FEDERAL COURT OF AUSTRALIA Chaudhri v Commissioner of Taxation [2001] FCA 554 INCOME TAX – exempt income under s 23AG of the Income Tax Assessment Act 1936 (Cth) – appeal from decision of Administrative Appeals Tribunal – whether employment at sea was "service in a foreign country" – meaning of the words "foreign country" considered – legislative history of s 23AG discussed. WORDS & PHRASES – "foreign country" Income Tax Assessment Act 1936 (Cth) ss 23AG(1), (2), (7) Acts Interpretation Act 1901 (Cth) s 22(1)(f) CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 referred to Saraswati v The Queen (1991) 172 CLR 1 referred to Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297 referred to Federal Commissioner of Taxation v Mitchum (1965) 113 CLR 401 referred to Smith v United States (1993) 507 US 197 referred to Koe v Minister for Immigration and Ethnic Affairs (1997) 78 FCR 289 referred to VIKRANT CHAUDHRI v COMMISSIONER OF TAXATION V 805 of 2000 HILL, DRUMMOND AND GOLDBERG JJ 11 MAY 2001 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 805 of 2000 BETWEEN: VIKRANT CHAUDHRI APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGES: HILL, DRUMMOND AND GOLDBERG JJ DATE OF ORDER: 11 MAY 2001 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 2. The applicant pay the respondent's 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 V 805 of 2000 BETWEEN: VIKRANT CHAUDHRI APPLICANT AND: COMMISSIONER OF TAXATION RESPONDENT JUDGES: HILL, DRUMMOND AND GOLDBERG JJ DATE: 11 MAY 2001 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The applicant, Vikrant Chaudhri, is a merchant seaman and at the relevant time was a resident of Australia. He appeals from a decision of the Administrative Appeals Tribunal ("the Tribunal") constituted by a Deputy President (Dr Gerber) in relation to an objection decision of the respondent Commissioner of Taxation ("the Commissioner") for the year of income ended 30 June 1996. The appeal, which is in the original jurisdiction of the Court, was heard at the direction of the Chief Justice under s 44 (3)(b)(ii) of the Administrative Appeals Tribunal Act 1975 (Cth) by a Full Court. The appeal is an appeal on, that is to say an appeal limited to, a question of law. 2 The facts were not, when the matter was decided by the Tribunal, in dispute. They may be summarised as follows: 1 Mr Chaudhri was at all times in the year of income a resident of Australia. 2 At all relevant times, Mr Chaudhri was employed by a company incorporated in Bermuda pursuant to a contract of employment which stipulated that it was deemed to have been made in Hong Kong and to be governed in all respects by the laws of Hong Kong. The parties to that contract agreed to submit to the jurisdiction of Hong Kong. 3 Mr Chaudhri served, pursuant to this contract of employment, as an officer aboard two merchant ships which flew the Panamanian flag. 4 Since departing Australia for his employment on 18 September 1995 and until his return to this country on 19 January 1996 (a period well in excess of ninety-one days), the ship on which Mr Chaudhri served, as one would expect, docked at various foreign ports and travelled through the territorial waters of foreign countries and on the high seas. 5 The income which was derived by Mr Chaudhri in the relevant year of income pursuant to his contract of employment was income derived by him in his capacity as an employee engaged in foreign service and thus salary or wages as those words are used in the definition of "foreign earnings" in s 23AG(7) of the Income Tax Assessment Act 1936 ("the Act"). 6 The question which arises for decision is whether the income which Mr Chaudhri earned in the year of income was exempt from income tax under s 23AG of the Act. As that section stood during the year of income, it provided relevantly as follows: "(1) Where a resident, being a natural person, has been engaged in foreign service for a continuous period of not less than 91 days, any foreign earnings derived by the person from that foreign service is exempt from tax. (2) An amount of foreign earnings derived in a foreign country is not exempt from tax under this section if the amount is exempt from income tax in the foreign country only because of any of the following: … (7) In this section: … 'foreign earnings' means income consisting of earnings, salary, wages, commission, bonuses or allowances but does not include any payment, consideration or amount that… 'foreign service' means service in a foreign country as the holder of an office or in the capacity of an employee." 7 It was submitted in the Tribunal that Mr Chaudhri was entitled to the exemption under s 23AG because in the year of income his salary or wages were foreign earnings derived by him from foreign service for a continuous period of not less than ninety-one days, that being service in Panama because the ship on which he served was registered in Panama and thus flew a Panamanian flag. Alternatively, it was submitted that s 23AG should be construed so that employment at sea was comprehended within the meaning of the words "service in a foreign country". Both submissions were rejected. 