FEDERAL COURT OF AUSTRALIA Burton v Commissioner of Taxation [2018] FCA 1857 File number: WAD 170 of 2017 Judge: MCKERRACHER J Date of judgment: 27 November 2018 Catchwords: TAXATION – appeal from an objection decision of the Commissioner of Taxation – where the taxpayer made gains from investments in the United States – where tax was paid in the United States on the gains realised – where the gains were also taxable under Australian tax law as capital gains – where the Commissioner denied the taxpayer a foreign income tax offset against his tax liability in Australia on the gains to the extent of half of the United States tax paid – issue as to what constitutes double taxation – consideration of Australia's foreign income tax offset provisions in Div 770 of the Income Tax Assessment Act 1997 (Cth), particularly s 770-10(1) – construction of the terms 'included in' and 'in respect of' in s 770-10(1) – whether the Commissioner's construction is inconsistent with Art 22(2) of the Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income Held: an amount cannot be said to have been doubly taxed where it is not an amount included in assessable income Held: the construction of s 770-10(1) adopted by the Court is not inconsistent with Art 22(2) of the Convention and the 'general principles' it espouses Legislation: Income Tax Assessment Act 1936 (Cth) ss 121EF, 121EG(3A), 160AB, 175A, Pt IVA Income Tax Assessment Act 1997 (Cth) ss 4-10, 4-15(1), 24-45, 25-45, 102-5, 102-5(1), 104-10, 110-25, 115-25, 115-100(a), 115-215, 116-20, 995-1(1), 770-1, 770-5, 770-5(1), 770-10, 770-10(1), 770-10(2), 770-15, 770-75, 770-75(2)(b)(i), Subdivs 115-A, 115-B, 770-B, Div 770, Pt 3-1 International Tax Agreements Act 1953 (Cth) ss 4(2), 5 Taxation Administration Act 1953 (Cth) ss 14ZU, 14ZZ Tax Laws Amendment (2007 Measures No. 4) Act 2007 (Cth) Cases cited: Anson v Commissioners for Her Majesty's Revenue and Customs [2015] 4 All ER 288 Bank of New South Wales Savings Bank Ltd v Commissioner of Taxation (1962) 108 CLR 514 Douglass v Federal Commissioner of Taxation (1931) 45 CLR 95 Duckering (Inspector of Taxes) v Gollan [1964] 1 WLR 1178 Duckering (Inspector of Taxes) v Gollan [1965] 1 WLR 680 Federal Commissioner of Taxation v Lean (2009) 73 ATR 34 Federal Commissioner of Taxation v SNG (Australia) Pty Ltd (2011) 193 FCR 149 Lean v Federal Commissioner of Taxation (2010) 181 FCR 589 Macoun v Federal Commissioner of Taxation (2015) 257 CLR 519 Date of hearing: 2 May 2018 Registry: Western Australia Division: General Division National Practice Area: Taxation Category: Catchwords Number of paragraphs: 128 Counsel for the Applicant: Mr J Hmelnitsky SC and Ms C Burnett Solicitor for the Applicant: Herbert Smith Freehills Counsel for the Respondent: Mr AJ Musikanth and Mr KLF Chu Solicitor for the Respondent: Minter Ellison ORDERS WAD 170 of 2017 BETWEEN: CRAIG IAN BURTON Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: MCKERRACHER J DATE OF ORDER: 27 NOVEMBER 2018 THE COURT ORDERS THAT: 1. The appeal be dismissed. 2. There be no order as to costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT Table of Contents 1 OVERVIEW [1] 2 EVIDENCE [5] 3 LEGISLATIVE PROVISIONS [7] 4 THE ISSUES [11] 5 BACKGROUND [16] 5.1 NEPA Investment [18] 5.1.1 Australian tax on the NEPA Investment [29] 5.2 Strega 1 Investment [34] 5.2.1 US tax on the Strega 1 Investment [37] 5.2.2 Australian tax on the Strega 1 Investment [38] 5.3 Strega 2 Investment [40] 5.3.1 US tax on the Strega 2 Investment [42] 5.3.2 Australian tax on the Strega 2 Investment [44] 5.4 Australian and US tax concessions [48] 5.5 Amended assessments and objection process [51] 6 CONSTRUCTION OF S 770-10(1) [53] 7 'INCLUDED IN' [56] 7.1 Mr Burton's submissions on 'included in' in s 770-10(1) [56] 7.1.1 Context and purpose - avoiding double taxation [60] 7.1.2 Explanatory Memorandum [69] 7.1.3 Context and purpose - capital losses [70] 7.1.4 Context and purpose - consistency with treaty obligations [71] 7.2 Consideration - 'included in' [72] 7.2.1 Context [79] 7.2.2 The Authorities - submissions and consideration [90] 8 'IN RESPECT OF' [110] 8.1 Consideration - 'in respect of' [113] 9 MR BURTON'S ALTERNATIVE CASE – ART 22(2) PREVAILS OVER S 770-10(1) [115] 9.1 Consideration - Art 22(2) [126] 10 CONCLUSION [128] MCKERRACHER J: 1. OVERVIEW 1 Mr Burton applies pursuant to s 14ZZ of the Taxation Administration Act 1953 (Cth) (TAA) to appeal the Commissioner of Taxation's objection decision in relation to Mr Burton's income tax assessments for the income years ending 30 June 2011 and 30 June 2012, specifically in relation to capital gains tax (CGT). 2 Mr Burton is an Australian resident but derived gains in the United States of America (US) on which he was taxed under US income tax law. Under US law, Mr Burton was entitled in the relevant years to concessional treatment of capital gains on assets held for more than a year by taxing them at a rate which was less than half the ordinary income tax rate. Those gains however were also taxable in Australia as capital gains on assets held for more than a year. The concessional treatment provided under Australian law in those circumstances was to apply a 50% discount to the capital gain before imposing the tax. 3 The Commissioner has partially denied Mr Burton a foreign income tax offset (FITO) against his Australian tax liability on the gains to the extent of half of the US tax which Mr Burton paid. 4 The Commissioner's position is that while Australian residents deriving assessable foreign income are entitled to relief from double taxation, double taxation occurs where a person pays both foreign tax and Australian tax on the same amount. The key to the Commissioner's argument is that an amount not included in assessable income (namely, 50% of the capital gain) cannot, by definition, be doubly taxed. 2. EVIDENCE 5 Mr Burton relied on two affidavits: (1) an affidavit of Mr Burton, sworn on 12 September 2017; and (2) an affidavit of Professor John Paul Steines, sworn on 12 September 2017. 6 The evidence is uncontroversial and is recorded below under 'Background'. The question in issue is one of legal construction. 3. LEGISLATIVE PROVISIONS 7 The Convention between the Government of Australia and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income ([1983] ATS 16), signed in Sydney on 6 August 1982, is incorporated into Australian law pursuant to s 5 of the International Tax Agreements Act 1953 (Cth). Article 22 of the Convention provides as follows: Relief from double taxation (1) Subject to paragraph (4) and in accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), in the case of the United States, double taxation shall be avoided as follows: (a) the United States shall allow to a resident or citizen of the United States as a credit against United States tax the appropriate amount of income tax paid to Australia; and (b) in the case of a United States corporation owning at least 10 percent of the voting stock of a company which is a resident of Australia from which it receives dividends in any taxable year, the United States shall also allow as a credit against United States tax the appropriate amount of income tax paid to Australia by that company with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of income tax paid to Australia. For purposes of applying the United States credit in relation to income tax paid to Australia the taxes referred to in sub-paragraph (1)(b) and paragraph (2) of Article 2 (Taxes Covered) shall be considered to be income taxes. No provision of this Convention relating to source of income shall apply in determining credits against the United States tax for foreign taxes other than those referred to in sub-paragraph (1)(b) and paragraph (2) of Article 2 (Taxes Covered). (2) Subject to paragraph (4), United States tax paid under the law of the United States and in accordance with this Convention, other than United States tax imposed in accordance with paragraph (3) of Article 1 (Personal Scope) solely by reason of citizenship or by reason of an election by an individual under United States domestic law to be taxed as a resident of the United States, in respect of income derived from sources in the United States by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. The credit shall not exceed the amount of Australian tax payable on the income or any class thereof or on income from sources outside Australia. Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time. (3) An Australian corporation that owns at least 10 percent of the voting power in a United States corporation is, in accordance with the law of Australia as in force at the date of signature of this Convention, entitled to a rebate in its assessment, at the average rate of tax payable by it, in respect of dividends paid by the United States corporation that are included in the taxable income of the Australian corporation. However, should the law as so enforce be amended so that the rebate in relation to the dividends ceases to be allowable under that law, Australia shall allow credit under paragraph (2) for the United States tax paid on the profits out of which the dividends are paid as well as for the United States tax paid on the dividends. (4) For the purposes of computing United States tax, where a United States citizen is a resident of Australia, the United States shall allow as a credit against United States tax the income tax paid to Australia after the credit referred to in paragraph (2). The credit so allowed against United States tax shall not reduce that portion of the United States tax that is creditable against Australian tax in accordance with paragraph (2). (Emphasis added.) 