FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v Wong [2002] FCA 756 INCOME TAX – construction of subs 255(1) of the Income Tax Assessment Act 1936 (Cth) – whether controller of money belonging to a non-resident is obliged to retain money in respect of tax due and payable by the non-resident, where tax not assessed, and therefore not due and payable, and notice under par 255(1)(a) not served, until after controller has ceased to have the "receipt control or disposal" of any money belonging to the non-resident Income Tax Assessment Act 1936 (Cth) subs 255(1) THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v MOGO WONG N 1321 OF 2001 LINDGREN J 14 JUNE 2002 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1321 OF 2001 BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA APPLICANT AND: MOGO WONG RESPONDENT JUDGE: LINDGREN J DATE OF ORDER: 14 JUNE 2002 WHERE MADE: SYDNEY 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 NEW SOUTH WALES DISTRICT REGISTRY N 1321 OF 2001 BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA APPLICANT AND: MOGO WONG RESPONDENT JUDGE: LINDGREN J DATE: 14 JUNE 2002 PLACE: SYDNEY REASONS FOR JUDGMENT introduction 1 This case raises an interesting and important question as to the proper construction of subs 255(1) of the Income Tax Assessment Act 1936 (Cth) ("the Act"). In their written submissions counsel for the applicant ("the Commissioner") state that the question "has not previously been considered by a court" and in his written submissions counsel for the respondent ("Mr Wong") states that the proceeding raises "novel questions of interpretation". 2 Subsection 255(1) is as follows: "With respect to every person having the receipt control or disposal of money belonging to a non-resident, who derives income, or profits or gains of a capital nature, from a source in Australia or who is a shareholder, debenture holder, or depositor in a company deriving income, or profits or gains of a capital nature, from a source in Australia, the following provisions shall, subject to this Act, apply: (a) he shall when required by the Commissioner pay the tax due and payable by the non-resident; (b) he is hereby authorized and required to retain from time to time out of any money which comes to him on behalf of the non-resident so much as is sufficient to pay the tax which is or will become due by the non-resident; (c) he is hereby made personally liable for the tax payable by him on behalf of the non-resident to the extent of any amount that he has retained or should have retained under paragraph (b); but he shall not be otherwise personally liable for the tax; (d) he is hereby indemnified for all payments which he makes in pursuance of this Act or of any requirement of the Commissioner." For convenience I will refer to the "person having the receipt control or disposal of money ..." to whom the provision refers as "the Controller". The Controller may be a resident or a non-resident. Paragraph (a) does not stipulate that the Commissioner's requirement must be communicated to the Controller in any particular form, but I will refer to the communication of it as the giving of a notice of the requirement. 3 The question of construction is whether the obligation to retain imposed by par (b) and the personal liability created by par (c) arise independently of, and therefore potentially prior to, and even without, the giving of a notice under par (a). background facts 4 The Commissioner claims to be entitled to judgment against Mr Wong in a sum of $1,470,168.37. This was an amount of tax due and payable by a non-resident, Vivian Lee, for the year ended 30 June 1997. Over a period from May to July 1997, amounts of money totalling $1,495,856 were deposited into four accounts in her name, each being in a bank in Sydney. Excluding bank fees and taxes, $1,494,876 was withdrawn from the accounts. Mr Wong admits on the pleadings that he had the receipt, control or disposal of those moneys. There is, however, no allegation that he had the receipt, control or disposal of money belonging to Ms Lee after July 1997. 5 Nearly 2˝ years later, on 3 December 1999, the Commissioner issued a notice of assessment to Ms Lee in respect of the year ended 30 June 1997 in an amount of $1,470,168.37 (including $238,549.37 as "Additional Tax for Late Return"). Also on 3 December 1999 the Commissioner issued to Ms Lee a notice of assessment for the year ended 30 June 1998 in an amount of $4,855.57 (including $164.82 as "Additional Tax for Late Return"), but the Commissioner does not seek to recover judgment for this amount. 