CPD SEMINAR When is a taxpayer subject to double taxation? BURTON - PowerPoint PPT Presentation

CPD SEMINAR When is a taxpayer subject to “double taxation”? BURTON v COMMISSTIONER OF TAXATION [2019] FCAFC 141 CHAIR Greg Davies QC Speaker James Strong Liability limited by a scheme approved under professional standards legislation

CPD: Burton v Commissioner of Taxation – Overview 1.0 Introduction (Chair) 2.0 Facts, Arguments and Findings - Division 770 - Article 22(2) of the US Convention 3.0 Four Insights 4.0 Q&A (Chair) 5.0 Drinks

CPD: Burton v Commissioner of Taxation – Overview 2.0 Facts, Arguments and Findings - Division 770 - Article 22(2) of the US Convention

CPD: Burton v Commissioner of Taxation – Facts Sale of ‘NEPA Investment’ Mr Burton • Trust acquired rights to US Oil & Gas (Benficiary) properties in 2004 • Rights sold in 2010 for US$25.4m • Total gain (in US$ terms) – US$23.6m • Gain distributed to Mr Burton as Burton beneficiary of Trust for year ended 30 Family Trust June 2011 US Tax treatment Australia US • US$23.6m gain Article 13(1) of US Convention US$3.5m tax authorised US taxation US Oil & Gas • Mr Burton taxable in US as LTCG at rights “NEPA 15% vs. normal rate of 35% Investment” • US tax paid - $3.5m (over 2 years)

CPD: Burton v Commissioner of Taxation – Facts Australian tax treatment Mr Burton • Net income of Trust for 2011 year (Benficiary) included capital gain on sale A$11.4m net CG A$22.8m • ‘Discount capital gains’ allocated to A$5.1m tax (gross) ‘discount Mr Burton by Trustee (Subdiv 115-C) capital gain’ • CGT cost base A$2.6m (higher than Burton US$1.8m due to appreciation of A$) Family • Trust Undiscounted Australian capital gain A$22.8m (vs US gain US$23.6m) Australia • Net capital gain included in US US$23.6m gain assessable income (s 102-5) = US Oil & Gas $22.8m x 50% discount = A$11.4m • rights “NEPA Australian tax payable @ 45% = $5.1m Investment”

CPD: Burton v Commissioner of Taxation – Facts Australian FITO claim • Mr Burton claimed FITO for US tax of Mr Burton US$3.5m against Aust tax of A$5.1m (Benficiary) • Commissioner denied FITO for US tax A$11.4m net CG A$5.1m tax (gross) paid on amount (50%) not included in net capital gain Burton History of the dispute Family • Taxpayer objected on 2 grounds – Div Trust 770 and Article 22 of US Convention Australia • Objections denied. Test case funding US$23.6m gain US granted for ‘appeal’ to Federal Court. US$3.5m tax • Commissioner succeeded in Federal US Oil & Gas Court ( Burton v CoT [2018] FCA 1857) rights “NEPA Investment”

CPD: Burton v Commissioner of Taxation – Taxpayer Appeal Grounds 1 & 2 - Division 770 1. Entire amount of A$22.8m capital 770-10 Entitlement to foreign gain was ‘ included in assessable income tax offset income ’ for the purposes of s 770- 770-10(1) You are entitled to a 10(1) as it was taken into account in *tax offset for an income year for the calculation of net capital gain *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year 2. Alternatively, entire amount of US if you paid it in respect of an tax was paid ‘ in respect of ’ the amount that is all or part of an amount included in assessable amount included in your income assessable income for the year

CPD: Burton v Commissioner of Taxation – Taxpayer Arguments - Division 770 - Object 770-5 Object Object reflects Australia’s obligation (1) The object of this Division is to to relieve juridical double taxation relieve double taxation where: ‘Double taxation’ arises where the (a) you have paid foreign income ‘same income’ is subject to tax in tax on amounts included in your two countries’ (OECD Commentary) assessable income; and (b) you would, apart from this Division, pay Australian income ‘Amounts’ should be considered the tax on the same amounts . ‘same’ despite differences between (2) To achieve this object, this basis of taxation in Australia and US Division gives you a tax offset to reduce or eliminate Australian (Anson v HMRC [2015] UK Supreme income tax otherwise payable on Court – ‘pragmatic approach’) those amounts.

