Commissioner of Taxation (Cth) v Spotless Services Ltd [1996] HCA 34

High Court of Australia Brennan CJ Dawson, Toohey, Gaudron, McHugh, Gummow and Kirby JJ Commissioner of Taxation (Cth) v Spotless Services Ltd [1996] HCA 34

ORDER In each appeal, the order is:

1. Appeal allowed with costs.

2. Set aside the order of the Full Court of the Federal Court of Australia and in lieu thereof order:

(a) Appeal to the Full Court allowed with costs.

(b) Set aside the orders of Lockhart J and in lieu thereof order that the taxpayer's appeal be dismissed with costs.

Cur adv vult

The following written judgments were delivered:—

3 December 1996 Brennan CJ, Dawson, Toohey, Gaudron, Gummow and Kirby JJ.

These appeals turn upon the operation of Pt IVA (ss 177A-177G) of the Income Tax Assessment Act 1936 Cth (the Act). The respondents (the taxpayers), Spotless Services Ltd (Spotless Services) and Spotless Finance Pty Ltd (Spotless Finance), are two Australian residents as defined in s 6(1) of the Act. They are related corporations, both being members of the Spotless group of companies. Spotless Services is a substantial trading corporation whose business activities essentially are conducted in Australia.

From the successful public flotation of shares in Spotless Services in about September 1986, the taxpayers held approximately $40 million of surplus funds available for short-term investment. By written agreement (the Joint Venture Agreement) made between Spotless Services and Spotless Finance and dated 8 December 1986, they agreed to associate themselves as joint venturers for the purpose of investing funds in the Cook Islands. The agreement stipulated that "for the sake of convenience" investments would be made in the name of Spotless Services.

In its return for the year of income ended 30 June 1987 (the year of income), Spotless Services claimed that $2,670,663 [1] had been received by it from European Pacific Banking Co Ltd (EPBCL) as interest derived from a deposit of $40 million made with EPBCL in the Cook Islands. In its return for the year of income, Spotless Finance similarly claimed that it had received interest of $295,688 from EPBCL. There was between Australia and the Cook Islands no "double-taxation" agreement to which the Income Tax (International Agreements) Act 1953 Cth applied. However, the taxpayers claimed that, pursuant to s 23(q) of the Act [2] , the interest was exempt from income tax on the footing that it had been derived in the Cook Islands and that withholding tax had been paid on the interest in the Cook Islands.