6 On 11 January 2000 the Commissioner gave notice to Mr Wong requiring him to pay the sum of $1,470,168.37. The notice purported to be given under par 255(1)(a) of the Act. It alleged that Mr Wong, "being a person who had the receipt, control or disposal of money belonging to [Ms Lee], a non-resident taxpayer by whom the amount of $1,470,168.37 [was] due and payable in respect of tax", pay to the Commissioner the tax due and payable by Ms Lee. reasoning 7 Mr Wong contends: (a) that the Commissioner has not proved that Ms Lee was a non-resident; (b) that subs 255(1) operates only where a notice under par 255(1)(a) is given to a the person who at that time, or perhaps later, has receipt, control or disposal of money belonging to the non-resident; and (c) that the giving of a notice under par 255(1)(a) is pre-condition of the requirement and authority to retain money on account of the non-resident's tax liability under par (b), and, consequently, of the personal liability of the Controller under par (c) and of the indemnity under par (d). I will address these three submissions in turn. Has the Commissioner proved that Ms Lee was a non-resident? 8 Section 6 of the Act defines a "non-resident" as "a person who is not a resident of Australia". The same section defines "resident of Australia" as, relevantly, "a person, other than a company, who resides in Australia", and as including certain classes of persons specified in the definition. 9 The Commissioner relies on evidence which establishes that: (a) In the two years of income ended 30 June 1997 and 30 June 1998, Ms Lee visited Australia three times as follows, in each case travelling from and returning to Hong Kong: Arrival Date 22 August 1996 Departure Date 3 September 1996 Arrival Date 4 May 1997 Departure Date 16 May 1997 Arrival Date 26 June 1997 Departure Date 2 July 1997 (b) In each case on her departure card, she crossed out the "Resident departing temporarily" and "Resident departing permanently" sections and completed the "Visitor or temporary entrant departing" sections; (c) On her departure and entry cards, Ms Lee stated her country of residence to be variously Hong Kong and Canada; (d) Ms Lee travelled on a Canadian passport issued in Hong Kong. 10 Mr Wong submits that so far as the evidence reveals, Ms Lee may have resided in Australia for periods in addition to the three indicated above. Mr Wong also points to the facts that the Commissioner's notices of assessment were addressed to Ms Lee at an Australian address and that the four bank accounts in her name were in banks in Australia, as constituting some evidence that she was residing here. 11 The Commissioner relies on a document emanating from the Department of Immigration and Multicultural Affairs, which I admitted over objection, as showing that the three visits to Australia identified above represented the only passenger movements for Ms Lee in the relevant period of which the Department had any record. As well, the Commissioner submits that there must have been some relationship between Ms Lee and the Controller, Mr Wong, and that I should infer from his failure to testify, that although he could have shed light on the question of Ms Lee's residential status, his testimony would not have assisted him. 12 I accept the Commissioner's submissions and reject those of Mr Wong. In particular, I infer from the date and terms of the Department's document that the only times Ms Lee resided in Australia during the period 22 August 1996 to 24 May 2001 (the date of the document) were the three periods occurring between the three pairs of arrival and departure dates mentioned above. The terms of Ms Lee's departure cards are also persuasive. 13 I am satisfied that in respect of the financial years ended 30 June 1997 and 30 June 1998, Ms Lee was a non-resident. 14 In order for pars (b), (c) and (d) to operate, is it required that: (a) a notice under par 255(1)(a) have first been given; and (b) the recipient of the notice have had the receipt, control or disposal of money belonging to the non-resident at the time of receiving the notice, or perhaps later? Is it required, in order for pars (b), (c) and (d) to operate that: (a) a notice under par 255(1)(a) be first given; and (b) the recipient of the notice have the receipt, control or disposal of money belonging to the non-resident (i) at the time of receiving the notice, or (ii) at or after that time? 15 I find it convenient to address these two related questions together. In my opinion the answer to both of them is "Yes" and accordingly the present application must be dismissed. 16 Senior counsel for the Commissioner has helpfully guided me through the historical antecedents of subs 255(1). As he acknowledged, however, this served only the purpose of showing that the issue addressed by the current provision has long been a live one in income tax legislation in Australia. He referred, for example, to s 35 of the Income Tax Assessment Act 1918 (Cth) (Act No 18 of 1918) which introduced the predecessor s 52A into the Income Tax Assessment Act 1915 (Cth) and to similar provisions in the early income tax legislation of the States. It was not submitted that any aspect of the history favoured a particular construction of the current provision. 