8 Before us, senior counsel for Mr Chaudhri did not seek to rely upon the first of these submissions and with respect, as presently advised, we think correctly. Whilst it is true that the criminal jurisdiction of the United Kingdom extends to British ships upon the high seas (and the same would be true of the criminal jurisdiction of the various State Courts in Australia), the case law which so holds does not go so far as to determine that a ship carrying a British (or for that matter Australian) flag is part of the territory of the country whose flag is carried: cf Oteri v The Queen [1977] 51 ALJR 122. Since the matter was not argued, however, we prefer not to comment in detail upon it. 9 At the heart of the argument before us is the meaning of the words "foreign country" in the definition of "foreign service" in s 23AG(7). Senior Counsel for Mr Chaudhri submitted that the meaning to be given to those words should be ascertained having regard to the ordinary meaning of them, the context in which they appear and the purpose or object of the legislation in which they appear. That submission is, with respect, correct. The guiding principle of statutory interpretation may be summed up as being the ascertaining of the meaning of the words which Parliament has used by reference to the context in which they appear, where "context" has the wide meaning which extends to the legislative history, the Parliamentary intention and the mischief to which a particular provision has been directed as well as the narrower meaning which would dictate reading the words to be construed by reference to the immediately surrounding or otherwise related provisions. We can do no better than repeat what was said in the joint judgment of Brennan CJ, Dawson, Toohey and Gummow JJ in CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384 at 408: "…the modern approach to statutory interpretation (a) insists that the context be considered in the first instance, not merely at some later stage when ambiguity might be thought to arise, and (b) uses 'context' in its widest sense to include such things as the existing state of the law and the mischief which, by legitimate means such as those just mentioned, one may discern the statute was intended to remedy. Instances of general words in a statute being so constrained by their context are numerous. In particular, as McHugh JA pointed out in Isherwood v Butler Pollnow Pty Ltd, if the apparently plain words of a provision are read in the light of the mischief which the statute was designed to overcome and of the objects of the legislation, they may wear a very different appearance. Further, inconvenience or improbability of result may assist the court in preferring to the literal meaning an alternative construction which, by the steps identified above, is reasonably open and more closely conforms to the legislative intent." (references omitted). 10 Regard must be had, if for no other reason, by force of s 15AA of the Acts Interpretation Act 1901 (Cth), to the legislative purpose. However, as has been said in many cases, for example, by McHugh J in Saraswati v The Queen (1991) 172 CLR 1 at 21 (and see too generally Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297, per Gibbs CJ): "In many cases, the grammatical or literal meaning of a statutory provision will give effect to the purpose of the legislation. Consequently, it will constitute the 'ordinary meaning' to be applied." 11 It may be noted at the outset that the expression "foreign country" is defined, subject to any contrary intention, in s 22(1)(f) of the Acts Interpretation Act 1901 (Cth) to mean: "any country (whether or not an independent sovereign state) outside Australia and the external Territories" 12 We can see nothing in the context which would displace this definition. Indeed, it was not suggested otherwise. But, that still leaves for decision the meaning of the word "country", for it was the meaning of this word which was the focus of the submissions for Mr Chaudhri. 13 We were referred both to The Oxford English Dictionary (2nd ed, 1989) and The Macquarie Dictionary (3rd ed, 1997) for the meaning of the word "country". The former, gives some fourteen definitions before turning to consider various combinations of words in which the word "country" appears. Many can be said to have no relevance to the particular context. It suffices to say that the first meaning given is "A tract or expanse of land of undefined extent; a region, district". It seems that there was a transition in the meaning of the word to a district with distinct or defined physical characteristics, and that it came to be used for a territory or land of a nation usually, although not necessarily, an independent state. While a perusal of these meanings shows the word is generally used by reference to land, the dictionary does show that, in a technical sense, the word can mean: "A region of the sea or ocean". 14 The Macquarie Dictionary gives ten meanings before colloquial or adjectival meanings are given. Of these, the first is "a tract of land considered apart from geographical or political limits; region; district". It is instructive to note that no definition given under the word "country" suggests that the high seas might collectively, or for that matter that a particular ocean might individually, be described as a country. Nevertheless, by reference to the same dictionary meaning of "region" which, it will be observed, is included in the definition of "country", it is suggested that the word "country" may be said to mean "a part of the earth's surface (land or sea) of considerable and usually indefinite extent". The suggestion may be said to depend upon the word "region" being a synonym for the word "country", which is surely questionable. 