Chong v Commissioner of Taxation [2000] FCA 635

FEDERAL COURT OF AUSTRALIA

Chong v Commissioner of Taxation [2000] FCA 635 TAXATION – Australia and Malaysia taxation agreement – agreement to avoid double taxation – Malaysian government pension received by Australian resident – pension taxed in Malaysia – whether right to tax government pensions exclusive or joint – interpretation of agreement – effect, if any, of domestic law on agreement. International Tax Agreements Act 1953 (Cth): Sch 16, Art 18(2), 22, 23 Income Tax Assessment Act 1936 (Cth): s 23(q) Western Australian Trustee Executor & Agency Co Ltd v Commissioner of State Taxation (WA) (1980) 147 CLR 119 cited Applicant A v Minister for Immigration & Ethnic Affairs (1997) 190 CLR 225 cited Commissioner of Taxation v Lamesa Holdings BV (1997) 77 FCR 597 applied The Queen v Melford Developments Inc (1982) 82 DTC 6281 distinguished Vogel, Double Taxation Conventions 3rd ed 1997 NGEE HIN CHONG v COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA VG 463 of 1998 GOLDBERG J 16 MAY 2000

MELBOURNE

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 463 of 1998

BETWEEN: NGEE HIN CHONG

Applicant

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

JUDGE: GOLDBERG J

DATE OF ORDER: 16 MAY 2000

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. There will be no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 463 of 1998