17 In Taxation Ruling No IT 354 ("Sharedealing Transactions by Overseas Investors: Application of sections 254 and 155") issued on 5 April 1974, the Commissioner stated as follows in relation to the provision: "2. Section 255 deals specifically with persons having the receipt, control or disposal of money belonging to a non-resident. On a literal interpretation, the section might be thought to cast upon any person having a liability to pay money to a non-resident a duty to retain funds sufficient to meet an unspecified tax demand, and would render that person liable if he failed to do so. 3. However, the context in which the section appears in the Act suggests that it was intended to be as a general provision directed towards facilitating the recovery, from moneys in Australia, of tax assessed in cases where a person in receipt or control of money for a non-resident has received a notice from the Commissioner requiring him to pay the tax due. 4. This is how the provision has always been interpreted by the Commissioner. The view is taken that section 255 does not require stockbrokers or other persons having the receipt, control or disposal of money belonging to a non-resident to retain any part of the money unless tax has been assessed and the person has received notice of that fact from the Commissioner." 18 Subsequently, the Commissioner's view changed. His present opinion as to the proper construction of the provision is apparently that expressed in par 6 of Taxation Ruling No IT 2544 ("Income Tax: Application of sections 254 and 255"), which is as follows: "... it is now considered that the correct interpretation is that paragraph 255(1)(b) can have effect before an assessment has issued and that it operates of its own force without requiring any notification from the Australian Taxation Office (ATO)." 19 The Commissioner recognised in that later Ruling, and before me, that the provision so construed could have a draconian operation. He stated in pars 12–14 of the Ruling as follows: "12. Counsel's opinions have indicated that, while section 255 appears to have a wide application, a court might seek to read it down in some way to prevent its operation in circumstances where it would clearly be unreasonable for it to apply. Discussions with tax practitioners and industries likely to be affected by this Ruling have highlighted a wide range of serious practical problems in ascertaining when and how much a person should retain for the payment of tax in the absence of some notification from the ATO. 13. Accordingly, the approach to be adopted in these cases is that the ATO will not regard a person as being required to retain moneys for the payment of a non-resident's tax unless the ATO has notified the person, whether before or after assessment of the non-resident, to retain a certain amount or percentage of the moneys belonging to the non-resident. Having received such a notice it is of course open to the person to seek further advice from ATO of the amount to be retained (e.g., to take account of expenses incurred by the non-resident). 14. It must still be recognised however, that the section, if interpreted literally by a court, could have much wider application. A person having the receipt, control or disposal of money who is unsure of his or her liability should contact the local office of the ATO for advice. In particular, this Ruling is in no way intended to change the current practice of some persons who contact the ATO for advice on what amounts should be withheld from payments to non-residents. These persons include those who are to make payments to overseas entertainers for performances, appearances or advertising work in Australia, or to non-resident contractors, sub-contractors, service companies and the like to perform services for short periods within Australia." 20 There can be no doubt that the construction advanced by the Commissioner could operate oppressively. So much was accepted by him before me. That construction does not depend on the money in question representing assessable income of the non-resident: it may be of a capital nature. It does not depend on the Controller's knowing that the non-resident is a non-resident or that he or she derives income, or profits or gains of a capital nature, from a source in Australia, or that tax is, or will become, due and payable by the non-resident: the Controller may be unaware of all these matters. 21 In the course of argument, I raised the possibility that the prefatory words of subs 255(1) might at least require some temporary connection between the Controller's "having the receipt control or disposal" of the money and the non-resident's deriving of the income, or profits or gains of a capital nature. However, senior counsel for the Commissioner rejected any such limitation on the basis that it would give the provision an impracticably narrow operation. I do not address this issue further. 