8 The provisions of the Convention prevail over the provisions of the Income Tax Assessment Act 1997 (Cth) (1997 Act) and the Income Tax Assessment Act 1936 (Cth) (1936 Act), other than Pt IVA of the 1936 Act: s 4(2) of the Agreements Act. 9 Section 102-5 of the 1997 Act provides: 102-5 Assessable income includes net capital gain (1) Your assessable income includes your net capital gain (if any) for the income year. You work out your net capital gain in this way: Working out your net capital gain Step 1. Reduce the *capital gains you made during the income year by the *capital losses (if any) you made during the income year. Note 1: You choose the order in which you reduce your capital gains. You have a net capital loss for the income year if your capital losses exceed your capital gains: see section 102-10. Note 2: Some provisions of this Act (such as Divisions 104 and 118) permit or require you to disregard certain capital gains or losses when working out your net capital gain. Subdivision 152-B permits you, in some circumstances, to disregard a capital gain on an asset you held for at least 15 years. Step 2. Apply any previously unapplied *net capital losses from earlier income years to reduce the amounts (if any) remaining after the reduction of *capital gains under step 1 (including any capital gains not reduced under that step because the *capital losses were less than the total of your capital gains). Note 1: Section 102-15 explains how to apply net capital losses. Note 2: You choose the order in which you reduce the amounts. Step 3. Reduce by the *discount percentage each amount of a *discount capital gain remaining after step 2 (if any). Note: Only some entities can have discount capital gains, and only if they have capital gains from CGT assets acquired at least a year before making the gains. See Division 115. Step 4. If any of your *capital gains (whether or not they are *discount capital gains) qualify for any of the small business concessions in Subdivisions 152-C, 152-D and 152-E, apply those concessions to each capital gain as provided for in those Subdivisions. Note 1: The basic conditions for getting these concessions are in Subdivision 152-A. Note 2: Subdivision 152-C does not apply to CGT events J2, J5 and J6. In addition, Subdivision 152-E does not apply to CGT events J5 and J6. Step 5. Add up the amounts of *capital gains (if any) remaining after step 4. The sum is your net capital gain for the income year. Note: For exceptions and modifications to these rules: see section 102-30. (2) However, if during the income year: (a) you became bankrupt; or (b) you were released from debts under a law relating to bankruptcy; any *net capital loss you made for an earlier income year must be disregarded in working out whether you made a *net capital gain for the income year or a later one. (3) Subsection (2) applies even though your bankruptcy is annulled if: (a) the annulment happens under section 74 of the Bankruptcy Act 1966; and (b) under the composition or scheme of arrangement concerned, you were, will be or may be released from debts from which you would have been released if instead you had been discharged from the bankruptcy. 10 Australia's FITO provisions are set out in Div 770 of the 1997 Act. Such tax offsets, including FITO and other offsets, reduce the amount of income tax payable by a taxpayer in respect of a year of income pursuant to s 4-10 of the 1997 Act. At all relevant times, the key FITO provisions provided as follows: Guide to Division 770 770-1 What this Division is about You may get a non-refundable tax offset for foreign income tax paid on your assessable income. There is a limit on the amount of the tax offset. A resident of a foreign country does not get the offset for some foreign income taxes. You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia. 770-5 Object (1) The object of this Division is to relieve double taxation where: (a) you have paid foreign income tax on amounts included in your assessable income; and (b) you would, apart from this Division, pay Australian income tax on the same amounts. (2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts. Note 1: This Division applies in relation to Medicare levy and Medicare levy (fringe benefits) surcharge in the same way as it applies to Australian income tax. See section 90-1 in Schedule 1 to the Taxation Administration Act 1953. Note 2: The tax offset under this Division can be applied against your Medicare levy and Medicare levy (fringe benefits) surcharge liability for the year, if an amount of it remains after you apply it against your basic income tax liability. See item 22 of the table in subsection 63-10(1). Subdivision 770-A—Entitlement rules for foreign income tax offsets Table of sections Basic entitlement rule for foreign income tax offset 770-10 Entitlement to foreign income tax offset 770-15 Meaning of foreign income tax, credit absorption tax and unitary tax Basic entitlement rule for foreign income tax offset 770-10 Entitlement to foreign income tax offset (1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax—even if you paid the foreign income tax in another income year. Note 2: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)). Note 3: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced: see subsection 121EG(3A) of the Income Tax Assessment Act 1936. … (Emphasis added.) 4. THE ISSUES 11 The primary question is whether, in the language of s 770-10(1) of the 1997 Act, Mr Burton paid the relevant amount of US tax 'in respect of' an amount that was all or part of an amount 'included in' his assessable income. Mr Burton submits that he did. The Commissioner disagrees. 12 Mr Burton argues the FITO provisions in Div 770 of the 1997 Act, on their proper construction, contemplate that an amount is 'included in' assessable income when it is part of the calculation of assessable income. He says a capital gain is included in assessable income even though it may be subject to a discount or reduced by unrelated capital losses. Mr Burton argues that the Commissioner elides the relevant amount with assessable income itself, but s 770-10(1) refers to 'an amount included in your assessable income', not the amount of assessable income. 13 Additionally, Mr Burton argues that if 'included in' does require that the whole amount be identifiable in the ultimate assessable income figure, his appeal should still be allowed because he paid the US tax 'in respect of' such an amount (in terms of s 770-10(1)), even though the taxed amounts in the two countries were not identical. 14 Mr Burton argues his construction is supported by the text of the provision and by its context. He further contends his construction also gives effect to Australia's obligations under the Convention. 15 A further issue on this appeal is whether, properly construed, s 770-10(1) of the 1997 Act and Art 22(2) of the Convention are consistent. Mr Burton says that if, contrary to his primary argument, the provisions are inconsistent then, by reason of s 4(2) of the Agreements Act, Art 22(2) prevails and the assessments are excessive for that reason. 5. BACKGROUND 16 As noted, the evidence is not in dispute. Relevantly, Mr Burton is and was an Australian resident for tax purposes, being the trustee of an Australian discretionary trust: the CI Burton Family Trust. He was also a member of the class of objects of the Trust at the relevant times. Three gains derived by Mr Burton as trustee of the Trust are relevant to this appeal: (1) The first is the gain on the disposal of what is described below as the NEPA Investment; (2) The second is the gain on the disposal of what is described below as the Strega 1 Investment; and (3) The third is the gain on the disposal of what is described below as the Strega 2 Investment. 17 Mr Burton held each of these investments for more than 12 months and on capital account for Australian tax purposes. 5.1 NEPA Investment 18 On or around 18 November 2004, Mr Burton as trustee acquired certain rights in respect of oil and gas wells in Pennsylvania, US, which on 18 September 2010 he then sold to Chesapeake Energy Corporation. Those rights were a 1.75% option to participate in certain wells and an interest in other wells in respect of which Mr Burton as trustee had previously exercised an option (the Nepa Investment). 19 The Nepa Investment arose under the Participation Agreement dated 18 November 2004 between Mr Burton as trustee, Tioga Oil & Gas Inc and Seaspin Pty Ltd as trustee of the Aphrodite Trust, under which the Nepa Investment and the other rights were acquired. The quantum of the option to participate was initially 6%. 