the domestic taxation environments of the two countries when the treaty was negotiated; and the political, economic and diplomatic background to the treaty. The bodies reiterate that they have seen no evidence of the three factors asserted as being relevant, if indeed they are relevant in the interpretation task. D Citation of reservation to OECD Model Treaty does not support the conclusion asserted The bodies note that the draft ruling at para 45ff. states that: In 1976 Australia entered reservations against the new OECD Model published in 1977 (the first since the 1963 Draft Convention). Among these was a reservation to the OECD s Capital Gains Article (Article 13): ATC 5009 at 5017; (1998) 40 ATR 181 at 188.

6 Australia reserves the right to propose changes to reflect the fact that Australia does not levy a capital gains tax and that the terms movable property and immovable property are terms not used in Australian law. 46. By reserving the right to propose changes to the OECD Model Australia clearly signalled it was not going to follow the OECD Model approach which was to include a comprehensive article dealing with capital gains. With respect the bodies note that the conclusion drawn in para 46 is not supported by the reservation. The language of the reservation was that Australia reserves the right to propose changes to the treaty for the two reasons named. This was a reservation of the right to propose changes to the model treaty in the future. It was no more than that. It was, the bodies submit: a) not a signal that Australia rejected the model treaty as at date of release of the treaty b) not a signal that the changes to be proposed had been formulated. The language of the reservation might support a view that treaties might be renegotiated over time. The reservation cannot be used as evidence of a clear intent or policy of the Government or the ATO, as the ruling asserts. In fact the draft ruling then states at para 52: Developing a treaty source country position in an environment in which Australia did not tax capital gains would have been a difficult abstract 3 exercise, potentially limiting the cross-border aspects of any future CGT regime. Australia s response was to reserve its position on the OECD Capital Gains Article. In negotiations it then proposed modifications to that Article that effectively continued the previous policy of not dealing with capital gains in its tax treaties. Thus Australia preserved its right to negotiate appropriate distributive rules for capital gains in the event a comprehensive CGT was introduced. So the bodies submit that the reservation is not authority for any proposition other than that this was an issue, for potential negotiation at a future time. E Summary of the bodies view on the technical issues The bodies have, as stated above determined not to present a massive, long submission on the technical analysis, as that would consume many months and (more importantly) some of the propositions made in

7 the draft ruling cannot be tested without an in-depth analysis of files of the ATO, which at date of writing have not been sought to be obtained for this purpose. The bodies do reiterate our basic propositions, as enunciated in the draft ruling, that: a) the pre-cgt treaties, whether pre-oecd or post-oecd, when considering income subject to the treaties used language which encompassed the taxation of income under the CGT provisions, just as much as it encompassed taxation under Sections 25, 26(a), 26AAA, section 59, Division 16E and all other provisions of the ITAA; b) that such gains taxed as a capital gain in Australia under the 1936 or 1997 versions of the ITAA arising from the recurrent activities of a business or as an adventure in the nature of trade fall within the business profits article and, in the absence of a permanent establishment in Australia, will be taxable in the country of residence and not in Australia; c) that in the 15 years since the introduction of the CGT, and indeed in the 10 years since the decision of the High Court in the case of Thiel, the ATO provided no utterance or guidance to confirm the contextual matrix now asserted as having applied ab initio; d) the Alienation of Income Articles provide coverage of the income subject to the CGT rules; e) where individual treaties contain a capital gains article with a residual provision in favour of the country of residence, and a capital gain arises in Australia otherwise than in the conduct of a business or an adventure in the nature of trade, it is taxable in line with the provisions of the capital gains Article. F. Implementation of the change of policy to be prospective The date of effect of the draft ruling is highly problematical. Given the lack of clarity, and the asserted reliance on a number of indicators most of which were not known to taxpayers and could not reasonably be expected to be known, the bodies consider that the date of effect cannot properly be to all transactions and taxpayers and situations other than those expressly the subject of a settlement entered into before the date of issuance of the ruling. Let us be very clear: 1. The purported retrospective effect claimed, on the principle inter alia of silence is golden, is in our view bad policy. It is against the principles of proper tax administration to put a weak position

8 on the part of the ATO and assert that it has had effect for the last 15 years, with the obvious potential penalty risks to taxpayers. The professions believe that the ruling ought to have effect, if indeed it has any effect, only to gains realised after the date of issue of the final ruling, Precedents include. 2. The position taken in relation to prior transactions and taxpayers would in any event demand that the ATO publicly state in the ruling that no penalties of any sort would be imposed in relation to the ATO s now-enunciated position. Again we suggest that the principles of proper administrative law make it inappropriate for the ATO to trap taxpayers in relation to events of anywhere up to 15 years ago, with no allowance for the ATO s contributory role in the position. G This matter needs to be discussed more, in the CGT and international sub-committees of NTLG The bodies are interested in participating in the process of developing the draft ruling. The issue is one of substance, and is significant for Australia s interest. However the issue is not one where the current approach of the draft ruling is appropriate. However we clearly identify to the ATO that the issue will not be resolved, and cannot be resolved, without the involvement of other arms of Government. If you need any further information please contact Yours truly