Introduction

With globalisation and the growth of e-commerce, taxpayers are increasingly involved in cross-border transactions and business relationships. In light of this, revenue authorities have a concomitant need to access information from outside their jurisdictions in order to obtain a complete picture of cross-border transactions in order to protect their revenue.

However, it is a principle of the law of nations that each country’s territorial sovereignty is respected by other countries. An element of this sovereignty is that a country cannot perform acts of state, including tax audits and investigations in another country without its consent.1 This problem is ameliorated by bilateral tax treaties between countries. The exchange of information clause in these treaties is based on either Art 26 of the OECD Model Convention, or Art 26 of the UN Model Convention which is expressed in almost identical terms.

The legislative framework

International treaties entered into by the Australian government do not automatically form part of domestic law. Treaty provisions will be incorporated into domestic law when Parliament adopts the treaty by way of enactment. Hence, Australia’s tax treaties with other countries are found as schedules to the International Tax Agreements Act 1953. Each tax agreement contains an article authorising the exchange of information between the respective taxation authorities. The form of the exchange of information articles varies depending on the treaty; however, they largely reflect the OECD Model Convention. Article 21 of the United Kingdom Agreement is as follows:

"The taxation authorities shall exchange such information (being information which is at their disposal under their respective taxation laws in the normal course of administration) as is necessary for carrying out the provisions of this Agreement or for the prevention of fraud or for the administration of statutory provisions against legal avoidance in relation to the taxes which are the subject of this agreement. Any information so exchanged shall be treated as secret but may be disclosed to persons (including a court or tribunal) concerned with the assessment, collection, enforcement or prosecution in respect of the taxes which are the subject of this agreement. No information as aforesaid shall be exchanged which would disclose any trade, business, industrial, or professional secret or trade process."

Article 25 of the United States Convention provides:

"(1) The competent authorities shall exchange such information as is necessary for carrying out the provisions of this convention or for the prevention of fraud or for the administration of statutory provisions concerning taxes to which this convention applies provided information is of a class that can be obtained under the laws and administrative practices of each contracting state with respect to its own taxes.

(2) Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those (including a court or administrative body) concerned with the assessment, collection, administration or enforcement of, or with litigation with respect to, the taxes to which this convention applies.

(3) No information shall be exchanged which would be contrary to public policy.

(4) If specifically requested by the competent authority of one of the contracting states, the competent authority of the other contracting state shall provide information under this article in the form of copies of unedited original documents (including books, papers, statements, records, accounts or writings) to the same extent such documents can be obtained under the laws and administrative practices of that other state with respect to its own taxes."

Sections 263 and 264 and their inherent restrictions

The foregoing articles are not an independent source of power to enable the Commissioner to obtain information. The articles clearly contemplate that any power the Commissioner has is under the domestic law, that is the Income Tax Assessment Act 1936 (the ITAA). Therefore, should the Commissioner be requested by a foreign revenue authority to provide information under the exchange of information article, it must be determined whether the Commissioner can use his statutory powers under the ITAA to obtain the information?

The Commissioner’s two main sources of power to obtain information are ss 263 and 264 of the ITAA. Section 263 of the ITAA empowers the Commissioner or an authorised officer to:

"have full and free access to all buildings, places, books, documents and other papers for any of the purposes of this Act, and for that purpose may make extracts from or copies of any such books, documents or papers." (Emphasis added.)

Section 264 is expressed in similarly broad terms:

"The Commissioner may by notice in writing require any person, whether a taxpayer or not, including any officer employed in or in connexion with any department of a Government or by any public authority:

(a) to furnish him with such information as he may require; and

(b) to attend and give evidence before him or before any officer authorized by him in that behalf concerning his or any other person’s income or assessment, and may require him to produce all books, documents and other papers whatever in his custody or under his control relating thereto."