20 On a number of occasions the Participation Agreement was amended by further agreement. Amongst other things, the quantum of the option to participate varied. Immediately before 1 March 2010 this was at approximately 3.375%. On that date Mr Burton as trustee sold to Chesapeake 1.625% of his then 3.375% option. That transaction did not give rise to gains which are in issue in this proceeding. 21 Mr Burton as trustee in respect of the Nepa Investment paid costs totalling $1,864,355 in the calendar years 2009 and 2010. 22 There was a further sale by Mr Burton as trustee on 18 September 2010 to Chesapeake. This sale concerned the remaining 1.75% option to participate and his interest in other wells in respect of which he had previously exercised an option, that is, the NEPA Investment. The consideration was US$25,434,715. That consideration was paid to Mr Burton in five instalments of: (1) US$2,712,480 on or around 13 October 2010; (2) US$8,137,440 on or around 30 November 2010; (3) US$8,137,440 on or around 28 January 2011; (4) US$5,459,635 on or around 29 April 2011; and (5) US$987,720 on or around 8 June 2011. 23 A resolution was made by Mr Burton in his capacity as trustee on 30 June 2011 to distribute all discount capital gains arising from the sale of assets other than shares (including the gains arising from the disposal of the NEPA Investment) to Mr Burton in his capacity as an object of the Trust. 24 This gave rise to certain US tax treatment of Mr Burton's disposal of the NEPA Investment. Although he was not a resident of the US for tax purposes, Mr Burton was taxable on the sale of the NEPA Investment under US law because it represented a gain on a US 'real property interest', which is treated as 'income effectively connected with a United States trade or business' (ECI). ECI is earned by a non-resident alien when it qualifies as a long-term capital gain by virtue of it being held for more than one year. Such ECI was taxed at 15% at the relevant time. This is in contrast to ordinary income in respect of which the tax rate was 35%. 25 Mr Burton was liable in his personal capacity to pay US tax on the long-term capital gain from the disposal of the NEPA Investment as US law regarded the Trust of which Mr Burton was trustee as a 'grantor trust', the income of which is attributed to the 'owner' of such a trust (for present purposes being Mr Burton in his personal capacity). 26 As a consequence, for the US tax year ended 31 December 2010, Mr Burton returned and paid US tax at 15% on the long-term capital gain from the disposal of the NEPA Investment of US$8,985,565 (being the two instalments received in the 2010 calendar year totalling US$10,849,920, less the cost of US$1,864,355). The US tax paid was US$1,347,834. 27 Secondly, for the US tax year ended 31 December 2011, Mr Burton returned and paid US tax at 15% on the long-term capital gain from the disposal of the NEPA Investment of US$14,584,795 (being the three instalments received in the 2011 calendar year). The US tax paid was US$2,187,720. 28 Across these two US tax years the total long-term capital gain from the disposal of the NEPA Investment was US$23,570,360 and the total US tax paid by Mr Burton on this gain was US$3,535,554. 5.1.1 Australian tax on the NEPA Investment 29 The consideration for the disposal of the NEPA Investment in respect of all five instalments was received in the year ended 30 June 2011. 30 It is common ground that for Australian tax purposes the gain on the sale of the NEPA Investment was a CGT event A1 within the meaning of s 104-10 of the 1997 Act. As such it gave rise to foreign capital gains of the Trust in that financial year by means of this computation: (1) The capital proceeds under s 116-20 of the 1997 Act from the disposal of the NEPA Investment were AUD$25,322,008; being the then equivalent of US$25,434,715; (2) The cost base, under s 110-25 of the 1997 Act for the NEPA Investment was AUD$2,567,687, being the then equivalent of US$1,864,355; (3) Under s 104-10 of the 1997 Act, subtracting the cost base from the capital proceeds derived from disposal (ie (b) from (a)) results in the capital gain on the disposal of the NEPA Investment, AUD$22,754,321; and (4) After application of the 50% CGT discount provided for in s 115-25 of the 1997 Act the amount of $11,366,161 was included in the net capital gain (NCG) of the Trust under s 102-5(1). 31 Mr Burton was personally liable for the tax on this capital gain because he was an object of the Trust and presently entitled to the capital gain on disposal of the NEPA Investment. Through the application of s 115-215, he had a capital gain of AUD$22,754,321 (being part of the capital gain in his tax return of AUD$24,013,666 covering both the NEPA Investment and the Strega 1 Investment referred to below). After application of the 50% discount in s 102-5(1) and s 115-25, a NCG of $11,366,161 was included in his assessable income in respect of the disposal of the NEPA Investment (being part of the NCG of AUD$12,006,833 that covered both the NEPA Investment and the Strega 1 Investment). 32 The Australian income tax payable by Mr Burton in his personal capacity on the NCG on the disposal of the NEPA Investment was $5,114,772 (being the NCG included in Mr Burton's assessable income in respect of the disposal of the NEPA Investment multiplied by his marginal tax rate). 33 In Mr Burton's tax return for the year ended 30 June 2011 in respect of the gain on the NEPA Investment he claimed a FITO of $3,414,207, representing the US$3,535,554 paid in US tax referred to above (being part of the total FITO of $3,875,952 claimed in respect of both the NEPA Investment and the Strega 1 Investment). 5.2 Strega 1 Investment 34 By agreement dated 5 March 2008, Mr Burton as trustee relevantly acquired a right to payment if the counterparty did not drill certain wells in Pennsylvania (the Strega 1 Investment). 35 Mr Burton as trustee received US$1,260,000 in January 2011 by way of satisfaction of the Strega 1 Investment. 36 On 30 June 2011, Mr Burton as trustee resolved to distribute all discount capital gains arising from the sale of assets other than shares (including the gains arising from the disposal of the Strega 1 Investment) to himself in his capacity as an object of the Trust. 5.2.1 US tax on the Strega 1 Investment 37 In the US, the gain on the disposal of the Strega 1 Investment was taxed as ECI in the form of a royalty at the ordinary income rate of 35% in the year ended 31 December 2011. The US tax paid by Mr Burton in respect of the disposal of the Strega 1 Investment was US$481,000. 5.2.2 Australian tax on the Strega 1 Investment 38 The consideration for the disposal of the Strega 1 Investment was received by Mr Burton in the year ended 30 June 2011. The NCG for Australian tax purposes as computed the same way described in [30] above with capital proceeds being $1,264,284 and the cost base $4,939 resulting in a capital gain of $1,259,345 and a discount capital gain of $629,673. 39 It followed that the Australian income tax payable by Mr Burton in his personal capacity on the NCG on the disposal of the Strega 1 Investment was $283,353. In his income tax return for 30 June 2011 Mr Burton claimed a FITO of $461,745 in respect of the gain on the Strega 1 investment, representing the US$481,000 paid in US tax (being part of the total FITO of $3,875,952 claimed in respect of both the NEPA Investment and the Strega 1 Investment). 5.3 Strega 2 Investment 40 The process here was much the same. Under the same 5 March 2008 agreement, Mr Burton as trustee retained participation rights in future wells via a nominee entity (the Strega 2 Investment). In May 2011, Mr Burton as trustee became entitled to proceeds of disposal of the Strega 2 Investment pursuant to an agreement dated September 2010. 41 As trustee, Mr Burton received a total of US$9,068,426 over the period 1 July 2011 to 30 June 2012 for the disposal of the Strega 2 Investment. Pursuant to a trust resolution dated 28 June 2012 Mr Burton as trustee resolved to distribute discount capital gains (including the gains arising from the disposal of the Strega 2 Investment) to himself in his capacity as an object of the Trust. 5.3.1 US tax on the Strega 2 Investment 42 The gain on this disposal was taxed in the US as long-term capital gain ECI at the rate of 15% for the years ended 31 December 2011 and 31 December 2012. The gain for these years was US$7,035,454 and US$2,032,972 respectively, totalling US$9,068,426. 43 The US tax was withheld from the proceeds due to Mr Burton and remitted to the US Internal Revenue Service in four tax payments totalling US$1,536,836, against which the US dollar equivalent of $291,470 was refunded (the net payment was the US dollar equivalent of $1,119,885). 5.3.2 Australian tax on the Strega 2 Investment 44 The consideration for the disposal of the Strega 2 Investment was received by Mr Burton in the year ended 30 June 2012. The NCG for Australian tax purposes was calculated in the same manner described in [30] above (before the capital losses subtraction, described below), with the capital proceeds being $8,944,014. There was no cost base. 45 In the year ended 30 June 2012, Mr Burton had discount capital losses of $1,199,755 from separate transactions. These were subtracted from the $8,944,014 capital gain derived from the Strega 2 Investment in accordance with 'step 1' of the method statement in s 102-5(1), resulting in $7,744,259. Under 'step 3' of s 102-5(1), the 50% discount was applied to that net figure, resulting in a NCG of $3,872,129. 