22 Accordingly, senior counsel for the Commissioner seemed to accept that the provision would impose liability on a Controller who, for a week, had control of money belonging to a non-resident, who, five, ten or twenty years later, for the first time derived income from a source in Australia giving rise to a taxable income, an assessment, and tax becoming due and payable. Indeed, although I did not put this to senior counsel, it would not matter that a notice under par (a) was never given and was never going to be given to the Controller. This gives rise to a question as to what object and purpose, consistent with the Commissioner's construction, would be served by the giving of a notice under par (a) that would not be served by pars (b), (c) and (d) themselves (the requirement to "pay" referred to in par (a) would surely be implied from pars (b), (c) and (d)). 23 In my opinion, the notice provided for in par (a) is the "trigger" which activates the operative provisions of subs 255(1). The word "he" at the beginning of par (a) refers back to the prefatory words "person having the receipt control or disposal of money belonging to a non-resident ...". It seems to me that the fallacy in the Commissioner's construction is to link the prefatory words of the subsection directly with paras (b), (c) and (d), and thus to ignore what I perceive to be the key role of par (a). 24 In order to decide the present case, I need not, and therefore I do not, decide whether, in order for pars (b), (c) and (d) to be enlivened, a person served with a notice under par 255(1)(a) must satisfy the description in the prefatory words at the time of service, or whether it suffices that he does so later and before action is brought. The reason is that in my opinion the recipient of a notice is required to satisfy that description (be a Controller) either at the first, or at either of those two times, but Mr Wong did not satisfy either formulation of the requirement. 25 Accordingly, Mr Wong did not incur personal liability and the application for judgment against him will be dismissed with costs. 26 I now proceed to discuss subs 255(1) more generally. 27 The prefatory words are themselves indefinite in point of time. I see no reason why notional words such as "at any time and from time to time" should not be understood to qualify "having" and "derives" in the prefatory words. 28 Consistently with this view, par (a)'s reference to "the tax due and payable by the non-resident" is a reference to the tax due and payable by the non-resident on the "income, or profits or gains of a capital nature" derived by him at any time and from time to time. In other words, a notice given under par (a) can be expressed to have an ambulatory or ongoing operation and to require the recipient to pay not only tax that is already due and payable, but tax which may become due and payable in the future, and will do so if the non-resident derives further income etc.. This construction apparently treats "when", not as referring to a time for payment, but as meaning "if". The construction is supported by par (b). 29 Having received a notice under par (a), a Controller will, at his peril, fail to retain the non-resident's money of which he has the receipt, control or disposal from time to time. Retention is authorised and required by par (b) out of the non-resident's money coming to the Controller from time to time in respect of tax becoming due from time to time by the non-resident. It may still seem harsh that the Controller is made personally liable, particularly in respect of tax to become due and payable by the non-resident in the future. But, at least, having received a notice under par (a), the Controller has been warned against parting with the money unless protected by an arrangement with the Commissioner, the non-resident, or both. 30 The operation of par (c) in the circumstances outlined seems to be straightforward. 31 So does the operation of par (d). But not according to the Commissioner's construction, under which a Controller would be required to retain money against the possibility that tax may become due and payable at some unidentified time in the future. The indemnity under par (d) is activated only in respect of payments of tax the Controller actually makes, not in respect of his having retained money in those circumstances against a demand of the non-resident for payment of it. Conclusion 32 Because Mr Wong did not, upon being served with the notice under par 255(1)(a), or later but prior to action, have the receipt, control or disposal of money of Ms Lee, he was not authorised and required to retain money by par 255(1)(b), and was not made personally liable to pay tax by par 255(1)(c). 33 Accordingly, the application will be dismissed with costs. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren. Associate: Dated: 14 June 2002 Counsel for the Applicant: Mr A H Slater QC and Mr M J Leeming Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: Mr D T Kell Solicitor for the Respondent: Baker & McKenzie Date of Hearing: 7 June 2002 Date of Judgment: 14 June 2002