While the Commissioner’s powers under these provisions are extremely broad, allowing him to undertake a "roving inquiry" or a "fishing expedition",2 they are not without limitation. The power under s 263 is expressed to be limited to "any of the purposes of this Act". Unlike s 263, s 264 is not expressed to be limited to "the purposes of this Act". However, in Industrial Equity Ltd v Deputy Federal Commissioner of Taxation3 the High Court made it clear that the Commissioner’s power under s 264 can only be exercised for the purposes of the ITAA:4

"The words ‘for the purposes of this Act have been embedded in s 263(1) … No such expression appears in 264; the purpose is referred to only obliquely in the words ‘concerning his or any other person’s income or assessment’ in s 264(1)(b). It may be, as the Commissioner submits, that any more specific reference to purpose was unnecessary. Be that as it may, it is clear enough that the powers contained in s 264(1), like those contained in s.263 must be exercised for the purposes of the Act." (Emphasis added.)

This outcome is not surprising considering that a statutory power cannot be exercised for a purpose outside that of the statute which confers the power.5 It can only be exercised bona fide for the purpose for which it was conferred.6

In addition to the implied limitation in s 264 that any purported exercise of the power be for the purposes of the Act, there is an express limitation in s 264(1)(b) that would appear to restrict the Commissioner’s ability to exercise the power in order to fulfil a request from a foreign tax authority pursuant to a particular double tax agreement. Section 264(1)(b) requires that the notice concern a named person’s income or assessment.7 The term "income" is not defined and is usually accompanied by the epithets "ordinary", "statutory", "assessable" or "taxable"; however, it would appear that in the context of s 264(1)(b) the term "income" would encompass any or all of these forms of income. Unlike the term "income", "assessment" is defined in s 6 as being the "ascertainment of taxable income … and of the tax payable on that taxable income". Both terms, however, must be understood in the context in which the power under s 264 is exercised. In Smorgon’s case Mason J said:

"It is the function of the Commissioner to ascertain the taxpayer’s taxable income. To ascertain this he may need to make wide ranging inquiries, and to make them long before any issue of fact arises between him and the taxpayer. Such an issue will in general, if not always, only arise after the process of assessment has been completed. It is to the process of investigation before assessment that s 264 is principally, if not exclusively directed."8 (Emphasis added.)

Similarly, in IEL the High Court considered that the powers under ss 263 and 264 were designed to assist the Commissioner in obtaining "information bearing upon the taxable income of that taxpayer".9

If a person is required to attend and give evidence in circumstances such as that posited, it would be difficult for the Commissioner to argue that a notice under s 264(1)(b) is concerning the income or assessment of a person. If the Commissioner is not exercising the power for the purposes of investigations that would assist in ascertaining a taxpayer’s taxable income (that is, concerning a taxpayer’s income or assessment) then the exercise of power will be invalid.10

Do the purposes of the ITAA extend to the International Agreements Act?

Discussion of the inherent limitations on the Commissioner’s information gathering powers is, however, rather sterile in the absence of an understanding of what the purposes of the ITAA actually are.

The principal function of the Commissioner under the ITAA is the assessment of taxable income and collection of income tax. Therefore, the phrase "for the purposes of the Act" will be sufficiently wide to cover any action by the Commissioner whose object is the assessment and collection of income tax. In IEL the High Court considered the scope of purpose in the context of ss 263 and 264:

"The question whether a purpose is a purpose of the Act should be considered in the context of s 17 of the Act. This section provides for the levy of tax upon the taxable income of a person derived during a year of income and it is by reference to this primary purpose that all other purposes of the Act are to be determined."11

The High Court added that an examination of a taxpayer’s affairs will be for the purposes of the Act:

"where it is directed to ascertaining the taxable income of a taxpayer. The examination is relevant to the process of assessment and to the further consideration of an assessment, once raised."12

It follows that a purpose not characterised as at least incidental to the Commissioner’s function of assessing and collecting income tax would preclude the exercise of power under ss 263 and 264.

The phrase "this Act" is defined in s 6 of the ITAA to include Pt IVc of the Taxation Administration Act 1953 insofar as that Part relates to the Act. Significantly, it does not include the International Tax Agreements Act.

The provision of information pursuant to a request for information under a double tax agreement, being pursuant to another Act, could not be considered for the purposes of the ITAA (the purpose being the fulfillment of obligations under the International Tax Agreements Act). The Commissioner would therefore lack the power under the ITAA to compel a person to provide the information requested.