46 The Australian income tax payable by Mr Burton in his personal capacity on the NCG on the disposal of the Strega 2 Investment was therefore $1,742,458. 47 In his Australian tax return for the year ended 30 June 2012, Mr Burton claimed a FITO of $1,119,886 in respect of the gain on the Strega 2 Investment, representing the US tax referred to above. 5.4 Australian and US tax concessions 48 In short, these long-term investments were concessionally taxed in the US because the US, like Australia, allows concessions on capital gains made on long-term investments. For the most part Mr Burton paid US tax at a rate of 15% on the whole of those gains; in relation to some (identified above) he paid at a rate of 35%. 49 In Australia, Mr Burton also paid tax on those gains as an Australian resident, with the tax that he paid on those gains in Australia also being calculated concessionally. The concession that Australia grants its taxpayers for long-term investments is to give a 50% discount. So whereas in the US ordinarily one pays 35% (with one paying 15% in the case of long-term gains on the whole), in Australia one pays one's normal marginal rate, but on 50% of the gain. As Mr Burton was at the relevant times a resident of Australia, and because the gains were made in the US, he was entitled to claim foreign tax credits in relation to the tax paid in the US and he sought to claim the whole of the tax paid in the USA as a credit against his Australian income tax. 50 The view the Commissioner has taken is that because the mechanics of the Australian tax system involve the whole of the gain being discounted by 50%, it followed that Mr Burton was only entitled to a credit for 50% (in fact, a credit for a little less than 50%) of the tax that he had paid in relation to the gains in the US. 5.5 Amended assessments and objection process 51 The Commissioner amended Mr Burton's income tax assessments on 7 September 2016 for the relevant years. The consequence of the amendment was to deny part of the FITO claimed by Mr Burton in respect of the US tax on the three gains the subject of this proceeding. For the year ended 30 June 2011, the Commissioner denied half of the relevant FITO (on the basis of the 50% CGT discount) and for the following year denied more than half of the FITO (reflecting the 50% discount and also unrelated capital losses). 52 On 4 November 2016, Mr Burton objected to the amended assessments under s 175A of the 1936 Act and s 14ZU of the TAA. The Commissioner disallowed Mr Burton's objection on 7 February 2017 on the basis of the Australian Taxation Office's interpretation of s 770-10(1) of the 1997 Act (outlined in ATO IDO 2010/175). Applying this interpretation, the Commissioner observed: … foreign income tax is paid on the whole amount of a gain but 50% of the gain is assessed in Australia (as a result of the application of the CGT discount), only 50% of [the] gain counts towards the calculation of the foreign income tax offset. This is otherwise known as the apportionment approach. (Emphasis in the original.) 6. CONSTRUCTION OF S 770-10(1) 53 In issue is the proper construction of the second sentence of s 770-10(1): An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. (Emphasis added.) 54 The provision has three elements: (1) an 'amount of foreign income tax'; (2) 'an amount'; and (3) 'assessable income for the year'. These three elements are connected by two linking terms: (1) must be paid 'in respect of' (2); and (2) must be 'included in' (3). 55 If Mr Burton's submissions on 'included in' are not accepted, Mr Burton submits that he paid the US tax in question 'in respect of' the amounts which under the Australian tax system are discounted capital gains. 7. 'INCLUDED IN' 7.1 Mr Burton's submissions on 'included in' in s 770-10(1) 56 The correctness of the assessments depends on the proposition that the full US tax amount paid by Mr Burton was not paid in respect of an amount 'included in' Mr Burton's assessable income because a 50% discount was applied in computing Australian NCG. The Commissioner's objection decision states that where the CGT discount applies, '50% of the net capital gain is included in assessable income'. It characterised the other half of the capital gain as 'excluded from assessable income'. 57 However, Mr Burton says that no provision of Australian law excludes any part of the capital gains in question from assessable income. No part of the gains is characterised as non-assessable income or 'non-assessable, non-exempt' income. Rather, in each case, all of the capital gain forms part of the calculation of assessable income. In that calculation each gain is reduced by 50%, as well as being reduced by potentially unrelated capital losses, resulting in 'net capital gain'. Further, NCG itself is not assessable income but an input into the final calculation of a single omnibus amount of assessable income in s 4-15(1) of the 1997 Act, which is an input into the calculation of 'taxable income' under the same provision. 58 Therefore, Mr Burton submits that an amount can be 'included in' assessable income, even if it is larger than the final amount of assessable income, so long as it is part of the calculation of assessable income. 59 Mr Burton argues this construction is supported by the context and purpose of s 770-10. 7.1.1 Context and purpose - avoiding double taxation 60 Mr Burton stresses that it is important to approach the construction of s 770-10 with an appreciation of the mischief which Div 770 seeks to avoid, namely, 'to relieve double taxation': s 770-5(1). He notes that double taxation can arise where the tax laws of two or more countries seek to tax a certain economic transaction. 61 The OECD defines double taxation as 'the imposition of comparable taxes in two (or more) States on the same taxpayer in respect of the same subject matter'. Mr Burton draws attention to the fact that the term 'the same subject matter' is used rather than a more technical concept such as the same taxable amount. 62 Mr Burton submits this reflects the fact that the way in which a taxable gain is calculated in two countries will rarely, if ever, lead to the same number. Different currencies, different tax periods and computational differences will often arise between countries and their tax systems. Foreign tax is paid on the gain determined by the foreign tax system. It is not paid 'on' elements entering into the calculation of Australian assessable income. 63 Mr Burton argues where Australia wishes to reverse, for FITO purposes, the effect of a tax concession it does so through a specific rule, such as s 121EG(3A) of the 1936 Act. He argues that that provision would be otiose on the Commissioner's construction of s 770-10(1). 64 Mr Burton relies on Duckering (Inspector of Taxes) v Gollan [1965] 1 WLR 680. Mr Gollan, a United Kingdom (UK) resident derived New Zealand sourced interest income. In the year of assessment in dispute, the UK and New Zealand both sought to tax him on this interest income, although the two countries had different methods of computing the taxable amount. As a result, the taxable income figure was quite different between the two countries. Mr Gollan successfully sought a foreign tax credit under the Double Taxation Relief (Taxes on Income) (New Zealand) Order, the Order giving effect to the UK-New Zealand convention regarding double taxation relief. In the decision of the Court of Appeal (Duckering (Inspector of Taxes) v Gollan [1964] 1 WLR 1178), affirmed by the House of Lords, Lord Denning MR held (at 1184): It seems to me that article XIV is dealing with the chargeable income, that is, the income assessable in respect of any year. It is not referring to the measure by which it is computed. It is obvious that, if it were a case where a three-year average was used as a measure, the article could only refer to the income of the year of assessment. So it seems to me that, whatever measure one takes, nevertheless the tax is payable in respect of the chargeable income. (Emphasis added.) 65 In the House of Lords, Lord Donovan said (at 690): The appellant argues for this interpretation on the general ground that it is more in harmony with the scheme for giving double taxation relief than is the respondent's interpretation. Moreover, it avoids an inconvenience which would otherwise arise in the giving of relief. See also, Lord Reid (at 687). 66 The 'chargeable income' was numerically different in the two countries, but it was one and the same item of chargeable income: being the interest income derived by Mr Gollan from sources in New Zealand. 67 The United Kingdom Supreme Court reaffirmed this point when construing the phrase 'the same profits or income' in the foreign tax credit article of UK-US convention. In Anson v Commissioners for Her Majesty's Revenue and Customs [2015] 4 All ER 288, Lord Reed (with whom Lords Neuberger, Clarke, Sumption and Carnwath agreed) held (at [114]): The words 'the same' are ordinary English words. It should however be borne in mind that a degree of pragmatism in their application may be necessary in some circumstances if the object of the Convention is to be achieved, for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax is computed in the two jurisdictions ... (Emphasis added.) 