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Taxation Law Case Analysis

In: Business and Management

Submitted By dingalingg13
Words 1429
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CLAW3201 Case Analysis

Introduction
In Crown Insurance Services Ltd v Commissioner of Taxation (Crown), the issues raised are pertinent to the residence and source of the company under s6(1) of the Income Tax Assessment Act 1936. As cases are determined on the basis of all relevant facts and circumstances of each case, this analysis will focus on how the court’s decision process determined whether Crown had carried on business in the years 2004-2007 inclusive and the existence of central management and control (CM&C) in Australia. The purpose of this is to assess the valuation of Crown’s taxable income, which ultimately resulted in the objective decision to be set aside in favour of the applicant. Evaluation will be made in regards to how the case compares with previous cases and tax rulings and the likely impacts of the case on future commercial practices. Further, what the case infers about the current state of law in this area will also be discussed, as well as the potential degree of changes in modern judgements of residence and source issues within businesses not incorporated in Australia.

Past judgements and tax rulings
The facts of the case are similar to that of Malayan Shipping Co Ltd v FCT (1946), where the court held that “the mere trading in Australia by a company not incorporated in Australia will not of itself be sufficient to cause the company to become a resident”. This is true and consistent with the statutory definition of resident of Australia, and with the decision made in Crown. This is highlighted in paragraphs 57-58 as it indicates that the case does not result in new law. Moreover, in Tariff Reinsurances Ltd v Commissioner of Taxes (Vic) (1938), the contract was formed in London and the company’s profits were not “earned in or derived in or from Victoria” under s42 of the Victorian Income Tax Act 1928. This judgement is exemplified in the decision of Crown, where payments of claims to member companies were not made in Australia, thereby initiating performance (and formation) of the contract in Vanuatu. Thus, in both cases, residence and source was held to be outside Australia and that the appeal be granted.

Nevertheless, in Malayan Shipping, it was inferred that the establishment of CM&C would be sufficient that the business was being carried on and that the condition of ‘carrying on business’ is unwarranted (Dirkis 2005, p.128). This presents a departure from the statutory definition and was subsequently addressed and verified in TR 2004/15 paragraph 8, which emphasises that the two requirements form a two-tier test and are essentially distinct in determining the residence of companies not incorporated in Australia. Additionally, TR 2004/15 does not take into account the shareholder voting power test stated in s6(1), as the words ‘management’ and ‘control’ are often synonymous with one another (Dirkis 2005, p. 132). This is significant as Mr. Pattenden was the majority (ONLY?) shareholder of Crown with 100 percent (HE REPURCHASED 20% OF CONRY?) of voting power and has been at all times, the “controlling mind of Crown”. Accordingly, this constitutes a deviation from statute law, as it criticises the statutory definition of residence, despite the case not differing substantially from the facts and circumstances of those outlined in Malayan Shipping.

It is also possible to observe a serious inconsistency between the judgements of Crown and Malayan Shipping. Although it is not clearly stated in Crown that Mr Pattenden was an Australian resident for tax purposes during the years of relevance, it is highlighted that he ‘was a director throughout the period’ and ‘spent more time in Australia than in any other country’. Although it is agreeable with the ruling that the basis of Crown’s business was indeed ‘the entry into the various contracts with the member companies’, there was another business element present that has been ignored: Crown’s decisions on whether or not to pay out each claim. It is conjunctively proven in the case (para 67) that Mr Pattenden himself had made all the ‘decisions on whether to pay a claim, not one of the member companies’, so as to suggest that Mr Pattenden was processing these claims individually as part of its business and was properly evaluating the validity of each claim. Following from this, it is logical to assume that Mr Pattenden had dealt with the reception and decision towards the valuation of claims while residing in Australia, as it would be extremely unrealistic for him to travel to Vanuatu each and every single time he received a claim that needed processing. When now compared to Malayan Shipping, Crown appears to possess much of the same indicative facts that had caught Malayan Shipping as a resident of Australia. Mr Sleigh had similarly made decisions relating to his business while in Australia and had drafted contracts that were then intended to be signed outside of Australia. This was seen as the essential test confirming both ‘carrying on business’ and ‘CM&C’ in Australia. It is therefore possible to suggest that should Crown be further tested in a higher court in the future, highlighting the case of Malayan Shipping and focusing more on CM&C could potentially alter the case outcome.

Current state of law (200-250 words)

The law of Residence and Source within Australia has been both and unclear and problematic, thus creating uncertainties that have recently been “magnified with factual application and technology changes that allow remote management” (Dirkis 2005). Even cases as similar as Crown and Tariff Reinsurances have required significant amounts of time and effort to determine residency and source status for each individual company. Although concerns regarding the potential width of the residence test were addressed through the release of TR 2004/15, there has been limited clarification when examining more extensive and minute details within different cases.

As mentioned above, a company’s residence relies upon its facts and circumstances. This forces the Australian Tax Office to make individual and subjective judgements when dealing with each presented case. The ATO is therefore unable to provide simple and efficient guidelines on how the law operates, rather relying on a case by case nature to deal with proceedings such as with Crown. As the current self-assessment system is operational and in full effect, this uncertainty makes it extremely difficult for taxpayers to determine their own residency status. This makes it impossible to administer and effectively implement from the perspective of the Australian Tax Office.

There have been numerous suggestions to amend this issue and an issuing of a Review of International Taxation Arrangements consultative paper in 2002 resulted the Board of Taxation recommending “the adoption of ‘incorporation in Australia’ as the sole test for corporate residency”. This would no doubt bring complete efficiency and validation to the current company residence law and thus Legislative Reform is high recommended as a means going forward. * Business of reinsurer? IT 2367 http://law.ato.gov.au/atolaw/view.htm?rank=find&criteria=AND~reinsurance~basic~exact&target=E%20EA&style=html&sdocid=ITR/IT2367/NAT/ATO/00001&recStart=1&PiT=99991231235958&recnum=15&tot=55&pn=ALL:::RDB * Separate legal entity (IMPORTANT ISSUE!) * What does the case say about the current state of law in this area? * Whether and how the case applies the law to novel fact situations * Why did the Commissioner litigate this case? Is there a strategic element * Masters v Cameron http://www.austlii.edu.au/au/cases/cth/HCA/1954/72.html

Future implications on commercial practices (200-250 words) * Will case impact on commercial practice * Where will the case go from here * Transparent companies (don’t know if this is relevant?) http://search.informit.com.au.ezproxy2.library.usyd.edu.au/fullText;dn=20063612;res=AGISPT *

Conclusion (100-150 words)

Word count: 1000 words (including subheadings)

Bibliography

Case Law
Crown Insurance Services Ltd v Commissioner of Taxation [2011] AATA 847
Malayan Shipping Co Ltd v FCT (1946) 71 CLR 156; 3 AITR 258
Tariff Reinsurances Ltd v Commissioner of Taxes (Vic) [1938] HCA 21

Legislation
Income Tax Assessment Act 1997
Income Tax Assessment Act 1936
Ruling TR 2004/15 Income tax: Residence of companies not incorporated in Australia
Victorian Income Tax Act 1928

Law Journals
Dirkis, M. ‘Still a Problem Child: Central Management and Control after RITA’ (2005) Revenue Law Journal, Vol. 15(1), pp. 126-139

Other sources
Coleman et al., Australian Tax Analysis – Cases, Commentary, Commercial Applications and Questions, 8th ed, Thomas Reuters, Lawbook Co. 2011

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