In the long-running Hua Wang Bank dispute, the High Court has unanimously dismissed appeals of the four corporate taxpayers involved, confirming that they were Australian residents for income tax purposes. Accordingly, the companies were found to be liable to tax in Australia on the profits they made from share-trading activities on the Australian Stock Exchange (ASX). In making this finding, the Court rejected the taxpayers' contention that because Perram J at first instance found that the directors of each taxpayer were resident abroad, and because meetings of those directors were held abroad, Perram J and the Full Federal Court should have held that the central management and control of each company was exercised abroad, and that the companies were not residents of Australia for income tax purposes.

Background

The appellants were four companies: Hua Wang Bank Berhad, Bywater Investments Ltd, Chemical Trustee Ltd and Derrin Brothers Properties Ltd. Their combined amount of tax in dispute was over $14 million plus penalties. The Commissioner had issued assessments for the 2001 to 2007 income years treating profits from the companies' acquisition and sale of securities on the ASX as income subject to tax in Australia (under s 6(1) of the Income Tax Assessment Act 1936). The taxpayers claimed they were not liable for tax on the profits because their "central management and control" was in various overseas locations, meaning they were not Australian residents for tax purposes.

In particular, the taxpayers claimed that the companies' central management and control took place in the countries where they were incorporated (Switzerland, the UK and Samoa) because their directors were resident and held meetings of directors there. They further claimed that the profits were only subject to tax in the countries of incorporation because of the double taxation agreements (DTAs) then in effect. The parties did concede that if the taxpayers were found to be Australian residents, they would not be entitled to protection from Australian tax under the DTAs.

At first instance, in Hua Wang Bank Berhad v FCT [2014] FCA 1392, the Federal Court (Perram J) held that the taxpayers were residents of Australia, despite the directors being resident abroad. After an examination of the evidence, the judge found that the companies' "real business", and therefore their central management and control, took place in Australia. In particular, Perram J found that Chemical Trustee's, Derrin's and Bywater's real business was conducted in Sydney by a Sydney-based accountant (Mr Vanda Russell Gould). The Court also found that Mr Gould owned Hua Wang Bank Berhad.

On appeal, in Bywater Investments Ltd v FCT [2015] FCAFC 176, the Full Federal Court unanimously dismissed the taxpayers' appeals, holding that Perram J had been correct in concluding that each taxpayer had failed to discharge the burden of proving they were not Australian residents. Further, as none of the parties sought to challenge the Perram J's finding that the shares were trading stock, the Court said it would be inappropriate to reconsider the issue of whether profits from the sale of shares were on revenue account.

The Commissioner told the High Court that there was no error in the prior decisions. The Commissioner argued that a company's central management and control is located where its real business is carried on and, conversely, a company's real business is carried on where its operations are controlled and directed. Moreover, the Commissioner argued that where a company's operations are controlled and directed is "a pure question of fact to be determined, not according to the construction of this or that regulation or by-law, but upon a scrutiny of the course of business and trading".

Decision

The High Court unanimously agreed with the Commissioner and 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 company's central management and control actually occurs. Moreover, the Court emphasised, it was to be answered by reference to the course of the company's business and trading, rather than by reference to the documents establishing the company's formal structure and other procedural matters.

The High Court further held that the overseas locations of the companies' boards of directors were insufficient to make the companies "foreign residents" in circumstances where, on the facts (as found at first instance), the boards of directors had abrogated their decision-making in favour of Mr Gould, and only met to mechanically implement or rubber-stamp decisions he made in Australia.

For the same reasons, the High Court found that the companies could not rely on the relevant DTAs to make the case that their "place of effective management" was outside Australia.

Bywater Investments Ltd v FCT; Hua Wang Bank Berhad v FCT [2016] HCA 45, High Court, French CJ, Kiefel, Bell, Nettle and Gordon JJ, 16 November 2016, http://www.austlii.edu.au/au/cases/cth/HCA/2016/45.html.

ATO statement

Tax Commissioner Chris Jordan said the High Court's decision in Bywater Investments Ltd v FCT [2016] HCA 45 means that any parties who set up complex structures offshore "with the clear intent to avoid paying tax in Australia should take a hard look at what they are doing and whether they want to run the risk of being caught and seriously penalised".

Commissioner Jordan said the High Court's decision affirms the ATO's "resolve to pursue cases of blatant tax evasion – we can and will catch this type of contrived behaviour". He said the ATO will use all available powers and resources "to deal with such schemes and ensure all Australian residents pay the right amount of tax".

He said the High Court's finding was not a one-off decision. This case has a substantial litigation history, including 19 challenges to the evidence and procedure at the Federal Court, followed by an appeal to the Full Federal Court. "This was not an easy process", Commissioner Jordan said, but "the ATO will not shy away from difficult and complex cases, no matter how long they take to run, and no matter how many obstacles are put in our way".

Source: ATO media release, "High Court judgement confirms blatant tax evasion", 16 November 2016, https://www.ato.gov.au/Media-centre/Media-releases/High-Court-judgement-confirms-blatant-tax-evasion/.