68 The US and Australia each tax long-term capital gains similarly, although they do so by different methods. US taxes the 'whole' gain at a rate which is just under half the rate for short term gains. Australia taxes 'half' of the long-term capital gain at the 'full' tax rate. Mr Burton says that the difference in mechanics is no reason to allow double taxation to go unrelieved. As in Duckering, the difference is only in the 'measure by which [the assessable income] is computed'. Through this computation, the full capital gain is 'included in' assessable income under s 770-10(1). 7.1.2 Explanatory Memorandum 69 Mr Burton argues that the reading for which he contends of 'included in' is also confirmed by the Explanatory Memorandum which accompanied the introduction of Div 770 in the Tax Laws Amendment (2007 Measures No. 4) Act 2007 (Cth). It expressly contemplates that under s 770-10(1) a capital gain is 'included in' assessable income even though the 'net capital gain', of which it is an integer, is a smaller amount. The Explanatory Memorandum states (at [1.42]): In general, the new law maintains the current treatment with respect to net capital gains. Only foreign income tax paid on the whole or part of a capital gain (or capital gains) that is (are) included in the taxpayer's net capital gain in accordance with section 102-5 will be eligible for a tax offset [Sch 1, item 1, subs 770-10(1)]. Namely, where the taxpayer has paid foreign income tax on the whole or part of a capital gain that is included in their net capital gain, the requirement that the foreign income tax be paid in respect of an amount that is all or part of an amount included in assessable income will be satisfied. (Emphasis added.) 7.1.3 Context and purpose - capital losses 70 Mr Burton contends that his interpretation is also confirmed by the treatment of capital losses. Taking the Strega 2 Investment as an example, in the 2012 year Mr Burton's NCG from this investment was reduced by unrelated capital losses. Thus, the final assessable income 'traceable' to this gain is less than the gain itself, even setting aside the CGT discount. The Commissioner's amended assessment for the 2012 year further reduces Mr Burton's FITO corresponding to the capital losses (ie, more than half the FITO is disallowed), but nowhere in his objection decision, or elsewhere, does the Commissioner justify the further reduction. His reasoning relates only to the 50% CGT discount. Mr Burton says there is no policy reason for treating capital losses differently from revenue losses (which indisputably do not reduce a FITO). 7.1.4 Context and purpose - consistency with treaty obligations 71 It is also important, Mr Burton contends, to recognise that Div 770 gives effect to Australia's obligations under its bilateral double tax conventions to relieve double taxation by the 'foreign tax credit' method. Such legislation should be interpreted, he says, consistently with the relevant international obligation where possible: see, for example, Macoun v Federal Commissioner of Taxation (2015) 257 CLR 519 per French CJ, Bell, Gageler, Nettle and Gordon JJ (at [67]). In the present case, because Art 22(2) of the Convention is given force of law and prevails over Div 770, it is more than just an interpretive guide, but for the purposes of Mr Burton's primary argument the interpretive principle is relevant. It further confirms, he says, the need to construe the statute, where possible, so as to avoid undue technicality and achieve the object of preventing double taxation. 7.2 Consideration - 'included in' 72 As noted at the outset, the essence of the Commissioner's submission is that double taxation occurs where a person pays both foreign tax and Australian tax on the same amount. An amount not included in assessable income cannot, by definition, be doubly taxed. This informs the entirety of the Commissioner's submissions. 73 A central feature of the Commissioner's submission is that Mr Burton has not suffered double taxation to the extent of 50% of the capital gain. In this regard, the consistent point the Commissioner makes is that double taxation is suffered only to the extent that the amount that is subject to foreign tax is part of assessable income. 74 Relief from double taxation is the principle which underpins both s 770-10 and Art 22 of the Convention and the foundation of that principle is that a taxpayer should not pay both foreign tax and Australian tax on the same amount. That principle is applicable where the amount on which foreign tax is paid is also assessable in Australia. 75 Section 770-10(1) provides an offset where foreign tax is paid in respect of an amount that is all or part of an amount included in 'in respect of your assessable income'. 76 By s 102-5 of the 1997 Act, assessable income includes NCG. NCG is calculated ordinarily by: (1) reducing the capital gains made by any capital losses made in that income year; (2) applying any previously unapplied net capital losses from prior income years to reduce any amounts remaining after the reduction in (1); and (3) reducing by the discount percentage (as defined in Subdiv 115-B of the 1997 Act), each amount of a discount capital gain (as defined in Subdiv 115-A of the 1997 Act) remaining after (2); and (4) applying any applicable small business concessions. 77 In respect of individuals and trusts the discount percentage is 50%: s 115-100(a) of the 1997 Act. So it follows that the NCG, being the only portion of capital gain brought into assessable income is 50% at the most of the capital gains. Put another way, only 50% of the capital gain, as defined under the 1997 Act is 'included in' assessable income. CGT, therefore, is paid only on that 50% of assessable income. 78 If anything, this construction accords more with the observations of Lord Denning MR in Duckering. It is irrelevant that US law and Australian law may arrive at a similar result by different mechanics. The question is not how the amount of CGT is calculated, but on what assessable income it is calculated. That assessable income under Australian law excludes 50% of the capital gain and excludes certain capital losses. I consider the Commissioner's approach is correct even though it might not be as advantageous to Mr Burton as he would wish. 7.2.1 Context 79 There are contextual features of Div 770 which support this view. 80 Section 770-5 of the 1997 Act is central to the proper construction of Div 770. Section 770-5, which again for convenience, provides: 770-5 Object (1) The object of this Division is to relieve double taxation where: (a) you have paid foreign income tax on amounts included in your assessable income; and (b) you would, apart from this Division, pay Australian income tax on the same amounts. (2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts. Note 1: This Division applies in relation to Medicare levy and Medicare levy (fringe benefits) surcharge in the same way as it applies to Australian income tax. See section 90-1 in Schedule 1 to the Taxation Administration Act 1953. Note 2: The tax offset under this Division can be applied against your Medicare levy and Medicare levy (fringe benefits) surcharge liability for the year, if an amount of it remains after you apply it against your basic income tax liability. See item 22 of the table in subsection 63-10(1). (Emphasis added.) 81 It is clear that the object of the Division is relief from double taxation. The provision suggests that relief from double taxation is intended to be available where Australian income tax would otherwise be payable. To the extent that Australian tax would not otherwise be payable there cannot be said to be double taxation. In confirming that relief from double taxation is intended to be available where Australian income tax would otherwise be payable, s 770-5 reflects a principle that the object of such relief is to ensure that a taxpayer is not taxed twice on an amount because it has already borne foreign tax and, importantly, which is an amount also included in assessable income and therefore taxable under Australian law. 82 Section 770-1 of the 1997 Act is also relevant: 770-1 What this Division is about You may get a non-refundable tax offset for foreign income tax paid on your assessable income. There is a limit on the amount of the tax offset. A resident of a foreign country does not get the offset for some foreign income taxes. You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia. (Emphasis added.) 83 Section 770-1 also supports a conclusion that the words 'an amount included in your assessable income' are intended to refer to an amount which is itself assessable income. It is titled 'What this Division is about' and explains a taxpayer receives a non-refundable tax offset for foreign income tax paid on assessable income. The word 'on' is consistent with such a construction. 'On' in this context means an amount which equates to assessable income under Australian law. 84 Note 2 to s 770-10(1) is also relevant to the construction of the last sentence of s 770-10(1). Note 2 provides: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)). 