15 Senior counsel for Mr Chaudhri was, perhaps, on safer ground when referring to the legislative history of s 23AG. 16 When originally enacted, s 23(q) of the Act operated to exempt from income tax "income derived by a resident from sources out of Australia, where that income is not exempt from income tax in the country where it is derived…". It may be noted that the notion of derivation in a country appears in the paragraph. The first reference to derivation is, however, a reference to derivation from a source. That reference stems from the general theory underlying the Act, and indeed its predecessors, that liability to income tax is to be determined by reference both to the residence of a taxpayer and the source of the income which the taxpayer derived, cf Federal Commissioner of Taxation v W Angliss and Co Pty Ltd (1931) 46 CLR 417 at 441-2 per Evatt J. 17 Although it was not part of the argument for Mr Chaudhri, counsel for the Commissioner emphasised that we should note that the case law prior to 1986, when the first version of s 23AG was introduced, demonstrated initially a division of opinion as to whether the source of personal services income was to be determined by the place where the contract of employment was entered into or by the place where the services were performed, (cf Commissioner of Taxation v Cam & Sons Ltd (1936) 36 SR (NSW) 544 and Hall v Federal Commissioner of Taxation (1950) 9 ATD 161), a matter ultimately resolved by the High Court in Federal Commissioner of Taxation v French (1957) 98 CLR 398. Certainly it is now clear that the question of the derivation of personal service income is, just like the question of the derivation of income of other classes, a practical matter of fact (cf Federal Commissioner of Taxation v Mitchum (1965) 113 CLR 401). As that case itself demonstrates, there may in a particular case be a difficulty in determining the source of personal exertion income and it is not correct to say that the place where services are performed will, as a matter of law, always determine the source of such income (see too Federal Commissioner of Taxation v Efstathakis (1979) 38 FLR 276). Generally, however, while the place where the services are performed will be of great importance, the place where the income is paid might in a particular case have some significance, as might the place where the contract of employment was entered into, cf Case No C42 (1952) 3 TBRD 232, Case No C69 (1952) 3 TBRD 368 and Case No C88 (1953) 3 TBRD 499, all cases dealing with the derivation of income by seamen. 18 The next legislative intervention came with the independence of Papua New Guinea and the introduction in that country of an income tax. Parliament determined that where income was derived in the newly independent country and taxed there, a tax credit should be given against the tax payable when calculating Australian tax of a resident Australian taxpayer. Accordingly, s 160AF(1) was inserted into the Act providing for the grant of a credit and s 23(q) was amended to limit its application to income derived not only from sources outside Australia but also from sources outside Papua New Guinea. At the same time, s 23(qa) was inserted into the Act to exempt specifically income consisting of earnings, salary, wages, commission, bonuses or allowances derived from sources in Papua New Guinea from any office or employment where the income was not exempt from income tax under the income tax laws of Papua New Guinea. 19 In 1980, s 23AF was introduced to exempt from Australian income tax personnel employed on certain overseas projects, even where no tax was payable in the country of source of that income. 20 Ultimately, a decision was made by Parliament in 1986 effective for the year of income commencing 1 July 1987 to adopt a foreign tax credit system in place of the previous system of exemption of income taxed in the country of source reflected in s 23(q). In doing so it adopted the policy and some of the language that had been used in the tax credit provisions of s 160AF(1). At the same time, s 23(q) (and s 23(qa)) were repealed and s 23AG was enacted. Whether it is correct to say, as senior counsel for Mr Chaudhri suggested, that s 23AG was enacted to replace s 23(q) or as senior counsel for the Commissioner suggested to replace s 23(qa) is, with respect, of little consequence. Both paragraphs were repealed. 21 The new s 23AG, as originally enacted was restricted, as s 23(qa) had been, to specific classes of income being income consisting of earnings, salary, wages, commission, bonuses or allowances and did not extend to foreign source income of any class as s 23(q) had comprehended. An exclusion of dividends from s 23(q) was introduced in 1967. For reasons which are unexplained the word "earnings" was omitted by the subsequent amendments in 1986. However, by virtue of s 23AG(3) it was a condition of the exemption granted by that section that the foreign earnings were to be not exempt from tax in the foreign country. It may therefore be said that the original s 23AG had elements of both ss 23(q) and 23(qa). 22 As originally enacted the exemption was only a complete exemption where the foreign service extended for a continuous period of 365 days or more. If the number of days foreign service was for a continuous period of less than 365 days but not less than ninety-one days a proportionate exemption was applicable on what may be described as a progressive rate basis. 23 What is more important is that there was introduced for the first time the definition of "foreign service" in terms identical to that which operated in the year of income, it being a requirement that the foreign earnings be derived by a resident of Australia who was "engaged in foreign service" and whose earnings were derived "from that foreign service". 24 In 1991, s 23AG was amended by s 19 of the Taxation Laws Amendment Act (No 2) 1991 (Cth) to the text applicable to Mr Chaudhri in the year of income in dispute. The proportionate system was simplified and in its place the section contemplated that exemption was to be granted so long as the foreign service was for a continuous period of not less than ninety-one days. In place of the progressive rate structure there was substituted an average marginal rate. This was effected by amalgamating ss 23AG(1) and (2) as originally enacted. The exclusion from exemption where the amount of income was not exempt from income tax in the foreign country (to be found in the original s 23AG(3)) was replaced by the present terms of s 23AG(2). As earlier noted, "earnings" was excluded from the class of "foreign earnings". 