Bull v Commissioner of Inland Revenue (Dissenting Judgment) [1999] FJSC 3; CBV0005E.1998S (10 March 1999)

Fiji Islands - Bull v Commissioner of Inland Revenue (Dissenting Judgment) - Pacific Law Materials

IN THE SUPREME COURT OF FIJI

AT SUVA

ON APPEAL FROM THE COURT OF APPEAL, FIJI

CIVIL APPEAL NO. CBV0005, CBV0006 OF 1998S
(Court of Appeal, Fiji, Civil Appeal Action
No. ABU0017 & ABU0018 OF 1997S )

BETW/p>:

DONALD HENRY BULL
-and-
WILLIAM JOHN BULL
Appellants

AND:

COMMISSIONER OF INLAND REVENUE
Responden

Coram: The The Rt. Hon. Lord Cooke of Thorndon
The Hon. Sir Anthony Mason
The Hon. Sir Gerard Brennan

Hearing: Wednesday 3 March 1999
Date of Judgment: Wednesday, 10 March 1999

Counsel: Mr. F.G. Keil for the Appellants
Mr. G. Keay and Mr A. Bale for the Respondent

DISSENTING JUDGMENT OF SIR GERARD BRENNAN

These appeals turn on the construction of certain provisions of the Income Tax Act (Cap. 201) relating to income derived outside Fiji by a resident of Fiji. The facts are not in dispute. In the Court of Review, they were agreed as follows:

(a) each of the appellants derived income from investments in Australia in 1987, 1988, 1989 and 1990;

(b) the appellants were resident in Fiji;

(c) withholding tax at the rate of 10% of the whole amount of income was deducted in Australia before the income was received by the appellants;

(d) during the period in question (1987-1990) there was no double taxation agreement in force between Fiji and Australia;

(e) the Commissioner of Inland Revenue (the "CIR") does not dispute this was ‘income chargeable with income tax’ within the meaning of those words in s.102(b) of the (Income Tax) Act (cap. 201)("the Act").

S.102 of the Act provides:

"The tax chargeable in respect of income derived outside Fiji by a resident shall be abated or exempted as follows:-

(a) in respect of income derived from territory with whom arrangements have been made regarding relief from double taxation, relief shall be given in accordance with that arrangement;

(b) in respect of income derived from a territory with whom arrangements have not been made regarding to relief from double taxation, such income shall be exempt from tax to the extent that it is chargeable with income tax in that other territory:

Provided that -

(i) the taxpayer shall furnish evidence satisfactory to the Commissioner showing the amount of tax paid and the particulars of income;

(ii) such income shall not be exempt if, under the law of that other territory, tax is deducted therefrom at source but such person has the right thereafter of making a return of that income and being assessed to tax thereon with relief in proper circumstances for the whole or any part of the tax already deducted at source and he does not exercise that right; and a certificate purporting to be signed by an officer of the Taxation Department of that other territory shall be prima facie evidence that such a right exists and of the exercise or non-exercise thereof by the taxpayer." [p. 3,4]

The question is whether the whole of the Australian investment income should be omitted in calculating the normal tax to which the respective taxpayers should be assessed under the Act or whether the normal tax should be calculated taking that income into account but giving credit against that normal tax for an amount equal to the Australian withholding tax chargeable and paid in Australia in respect of that income.

The Court of Review held that the whole of the taxpayers’ Australian investment income, being chargeable with income tax that was paid in Australia, was exempt from tax in Fiji. In the High Court, Fatiaki J allowed an appeal by the Commissioner against the decision of the Court of Review. The taxpayers appealed to the Court of Appeal which by majority (Tikaram P and Thompson JA, Kapi JA dissenting) dismissed the appeal. The taxpayers now appeal to this Court.