85 Note 2 is consistent with the notion that relief from double taxation is only intended to be available to the extent to which foreign tax is paid on assessable income. Notes are intended to assist the understanding of the provision, here s 770-10(1). There is nothing in s 770-10 or in the surrounding provisions to suggest why the approach reflected in the Note should not apply equally where foreign tax is paid on an amount which partially comprises a component different to non-assessable non-exempt income but which, likewise, does not answer the description of assessable income. 86 Mr Burton relies on s 121EG(3A) of the 1936 Act which provides: 121EG Reduction of assessable OB income, allowable OB deductions and foreign income tax paid … Only eligible fraction of foreign income tax is taken to be paid (3A) Subject to section 121EH, this Act applies to an OBU as if only the eligible fraction of each amount of foreign income tax (within the meaning of the Income Tax Assessment Act 1997) the OBU paid in respect of an amount of assessable OB income had been paid in respect of that income. … 87 However, this provision is targeted at a discrete issue, namely, the treatment of assessable income of OBUs (or offshore banking units). It also forms part of a different division in a different Act, albeit that it was introduced at the same time as Div 770. Further, and unlike Note 2, it is not an example but an operative provision which operates on its own terms. Indeed it has its own discrete genesis as explained in its Explanatory Memorandum (particularly [1.90]-[1.93] and [1.306]-[1.308]), which describes the reasons why the provision was introduced. The reason was the fact that, at the time of the Explanatory Memorandum, foreign tax paid on assessable offshore banking income was quarantined from that paid on other assessable foreign income. The provision was to ensure that any excess foreign tax in respect of assessable offshore banking income could not be used to shelter other low foreign-taxed income earned by the offshore banking unit from Australian tax. It is a different regime with a discrete purpose which operates on its own terms. 88 Mr Burton also refers to subdiv 770-B, which provides: Subdivision 770-B—Amount of foreign income tax offset Guide to Subdivision 770-B 770-65 What this Subdivision is about The amount of your tax offset is based on the amount of foreign income tax you have paid. However, there is a limit on the maximum amount of your offset. The limit is the greater of $1,000 and an amount worked out under this Subdivision. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign-taxed and foreign-sourced income and related deductions were disregarded. You may choose to use the limit of $1,000 and not work out this amount. There is an increase in the limit to ensure foreign income tax paid on some amounts that are not taxed always forms part of the offset. Table of sections Operative provisions 770-70 Amount of foreign income tax offset 770-75 Foreign income tax offset limit 770-80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply Operative provisions 770-70 Amount of foreign income tax offset The amount of your *tax offset for the year is the sum of the *foreign income tax you paid that counts towards the offset for the year. Note 1: The amount of foreign income tax you paid may be affected by Subdivision 770-C. Note 2: The amount of the offset might be increased under section 770-230 of the Income Tax (Transitional Provisions) Act 1997, if you have pre-commencement excess foreign income tax. (Emphasis added.) 770-75 Foreign income tax offset limit (1) There is a limit (the offset limit) on the amount of your *tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess. (2) Your offset limit is the greater of: (a) $1,000; and (b) this amount: (i) the amount of income tax payable by you for the income year; less (ii) the amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made. Note 1: If you do not intend to claim a foreign income tax offset of more than $1,000 for the year, you do not need to work out the amount under paragraph (b). Note 2: The amount of the offset limit might be increased under section 770-80. (3) For the purposes of paragraph (2)(b), work out the amount of income tax payable by you, or that would be payable by you, disregarding any *tax offsets. (4) Assume that: (a) your assessable income did not include: (i) so much of any amount included in your assessable income as represents an amount in respect of which you paid *foreign income tax that counts towards the *tax offset for the year; and (ii) any other amounts of *ordinary income or *statutory income from a source other than an *Australian source; and (b) you were not entitled to any deductions that: (i) are *debt deductions that are attributable to an *overseas permanent establishment of yours; or (ii) are deductions (other than debt deductions) that are reasonably related to amounts covered by paragraph (a) for that year. Note: You must also assume you were not entitled to any deductions for certain converted foreign losses: see section 770-35 of the Income Tax (Transitional Provisions) Act 1997. Example: If an entity has paid foreign income tax on a capital gain that comprises part of its net capital gain, only that capital gain on which foreign income tax has been paid is disregarded. 770-80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply Your offset limit under subsection 770-75(2) is increased by any amounts of *foreign income tax that count towards the *tax offset for you for the year because of subsection 770-10(2). 89 The comparison Mr Burton seeks to make is not helpful in my view in determining whether or not an apportionment approach is contemplated in appropriate circumstances by s 770-10. The process of calculation assumes that there is already in existence an amount of income tax payable for the income year. This is apparent from s 770-75(2)(b)(i), which is a different situation from the present. 7.2.2 The Authorities - submissions and consideration 90 As noted, Mr Burton refers to a number of authorities which he contends support his argument. 91 Douglass v Federal Commissioner of Taxation (1931) 45 CLR 95 is called in aid by Mr Burton. In that case Dixon J (as his Honour then was) considered that the word 'included' enabled him to construe the provision in such a way as to achieve its object, stating relevantly (at 107): … the second of the two alternatives affords the right solution of the problem which that construction raises. The choice between the alternatives really depends upon the force attributed to the word "included." … The object of the provision was to secure to the taxpayer an allowance in respect of tax already paid upon the profits out of which the dividends were paid. Justice seems to require that he should receive an allowance in respect of so much of his taxable income as would not exist but for the inclusion of the dividends in the assessable income. It therefore seems proper to give to the word "included" a force which is in accordance with the meaning which ought fairly to be attributed to the legislation and which it may reasonably bear. 92 Starke J's approach differed. His Honour noted (at 103): In the present case the whole amount of the dividends has been included in account in ascertaining the taxable income. They are "included in his taxable income," or else the amount of that income would be less. 93 His Honour went on to identify the relevant question and answer as being (at 103-104): … have such dividends been included in the taxable income of the taxpayer? In the present case they have been so included in account, and if that satisfies the proviso to sec. 16(b), as I think it does, then the question is solved and the taxpayer is entitled to the deduction he claims. 94 In Bank of New South Wales Savings Bank Ltd v Commissioner of Taxation (1962) 108 CLR 514, Dixon CJ said (at 519-520): The argument for the taxpayer, needless to say, must depend on the word "included". It is a word that in different contexts may receive different applications. I discussed the word more generally in [Douglass] but I stated my view of the meaning of the word in s. 160AB definitely in Commercial Banking Co. of Sydney Ltd. v. Federal Commissioner of Taxation in the following passage "The purpose of s. 160AB is to ensure to a taxpayer who invests in particular loans a definite rebate. The assurance is held out to him in order to induce him so to invest, because it is to the public advantage that investments of that character should be made. The purpose is in effect to say – If make this interest from those securities a form of your income, from the tax upon that income you will obtain a rebate. The point of view both of the legislature and of the taxpayer who acted upon the assurance would more naturally be that he was to be assured of a rebate on the amount by which his income is increased by the inclusion of interest upon the specified securities. I construe s. 160AB as in effect meaning that a taxpayer is to be entitled to a rebate in his assessment of an amount of 2s. for every pound of interest by reason of the inclusion of which in his assessable income his taxable income has been increased. It will be seen that upon this meaning the rebate cannot be upon more than the taxable income which, of course, is obvious enough." (Citations omitted.) 