25 The legislative history which we have summarised is, however, of little aid to the construction of the definition of "foreign service" and in particular the word "country". Nor is assistance to be found in the extrinsic material to which we were taken which, to some extent, is not technically accurate or at least technically complete. It may well be, as was submitted by senior counsel for the Commissioner, that in enacting s 23AG Parliament took the opportunity of avoiding the problems of determining the source of personal services income to which we have averted above, by requiring that there be service in a foreign country. On the other hand, it may be said to the contrary that the concept of source of income was still to be found in s 23AG(3) which referred to "foreign earnings derived in a foreign country", language which was later to be repeated in s 23AG(2). 26 There is, however, some assistance to be gained from s 23AG(3) as originally enacted in the colour that the subsection gives to the meaning of "country", with which we are concerned. In our opinion, s 23AG(3) does suggest that whatever the word "country" may mean it contemplates some unit, to use a neutral word, capable of imposing a law of income tax – or in other words, a political entity or, perhaps, part of a political entity. That is reinforced by the terms of the present s 23AG(2) which likewise suggests that the foreign country be a political entity capable of legislating. We accept that caution should be taken in seeking to interpret a phrase in a section as originally enacted by reference to an amendment subsequently made to it, but at the least it can be said that the amendment is consistent with an interpretation that the word "country" was intended by Parliament to encompass a political entity capable of at least taxing income derived there. 27 We gain little assistance from cases in other contexts where the expression "foreign country" has been construed. Reference may be made to Smith v United States (1993) 507 US 197 or Koe v Minister for Immigration and Ethnic Affairs (1997) 78 FCR 289 per Tamberlin J. In the former, the United States Supreme Court held that Antarctica was a foreign country for the purposes of the Federal Tort Claims Act 28 USCS, the expression "country" being there said to bear its ordinary meaning of "[a] region or tract of land", whether or not there was a recognised government. In the latter, it was held that Hong Kong was a country of nationality for the purposes of the United Nations Convention relating to the Status of Refugees. 28 We were encouraged to consider the consequence of an interpretation adverse to Mr Chaudhri in the case of residents of Australia employed in Antarctica. No reference was made to the fact that that part of the continent called the Australian Antarctic Territory was, by s 2 of the Australian Antarctic Territory Acceptance Act 1933 (Cth), "accepted by the Commonwealth as a Territory under the authority of the Commonwealth"; nor was any reference made to the Australian Antarctic Territory Act 1954 (Cth) which ensures that the Territory is not in a legislative vacuum. Whether any part of Antarctica would be a foreign country for the purposes of s 23AG raises an interesting question which we do not need to decide. 29 Ultimately, we think that we should return to the ordinary English use of the word "country" in the context of that being a place where personal service such as employment may be engaged in and where income may be derived. In that context, ordinary usage would not suggest that the high seas, or for that matter some parts of them, were in a composite sense to be regarded as a country, or for that matter a series of countries. Rather the ordinary meaning of the expression "foreign country" in modern usage looks to a political entity, be that a tract of land, a district, or a group of islands. It does not extend to an ocean or region of the sea. 30 Further, clearly the legislature in enacting s 23AG adopted language which differed from that in s 23(q). The argument advanced on behalf of Mr Chaudhri really sought to suggest that the words "foreign country" be construed as meaning no more than "out of Australia". Had Parliament intended to exempt all personal service income so long as a resident taxpayer served at least ninety-one days outside Australia and the income was not otherwise exempt from tax for a reason originally set out in subs (3), it could have said so in language much more to the point than that which was adopted. 31 We would likewise reject an alternative submission advanced in the written submissions, although not developed in oral argument, that words be read into s 23AG so as to bring about a result that would equate the scope of the section to s 23(q). While it is true that in an appropriate case words may be read into legislation, for example where the failure to do so would bring about an interpretation which was capricious or irrational, the present is simply not such a case. To the contrary, a policy of subjecting to Australian income tax the earnings of an Australian resident who is outside the jurisdiction of any country levying taxation would seem entirely rational. 32 In our opinion, the learned Deputy President of the Tribunal was correct in holding that the income which Mr Chaudhri derived was not exempted from tax in accordance with s 23AG. The decision of the Tribunal should thus be affirmed and the application dismissed with costs. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Hill, Drummond and Goldberg. Associate: Dated: 11 May 2001 Counsel for the Applicant: R F Edmonds SC and A P Young Solicitor for the Applicant: Freehills Counsel for the Respondent: I Gzell QC and J Momsen Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 7 May 2001 Date of Judgment: 11 May 2001