Does the Incorporation of the ITAA into the International Tax Agreements Act alter the situation?

Section 4 of the International Tax Agreements Act provides:

"(1) Subject to subsection (2), the Assessment Act is incorporated and shall be read as one with this Act.

(2) The provisions of this Act have effect notwithstanding anything inconsistent with those provisions contained in the Assessment Act (other than section 160ao or Part IVa of that Act) or in an Act imposing Australian tax."

When provisions of an Act speak of "this Act", the incorporation of that act into another calls into question whether the term "this Act" includes the incorporating Act. That is to say, are the provisions of the incorporated Act (in this case the ITAA) to be construed mutatis mutandis, that is, with such changes as are necessary to fit them to the purposes of the International Tax Agreements Act?

The issue of reading two Acts together was considered by the Supreme Court of Victoria in Georgoussis v Medical Board of Victoria.13 In that case, s 9(2) of the Medical Act 1933 provided for a right of appeal against a decision "under Part I of the [Medical Act 1928] or under this Act" to refuse registration as a medical practitioner. Subsequent Acts amending the Medical Act 1928 contained a provision that they "shall be read and construed as one with Part I of the Medical Act 1928 (hereinafter called the Principal Act)". The Medical Board made a decision under one of the subsequent amending Acts and contended that there was no right of appeal as the decision was not a decision "under Part I of the [Medical Act 1928] or under this Act]. Smith J held that there was a right of appeal,

"when an Act is passed containing a direction that it shall be read and construed as one with an earlier Act expressions such as ‘under this Act’ appearing in the earlier Act must, in the absence of some indication of an intention to the contrary, be given an extended application as from the date of the later Act so as to cover, as from that date, things done under the later Act."14

On the basis of the foregoing reasoning it would be arguable that the purposes of the ITAA would include those of the International Tax Agreements Act, if the latter Act (being the later Act) was to be read as one with the ITAA (the earlier Act). However, the reverse is true. It is the ITAA which is incorporated and to be read as one with the International Tax Agreements Act. To construe provisions of the ITAA according to the purposes of the International Tax Agreements Act is to in effect amend the ITAA. However, the courts have held that this is impermissible.

In Amalgamated Television Services Pty Ltd v Australian Broadcasting Tribunal15 the Federal Court had to consider a situation not far removed from that of the present. Namely, an earlier Act (the Broadcasting and Television Act 1942)16 was incorporated and to be read as one with a later Act (the Television Station Licence Fees Act 1964).17 The BTA empowered the Tribunal to request a licensee to furnish to the Tribunal:

"such particulars with respect to broadcasting or television activities of the broadcasting or television activities of the licensee as the Tribunal specifies and any other information specified by the Tribunal, being information with respect to the activities or affairs of the licensee relevant to the operation of this Act." (Emphasis added.)

The Tribunal sought information under the foregoing provision which could only be characterised as for the purposes of the Licence Fees Act. Lockhart J held that the provision could not be given an extended application so as to cover functions under the Licence Fees Act:

"one cannot read the expression ‘this Act’ in s 106(4)(b) of the Broadcasting and Television Act other than what it says. It cannot be read as if it meant ‘this Act and the Television Stations Licence Fees Act 1964’. To so construe the provision would be to pass beyond interpretation and enter the impermissible field of amendment."18

The decision in Amalgamated Television Services is consistent with the earlier Canadian decision of Re Purdy and the Queen, the facts of which are not too dissimilar.19 In Re Purdy the Appeal Division of the New Brunswick Supreme Court had to consider a situation where provisions of the Criminal Code were incorporated into other Acts. One of the provisions of the Criminal Code was a power to issue search warrants to gather evidence in respect of an offence "against this Act". The court held that the provision did not apply to an offence against another Act notwithstanding it had been incorporated into the other Act:

"Provisions of the Criminal Code made applicable to other enactments … must be read as they are found in the Code. They cannot be applied ‘mutatis mutandis’ with such changes as are necessary to fit them to the purpose of the other enactment. As s 443 of the Criminal Code must be read without change, the phrase ‘against this Act’ cannot be eliminated or ignored in deciding the applicability of that section to the Broadcasting Act. The absence of such wording as ‘mutatis mutandis’ results in s 443 having specific application to the Criminal Code and is therefore incapable of being read to apply to any other Act."20

The decisions in both Amalgamated Television Services and Re Purdy clearly demonstrate the need for the incorporating Act to specifically state that the provisions that it incorporates are to apply with all the changes necessary to give them operation in the incorporating Act. It may be argued that s 4(2) of the International Agreements Act does this as it gives paramountcy to the International Agreements Act should there be any inconsistency with the ITAA. However, there is no inconsistency between ss 263 and 264 and any provision of the International Agreements Act.

While the decision in Georgoussis is distinguishable from Amalgamated Television Services on its facts, it has been suggested that a different outcome should not necessarily follow.21 The drafting device of incorporating one Act into another is an old one. The courts have long held that where this occurs, "we must construe every part of each of them as if it had been contained in one Act, unless there is some manifest discrepancy …".22 On this basis, it is arguable, as a matter of principle, to construe any reference to "this Act" as a reference to the consolidated Act. There is no manifest discrepancy which would preclude such a construction. Moreover, it is a long established principle that any powers in the earlier Act would have been limited to the purposes of that Act23 and would clearly have been known to the drafters of the International Agreements Act. As a consequence the broadening of the scope of particular provisions would have been foreseen. However, even if this view is correct and the decision in Amalgamated Television Services is not followed, the limitation contained in s 264(1)(b) would remain. That limitation relates to the income or assessment of an Australian taxpayer. In circumstances where the power would be exercised in order to obtain information for the purposes of fulfilling a request from a foreign tax authority regarding a foreign taxpayer, it cannot be said, even under the consolidated Act, to be concerning the income or assessment of an Australian taxpayer.

In the absence of any contradictory authority, the decision in Amalgamated Television Services would be applicable and would preclude the Commissioner from using his formal information gathering powers in order to provide information requested by a foreign tax authority under the International Agreements Act.

FOOTNOTES

  1. For a comprehensive discussion on the international legal issues surrounding exchanges of information, see Schaumburg and Schlossmacher, "Article 26 of the OECD Model in light of the Right to Informational Self-Determination", Bulletin for International Bureau of Fiscal Documentation, October 2000.

  2. FC of T v ANZ Banking Group Ltd (1979) 143 CLR 499 at 524 per Gibbs ACJ.

  3. (1990) 170 CLR 649 (IEL).

  4. Ibid at 659.

  5. See Gaudron J at 664.

  6. DFC of T v De Vonk (1995) 61 FCR 564 at 578 per Hill and Lindgren JJ.

  7. FC of T v ANZ Banking Group Ltd (1979) 143 CLR 499 at 523 (Smorgon’s case)

  8. Ibid at 536.

  9. (1990) 170 CLR 649 at 661.

  10. The only other purpose that would be sanctioned would be that of the collection and recovery of tax: Simionato Holdings Pty Ltd v FC of T (No 2) 95 ATC 4720

  11. Ibid at 659.

  12. Ibid at 660.

  13. [1957] VR 671.

  14. Ibid at 675.

  15. (1984) 1 FCR 409.

  16. Hereafter "the BTA".

  17. Hereafter "the Licence Fees Act".

  18. (1984) 1 FCR 409 at 415.

  19. (1972) 28 DLR 3d 720.

  20. Ibid at 726; cf Re Krassman and the Queen (1972) 8 CCC (2d) 45; Re Adelphi Book Store Ltd and the Queen (1972) 8 CCC (2d) 49.

  21. D C Pearce and R S Geddes, Statutory Interpretation in Australia (4th ed, 1996), p 210.

  22. International Bridge Co v Canada Southern Railway Co (1883) 8 AC 723 at 727 per Lord Selborne.

  23. Swan Hill Corporation v Bradbury (1937) 56 CLR 746 at 757.

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