95 I doubt whether Bank of New South Wales Savings Bank Ltd assists either way. It simply makes the point that 'included' is a word that in different contexts may receive different applications. It highlights that the meaning of the term should be consistent with the text, context and purpose of the statute. This cannot be doubted. 96 Turning back to Douglass, Dixon J noted (at 106): The other method is to treat the word "included" as referring to the amount by which the taxable income is increased by reason of the presence of the dividends in the assessable income. This means that to the extent that the taxable income is greater because of the inclusion of the dividends in the assessable income, the dividends are included in the taxable income. 97 The approach was to whatever extent taxable income increases, that is what 'included' meant. In this case, if any analogy is to be drawn with Douglass, only 50% of Mr Burton's capital gain can be said to have increased what would otherwise have been the assessable income. It follows that the other 50% cannot be said to be included in assessable income. While Douglass, in my view, would rather support the Commissioner's approach its relevance is greatly undercut by the simple observation that the decision predated the introduction of CGT by more than 50 years. 98 Mr Burton also seeks to rely on Commissioner of Taxation v Lean (2009) 73 ATR 34. In this case, Mr Lean, an Australian citizen, made a share sale profit totalling approximately $4.63 million in the US. He transferred the profits to invest in Hong Kong, but lost his original $4.63 million in what was referred to as a 'Ponzi scheme'. The issue concerned s 25-45 of the 1997 Act, which read: 25-45 Loss by theft etc You can deduct a loss in respect of money if: (a) you discover the loss in the income year; and (b) the loss was caused by the theft, stealing, embezzlement, larceny, defalcation or misappropriation by your employee or agent (other than an individual you employ solely for private purposes); and (c) the money was included in your assessable income for the income year, or for an earlier income year. Note: If you receive an amount as recoupment of the loss, the amount may be included in your assessable income: see Subdivision 20-A. 99 Stone J (at [8]), described the question as: [w]hether the proceeds of sale of a capital item [ie the $4.63 million] can be included in a taxpayer's assessable income for the purposes of s 25-45 of the [1997 Act] on the basis that, by reason of s 102-5 of the Act a taxpayer's assessable income includes the taxpayer's net capital gain and the net capital gain is worked out by reference to, amongst other things, the proceeds of sale of the capital item. 100 The Commissioner argued that no part of the $4.63 million could have ever been included in Mr Lean's assessable income, because 'assessable income' is not money, but an amount which is a fiction and a creature created by the 1997 Act. This was rejected by Stone J at first instance (at [43]-[44]) where her Honour said: 43 The Commissioner accepts that the money in respect of which the taxpayer suffered the loss was the money derived from the sale of the [US] shares but submits that what was included in the taxpayer's assessable income was not this money but 50% of the net capital gain from the share sales derived by working through the steps in s 102-5. This, it is argued, "is something altogether different to the money from the proceeds of the sales." Consequently the Commissioner argues that the tribunal erred in law in finding … that the taxpayer included in his 2002 tax return 50% of the share sale profits. 44 The Commissioner's submissions on this point must be rejected. If certain money has been included in the taxpayer's assessable income and if, pursuant to the [1997 Act] (which is applicable in this case) the money was properly so included, then to my mind whether it was derived as "income" per se or as a "capital gain" is not relevant. Section 25-45 does not require that the money be acquired as income but only that it be included in assessable income. Assessable income is defined in s 995-1 as having the meaning given by a number of sections including s 6-15(1) which provides that all assessable income is either statutory income or ordinary income. Section 25-45 does not prescribe the basis of inclusion in assessable income. It makes no distinction between money characterised as ordinary income pursuant to s 6-5 or statutory income pursuant to s 6-10. 101 Her Honour said (at [45]): Section 102-5 provides that assessable income includes net capital gain. As a matter of statutory interpretation it is the requirement that the money in respect of which the loss is suffered be included in assessable income that is important in the context of s 25-45. It follows that if the [1997 Act] requires that a certain percentage of money derived as a capital gain be included in assessable income then the loss of that money, if it otherwise comes within s 25-45, is deductible. (Emphasis added.) 102 Her Honour continued (at [46]): As the amount claimed as a deduction under s 25-45 is limited to money included in assessable income, it follows that where the loss is in respect of the proceeds of sale of a capital asset the amount deductible will be the net capital gain calculated in accordance with s 102-5. As the Commissioner submitted, the proceeds of sale will equal the net capital gain only in the rare circumstance where the cost base of the asset is zero and none of the steps in s 102-5 apply, "that is, the taxpayer has no other capital gains or losses; there are no net capital losses from earlier periods; no discount percentage is applicable; and no relevant concession applies." (Emphasis added.) 103 I would have thought my reasoning (set out at [77] above) accords with her Honour's approach. The appeal to the Full Court was dismissed: Lean v Federal Commissioner of Taxation (2010) 181 FCR 589. 104 On appeal Edmonds J expressed the view that s 25-45 could not apply in the circumstances for the reason that it really concerned items of an income nature. At [33] his Honour noted: Money equal in amount to the amount of the capital proceeds may well be received by the taxpayer; indeed, in most cases, will be received, but that money is not included in the assessable income of the taxpayer. If that be right, then the money misappropriated on the facts of the present case, could never give rise to an allowable deduction under s 25-45. (Emphasis added.) 105 Mr Burton suggests that this must be understood as an acceptance of the Commissioner's argument that the money is not at all included in assessable income if what one is looking at is s 102-5. It does not support, Mr Burton submits, the proposition that the Commissioner puts in this case, which is that the capital gain is included in assessable income rateably or proportionately. 106 Mr Burton further relies on the decision of the UK Supreme Court in Anson and what is described as a 'degree of pragmatism'. Anson concerned a double tax problem (though of a different nature than this case). Mr Anson was a UK resident, but he was non-domiciled UK tax resident and only liable for UK tax to the extent that his income was remitted to him in the UK. However, he had been a member of a US limited liability company (LLC) which for US purposes was treated in a similar manner as a partnership. The US LLC of which he had been a member had made gains and paid tax. Some of that had been remitted to him as a resident in the UK and the UK sought to impose tax on the parts remitted to him. Mr Anson sought to claim a tax credit for what had been paid by him as a member of the LLC in the US. 107 A question arose as to whether the UK tax to which Mr Anson was liable was 'computed by reference to the same profits or income' by reference to which the US tax was computed. Lord Reed said (at [114]): The words 'the same' are ordinary English words. It should however be borne in mind that a degree of pragmatism in their application may be necessary in some circumstances if the object of the Convention is to be achieved, for example where differences between UK and foreign accounting and tax rules prevent a precise matching of the income by reference to which tax is computed in the two jurisdictions. (Emphasis added.) 108 This and other judicial views relied upon by Mr Burton essentially invite the question as to legislative purpose. But there is nothing in the Commissioner's position which conflicts with the legislative purpose of avoiding double taxation. I accept the Commissioner's contention that double taxation is intended to relate to the same assessable income. 109 In conclusion, I do not think any of the cases assist Mr Burton on the proper approach to construction of s 770-10 and the meaning of 'included in' which is under debate. The construction which accords with the statutory object is that advanced by the Commissioner and set out at the outset of these reasons (at [4]). Nothing raised in argument as to context or purpose detracts from this construction. 