BETWEEN: NGEE HIN CHONG

Applicant

AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Respondent

JUDGE: GOLDBERG J

DATE: 16 MAY 2000

PLACE: MELBOURNE

REASONS FOR JUDGMENT Introduction and Background 1 The applicant appeals to the Court from a decision of the Administrative Appeals Tribunal made on 3 April 1998 which affirmed the decision by the respondent on 25 February 1997 to disallow the applicant's objection to his tax assessment for the income year ended 30 June 1996. 2 The issue between the parties involves the interpretation of Art 18(2) of the "Agreement Between The Government of Australia and The Government of Malaysia For The Avoidance of Double Taxation and The Prevention of Fiscal Evasion With Respect to Taxes on Income" ("the Malaysian Agreement"). The Malaysian Agreement is set out in Sch 16 of the International Tax Agreements Act 1953 (Cth) ("the Tax Agreements Act"). It was entered into on 20 August 1980 and was incorporated into Australian domestic law on 14 April 1981 by the Income Tax (International Agreements) Amendment Act 1981 (Cth) which inserted s 11F and Sch 16 into the Tax Agreements Act. 3 Section 11F(1) of the Tax Agreements Act provides: "Subject to this Act, on and after the date of entry into force of the Malaysian agreement, the provisions of the agreement, so far as those provisions affect Australian Tax, have, and shall be deemed to have had, the force of law- (a) in relation to withholding tax … (b) in relation to other than withholding tax – in respect of income of any year of income that commenced on or after 1 July 1979 and in relation to which the agreement remains effective. …" Section 4 of the Tax Agreements Act provides that the Income Tax Assessment Act 1936 (Cth) ("ITAA") is to be incorporated into, and read as one with, the Tax Agreements Act and is in the following terms: (1) Subject to sub‑section (2), the Assessment Act is incorporated and shall be read as one with this Act. (2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than section 160AO or Part IVA of that Act) or in an Act imposing Australian tax." 4 Article 18 of the Malaysian Agreement is in the following terms: "Government Service 1. Remuneration (other than a pension or annuity) paid by a Contracting State or a political subdivision or a local authority thereof to any individual in respect of services rendered in the discharge of governmental functions shall be taxable only in that State. However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other State and the recipient is a resident of that other State who: (a) is a citizen or national of that State; or (b) did not become a resident of that State solely for the purpose of performing the services. 2. Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to any individual in respect of services rendered to that State or subdivision or local authority thereof shall be taxable in that State. 3. The provisions of paragraphs 1 and 2 shall not apply to remuneration or pensions in respect of services rendered in connection with any trade or business carried on by one of the Contracting States or a political subdivision or a local authority thereof. In such a case, the provisions of Articles 14, 15 and 17 shall apply." 5 The relevant facts were not in issue between the parties and a statement of agreed facts was placed before the Tribunal. The applicant is a resident of Australia for the purposes of Australian tax and is not a resident of Malaysia for the purposes of Malaysian tax. The applicant receives a Malaysian Civil Service Pension of MR$1,212.50 per month and in the 1996 year he received payments totalling MR$15,762.50. The applicant's entitlement to the pension arose from his previous employment with the Malaysian Inland Revenue Department. The services rendered by him in his capacity as an employee of that Department were not services rendered in connection with a trade or business carried on by the Government of Malaysia. The pension received by the applicant is a pension of the kind referred to in Art 18 of the Malaysian Agreement. 6 In his income tax return for the year ended 30 June 1996 the applicant included Malaysian pension income of A$8,169.00 being the Australian dollar equivalent of the MR$15,762.50 he received during the year. He claimed a foreign tax credit of A$260.98. By notice of assessment issued to the applicant on 11 September 1996 the respondent assessed the applicant for the year ended 30 June 1996 as liable to tax of $991.45 on the Malaysian pension income of A$8,169.00. In arriving at the liability to tax on the income the respondent allowed a foreign tax credit of A$260.98 in accordance with the provisions contained in Art 23(3) of the Malaysian Agreement. 7 By notice of objection dated 30 October 1996 the applicant objected to the assessment on the grounds that Art 18(2) of the Malaysian Agreement does not allow for his Malaysian Civil Service Pension to be taxed in Australia. The respondent disallowed that objection by notice dated 25 February 1997. 8 The parties agreed before the Tribunal that the following paragraph was an accurate English translation of the Malay language version of Art 18(2): "Whatever pension which was paid by, or of moneys produced by, a Contracting State or a political small section or a local authority to any individual persons relating to services given to that Contracting State or the political small section or local authority may be taxed in the Contracting State." The parties made their submissions before the Tribunal on the basis that Art 18(2) read as set out in the English language version and it was that paragraph which the Tribunal used for the purpose of reaching its decision. 9 On the hearing of the appeal the respondent sought to rely on an affidavit by an interpreter which provided a translation of Art 18 and also Arts 6(1) and 17. The substance of the affidavit was that the Malaysian language uses the same word for "shall" and "may". I received the affidavit subject to objection by the applicant. As the parties agreed on what was said to be an accurate English translation of the Malay language version of Art 18(2) before the Tribunal, I do not consider it appropriate or relevant to allow the respondent to rely on the affidavit and I therefore rule it inadmissible. In any event for the reasons to which I shall refer its contents would not have required me to reach a different conclusion to that which I have reached. 10 On 2 August 1999 a Protocol amending the Malaysian Agreement was signed. There is nothing in that Protocol which bears upon any of the issues before the Court. Reasoning of the Tribunal 11 Article 22 provides: "Income derived by a resident of one of the Contracting States which, under any one or more of Articles 6 to 8, 10 to 16 and 18 may be taxed in the other Contracting State, shall for the purpose of Article 23, and of the income tax law of that State, be deemed to be income from sources in that other State." The Tribunal noted that Art 18 was specifically referred to in Art 22 and that the only income that might be subject to tax by each Contracting State was a pension referred to in Art 18(2). Article 23 provides for methods of eliminating double taxation by the granting of credits in respect of the tax paid in the other country. 12 The Tribunal also had regard to Art 23(1) which provides: "The laws in force in each of the Contracting States shall continue to govern the taxation of income in that Contracting State except where provision to the contrary is made in this Agreement. Where income is subject to tax in both Contracting States, relief from double taxation shall be given in accordance with the following paragraphs." The Tribunal took the view that Art 18(2) of the Malaysian Agreement was not a "provision to the contrary" as referred to in Art 23(1). 13 The Tribunal regarded the absence of the word "only" in Art 18(2) as "clearly significant" and noted that it was used elsewhere in the Malaysian Agreement, such as in Arts 7(1), 8(1), 14(1), 17(1) and 18(1). The Tribunal also noted that the word "may" in relation to a Contracting State's power to tax was used in a number of articles but that the use of the word "shall" in Art 18(2) made it clear that government pensions were taxable. The Tribunal found that Art 18(2) did not say that the relevant pension was taxable only in the State which paid it and that the Malaysian Agreement, read as a whole, drew a distinction between situations where the taxing power can only be exercised by one Contracting State to the exclusion of the other and on the other hand situations where both Contracting States exercise their taxing powers in relation to the same subject‑matter. The Tribunal concluded that Art 18(2) related to a situation where both Contracting States could exercise their taxing power. The Tribunal said that the ordinary meaning to be given to Art 18(2) is that it meant what it said, that its meaning was plain and that the Tribunal did not need to have recourse to Art 32 of the Vienna Convention on the Law of Treaties ("the Vienna Convention") in the interpretation of Art 18(2).