CPD: Burton v Commissioner of Taxation – Taxpayer Arguments - Division 770 – Offshore Banking Unit income Note 3 [to 770-10(1)]: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced : see If s 770-10(1) only allowed a FITO for subsection 121EG(3A) of the amounts that were included in Income Tax Assessment Act 1936 . assessable income (as contended by 121EG(3A)…this Act applies to an the Commissioner) – what was the OBU as if only the eligible statutory purpose of s 121EG(3A)? 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.

CPD: Burton v Commissioner of Taxation – Commissioner Arguments – Appeal Grounds 1 & 2 Commissioner Arguments – 50% FITO Note 2 to 770-10(1): If the foreign income tax has been paid on an amount that is part 1. Amount “included in assessable non-assessable non-exempt income” can only refer to amount income and part assessable included in net capital gain income for you for the income year, only a proportionate share 2. Only part (50%) of US tax is paid “ in of the foreign income tax (the respect of ” that amount share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2).

CPD: Burton v Commissioner of Taxation – Arguments - Division 770 Section 102-5 Assessable income Step 2 . Apply any previously unapplied *net capital losses from earlier income includes net capital gain years to reduce the amounts (if any) (1) Your assessable income includes remaining after the reduction under step 1….. your net capital gain (if any) for the income year. You work out your net Step 3. Reduce by the *discount capital gain in this way: percentage each amount of a Working out your net capital gain *discount capital gain remaining after step 2 (if any). Step 1 . Reduce the *capital gains you Step 4 [not relevant] made during the income year by the *capital losses (if any) you made during Step 5 . Add up the amounts of *capital the income year. gains (if any) remaining after step 4. The sum is your net capital gain for the Note 1: You choose the order in which you income year. reduce your capital gains.

CPD: Burton v Commissioner of Taxation – Taxpayer Appeal Ground 3– Article 22(2) of the US Convention Article 22 (extract) The credit shall not exceed the Relief from Double taxation amount of Australian tax payable “(2)…..United States tax paid on the income…… under the law of the United States and in accordance with this Subject to these general Convention….in respect of income principles, the credit shall be in accordance with the provisions derived from sources in the and subject to the limitations of United States by…..a resident of the law of Australia …. in force Australia shall be allowed as a from time to time.” credit against Australian tax payable in respect of the income.

CPD: Burton v Commissioner of Taxation – Commissioner Arguments – Appeal Ground 3- Article 22(2) Commissioner’s Arguments - Art 22(2) not inconsistent with Div 770 “Income derived from sources in the US” means “assessable income” under 1 Australian law Credit is limited to Australian tax on “the 2 income” (i.e. the assessable income) Article 22(2) is not an operative 3 provision No “double taxation” where Australia 4 excludes part of capital gain from tax

CPD: Burton v Commissioner of Taxation – Findings of Full Court- Appeal Ground 1 & 2 Appeal Ground 1 – refused (3-0) Appeal Ground 2 – refused (3-0) Logan J at [86]: Logan J at [87]: “As a matter of ordinary language flowing from the text of “….all that s 770-10 “counts s 770-10 and, in turn, s 102-5(1), towards” the tax offset is, in the it is only the net capital gain circumstances of this case, the which is, in each instance, amount of US tax paid by Mr included in …assessable Burton in this instance “ in income…There is no contextual respect of ” the net capital gain warrant for construing “ included as calculated in accordance with in ” as extending to an amount the 1997 Act. “ which is used for computation of an amount that is included in assessable income.”

CPD: Burton v Commissioner of Taxation – Findings of majority (Steward & Jackson JJ) – Appeal Ground 3 Appeal Ground 3 – refused (2-1) Steward J at [120]: Steward J at [121]: - Starting point for Art 22(2) is - Taxpayer doesn’t need more what income Australia taxes? than 50% credit to get relief from double taxation - Here Australia only taxes 50% of gain. - Double taxation occurs when “same amount” is taxed twice: but only if what is - US tax “in respect of” that taxed is the “same thing” income = 50% of total US tax