8. 'IN RESPECT OF' 110 If Mr Burton's submissions on 'included in' are not accepted, he makes the following submissions on the term 'in respect of' in the last sentence of s 770-10(1) which is now repeated for convenience: An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. (Emphasis added.) 111 Mr Burton says the term is inherently broad and is capable of connoting a range of different connections between the two subjects that it links, including an indirect connection. The statutory context of Div 770, discussed above, is said to be as equally relevant to the construction of 'in respect of' in s 770-10(1) and tells against any suggestion that the term refers to direct relationships only. The two concepts linked by the phrase – an amount of foreign tax on the one hand and an amount included in Australian assessable income on the other – will rarely (if ever) have a direct relationship. Mr Burton notes that the Commissioner's objection decision states 'foreign income tax is paid on the whole amount of a gain but 50% of the gain is assessed in Australia'. Mr Burton says the Commissioner seeks to link the foreign tax with the Australian capital gain. The Commissioner is said to also seek to replace the linking term 'in respect of' with the more direct 'on'. In both respects, this statement fails to recognise that foreign tax is levied on amounts entering the foreign tax system, not Australia's. This, Mr Burton says, is not only a legal distinction but also a practical and arithmetic one. As discussed above, the respective tax systems will rarely, if ever, provide identical tax treatment. 112 Mr Burton says that in the present case, the full US tax was paid 'in respect of' the discounted Australian capital gain just as much as it was paid 'in respect of' the undiscounted Australian capital gain. He acknowledges that to say that a person pays all of their tax in respect of half of their gains may be a relatively liberal construction of 'in respect of'. Irrespective, Mr Burton says his construction of the phrase is certainly available having regard to the language of s 770-10(1), as the Commissioner accepts. The considerations of text, context and purpose suggest, Mr Burton argues, that this is the construction of 'in respect of' which should be preferred. 8.1 Consideration - 'in respect of' 113 The words 'in respect of' require connection to, and they take their meaning from, their content and the purpose of the provision in context. The intent of the provision is that where only part of an amount in respect of which foreign income tax was paid equates to assessable income under Australian tax law, it is that portion to which the words are directed. The analysis set out above in relation to 'included in' applies also in relation to this debate. Assessable income is the limiting factor. In Australia, s 102-5 of the 1997 Act dictates that 50% of the capital gain is not assessable income. 114 This approach accords with the clear legislative intent that the words 'in respect of an amount' mean an amount which is itself assessable. 9. MR BURTON'S ALTERNATIVE CASE – ART 22(2) PREVAILS OVER S 770-10(1) 115 Mr Burton argues in the alternative that if s 770-10(1) is given a narrow construction, contrary to that for which he contends, the Convention arises for separate consideration. To the extent of any inconsistency with s 770-10(1), the Convention is said to prevail. 116 Under the Convention, both Australia and the US are entitled to tax gains on real property, natural resource rights and capital gains: Art 6 and Art 13. However, the Convention expressly requires Australia to allow, as a credit against Australian tax payable in respect of certain income, the 'United States tax paid' in respect of the same income: Art 22(2). As noted, Art 22(2) provides: Subject to paragraph (4), United States tax paid under the law of the United States and in accordance with this Convention, other than United States tax imposed in accordance with paragraph (3) of Article 1 (Personal Scope) solely by reason of citizenship or by reason of an election by an individual under United States domestic law to be taxed as a resident of the United States, in respect of income derived from sources in the United States by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. The credit shall not exceed the amount of Australian tax payable on the income or any class thereof or on income from sources outside Australia. Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time. 117 The 'income' referred to is the receipt or gain or other item which is the subject of tax in the two countries. In the present case, the 'income' is each gain on the disposal of the NEPA, the Strega 1 Investment and the Strega 2 Investment. It is this gain that is taxed both in the US and Australia. The US tax on the long-term capital gain is US tax paid 'in respect of' this gain. The Australian CGT is also payable 'in respect of' this same gain. 118 Mr Burton contends the words of Art 22(2) require Australia to give a credit which reduces the Australian tax payable on these three gains by the amount of the US tax paid on the three gains. (The credit would be capped if the US tax were higher than the Australian tax (penultimate sentence of Art 22(2)), but it is not.) Such an approach is said to be consistent with the object and purpose of Art 22(2), which is to provide relief from double taxation. It is also consistent with the context of Art 22(2), which recognises that the income tax systems of Australia and the US will be different from one another in various ways. Mr Burton submits this is why it is 'the income' 'in respect of' which tax is payable that is the common integer, rather than 'the taxable amount' or some other technical measurement. If Art 22(2) is broader than s 770-10(1) it is said to be in this use of 'the income' rather than 'assessable income'. 119 Article 22(2) is a provision of Australia's domestic legislation as a result of s 5 of the Agreements Act. To the extent that it is inconsistent with another provision of Australia's income tax legislation, it prevails and the other provision gives way: s 4(2) of the Agreements Act. That is the case here, if the proper construction of s 770-10(1) is inconsistent with Art 22(2). 120 The last sentence of Art 22(2) envisages that Australia will legislate specific foreign tax credit rules (as has been done in Div 770) and reads: Subject to these general principles, the credit shall be in accordance with the provisions and subject to the limitations of the law of Australia as that law may be in force from time to time. 121 However, it expressly requires that the legislation be '[s]ubject to these general principles'. 122 Mr Burton submits the OECD's Commentaries on the Articles of The Model Tax Convention is of relevance to the Court's consideration, relying on Federal Commissioner of Taxation v SNF (Australia) Pty Ltd (2011) 193 FCR 149 per the Full Court (Ryan, Jessup and Perram JJ) (at [113]-[114] and the cases therein cited). 123 The Commentaries to the equivalent of Art 22(2) refer to such treaty provisions, which 'provide that such domestic rules shall not affect the principle laid down in [the foreign tax credit article]'. 124 Mr Burton says the relevant 'principle' is Art 22(2)'s first sentence requirement that: ... United States tax paid ... in respect of income derived from sources in the United States by a person who, under Australian law relating to Australian tax, is a resident of Australia shall be allowed as a credit against Australian tax payable in respect of the income. 125 If s 770-10(1) does not give effect to that principle then, under s 4(2) of the Agreements Act, it is overridden by Art 22(2) as incorporated into domestic law. 9.1 Consideration - Art 22(2) 126 In my view, the same process of reasoning should apply. Under Australian law, the only income forming part of the assessable income is 50% of the capital gain on which tax is paid in the US. Where Art 22(2) refers to Australian tax payable in respect of income, the income is only 50% of the capital gain. 127 Secondly, the word 'all' does not appear before the words 'United States tax paid' in the first line of Art 22(2). The Article does not suggest that a credit is allowed against Australian tax payable for the whole amount of the US tax paid. The general principle is that one is allowed a credit. It simply says a credit against US tax paid. It does not prescribe how much is to be allowed as a credit. The credit is subject to the provisions and limitations of Australian law. Division 770 serves to determine the credit allowable and importantly nothing in the Art 22 is inconsistent with the construction of s 770-10 advanced by the Commissioner. 10. CONCLUSION 128 As none of Mr Burton's arguments has succeeded, his application must be dismissed. There will be no order as to costs (as the parties have agreed). I certify that the preceding one hundred and twenty-eight (128) numbered paragraph is a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher. Associate: Dated: 27 November 2018