Section 102 must be construed in the context of the Act of which it forms a part. The scheme of the Act is to impose normal tax assessed, levied and paid for each year of assessment "on every dollar of chargeable income" of a resident whose "total income" exceeds $2500: Section 7(1). The rates of normal tax, prescribed by the Fourth Schedule, vary according to the level of chargeable income. " Total income" means "the aggregate of all sources of income" and includes interest: Section 11, par (r). "Chargeable income" is the total income of a taxpayer for a year, subject to deductions that are statutorily prescribed: Section 24.

In the Act, tax is assessed and levied on the net aggregate amount which is "chargeable income" and that amount must be calculated before the quantum of tax is ascertained. Insofar as income derived outside Fiji is part of the chargeable income of a taxpayer, the tax payable on the chargeable income may be apportioned notionally between tax chargeable in respect of income derived inside Fiji and tax chargeable in respect of income derived outside Fiji. The apportionment is notional since normal tax is a global amount calculated on chargeable income which does not differentiate between the underlying parts of total income derived in Fiji and the parts of total income derived from a foreign territory. As section 102 states, it affects the tax chargeable in respect of income outside Fiji.

Section 102 addresses two situations: cases in which the territory in which the foreign income is derived has a double taxation arrangement with Fiji and cases in which that territory does not have such arrangements. Double taxation arrangements frequently provide that the amount of tax exacted in a foreign country upon an item of income be treated as a credit against the tax that that item of income would otherwise attract under domestic taxing legislation. Paragraph (a) of section 102 covers such a case. Depending upon the rate of tax exacted in the respective territories, liability to pay Fiji normal tax in respect of the item of foreign income would be reduced ("shall be abated") or extinguished ("exempted"). Paragraph (b) covers the case where there is no double taxation arrangement with the foreign territory from which the relevant income was derived.

Paragraph (b) provides that the income derived from such a foreign territory "shall be exempt from tax" to the extent specified in that paragraph. The subject of exemption is "income", not tax. The tax chargeable in respect of that income is reduced ("shall be abated") or extinguished ("exempted") by reason of the exemption of the income.

Tax that is charged upon income is not part of income; it is an impost that is assessed and levied in respect of income. Tax and the income in respect of which it is charged are distinct, both conceptually and in practice. It follows that the exemption for which paragraph (b) provides is not an exemption of the tax imposed but an exemption of the income which is chargeable with tax. What, then, is the meaning of the words "to the extent"? To answer this question, it is necessary to go back to the subject with which paragraph (b) deals, namely, "income derived from a [foreign] territory". That income may consist of several items, derived from different sources within the territory, some of which are chargeable with tax under the laws of the territory, some of which are not. The phrase "to the extent" is effective to ensure that paragraph (b) does not exempt the whole of the income derived from a foreign territory if some items of that income are not chargeable with tax under the laws of that territory. But when some or all of a taxpayers foreign income is exempt under paragraph (b) the tax that would otherwise have been assessed on the foreign income is reduced (if some of the foreign income is exempt) or extinguished (if all the foreign income is exempt). As exempt income is not included in the taxpayer’s total income, the chargeable income is reduced or extinguished and the tax otherwise exigible is reduced or extinguished. Evidence of the amount of tax paid in the foreign territory is required by the proviso. That evidence would be needed by the Commissioner either to calculate the net tax assessable when foreign income falls within paragraph (a) or to be satisfied as to the fact that foreign income is "exempt" under paragraph (b).

It follows that I perceive no ambiguity in section 102 which might require reference to external material in order to construe it correctly. If the majority of the Court of Appeal had not thought that there was an internal inconsistency in s 102, their Lordships would have construed paragraph (b) in the way in which I have construed it, but they held that there was an internal inconsistency. They said:

"The natural meaning of the words in paragraph (b) 'such income shall be exempt from tax to the extent that it is chargeable with income tax in that other country' is that to the extent the income is not chargeable with tax in Fiji, that is to say, such income is not part of the taxpayer’s income taken into account in calculating the amount of tax chargeable. Paragraph (b) provides that income in respect of which foreign tax has been paid or deducted is exempt from tax 'to the extent' to which it, that is to say the income, was chargeable with that foreign tax. In the appellants’ case the whole of their income derived from Australia was chargeable with Australian tax; the tax deducted was 10% of the total income. So, it appears that, if the words of paragraph (b) are given their natural meaning, they do not state the manner in which the amount of tax chargeable on that income is to be reduced or extinguished. Instead their effect is that there is no tax chargeable, so that there is no tax to be reduced or extinguished." [p.9]

In my respectful opinion, their Lordships were mistaken in reading paragraph (b) as a distributive provision applicable to a particular item of income rather than to the whole of the income derived from a foreign territory. It is a provision dealing with the aggregate of such income which, but for the provisions of paragraph (b), would be included in the total income of the taxpayer and would thus be reflected in the chargeable income and be brought to tax by section 7.

The majority of the Court of Appeal found an internal inconsistency in section 102 because the opening words of the section provided for the reduction or extinguishment of tax on income which, if exempt under paragraph (b), would not be chargeable with tax. Their Lordships then referred to the statutory antecedent of s.102 as an aid to interpretation.

The earlier provision was section 44 of the Income Tax Act (Cap. 176, 1967 edition of the Laws of Fiji). It provided:

"44.(1) Income derived by a person resident in Fiji but not derived from Fiji shall be exempt from tax if and so far as the Commissioner is satisfied that such income is derived from some country other than Fiji and that it is chargeable with income tax in that country."

Although, construing foreign "income" in paragraph (b) of s.102 as the aggregate of foreign income rather than its parts, I find no inconsistency in the section, if I read the earlier section 44 correctly, I would arrive at the same result. The operation of section 44 depends on the satisfaction of the Commissioner. The Commissioner could be satisfied as to the entirety of the matters to which the section refers or as to a part only of those matters ("if and so far as"), but the matters to which his satisfaction relates are the same matters as those referred to in the present section 102. The income must be derived from some country other than Fiji and it must be chargeable with tax in that country. But it is the whole of the income derived from that country which must be considered by the Commissioner, and he may be satisfied that only a part of that income is chargeable with tax in that country. Then it is only that part of the income that is "exempt from tax" in Fiji. It should be noted that what is exempted from tax in Fiji is the income that is chargeable with tax in the other country: it is not the tax charged on that income.

In his Review of Fiscal Policy in Fiji, Professor RL Matthews draws attention to this distinctive feature of the taxation system in this country and recommends a change. He wrote:

"4.67 Income earned overseas by Fiji residents is exempt from Fiji tax if it is liable to income tax in the overseas country. This differs from the position in the United Kingdom and New Zealand which levy local taxes on income derived overseas but give a credit for overseas tax paid. Australia adopts the same procedure with respect to overseas dividends received by resident individuals, but exempts from tax other overseas income earned by Australian residents provided tax has been paid in the country in which it was derived.

4.68 The exemption granted in Fiji is difficult to justify in a country seeking development capital.........

4.73 But for the sake of an uncertain advantage in respect of non-residents, Fiji through its tax system is currently providing a positive inducement to residents to invest abroad, which even the very low taxation of Fiji dividends is apparently insufficient to offset. It is therefore recommended that all overseas income derived by Fiji residents be liable to Fiji income tax, subject to a credit for income tax paid in the overseas country."

However desirable a change in the taxation of foreign income may be, I am unable to construe section 102 as having effected the change. Rather I construe it as continuing the system to which Professor Matthews drew adverse attention.

I would therefore allow the appeals, set aside the judgment of the Court of Appeal and allow the appeals to that Court from the judgment in the High Court. As this is a minority opinion, I need not consider the consequential orders that should be made for the working out of the relief to which I would hold the taxpayers entitled.

Sir Gerard Brennan

Solicitors:

Messrs. Mitchell Keil and Associates, Suva for the Appellants
Office of the Commissioner of Inland Revenue, Suva for the Respondent

CBV0005E.98S