In Crown Insurance Services Ltd v Commissioner of Taxation (Crown), the issues raised are pertinent to the residence and source of the company under s6(1) of the Income Tax Assessment Act 1936. As cases are determined on the basis of all relevant facts and circumstances of each case, this analysis will focus on how the court’s decision process determined whether Crown had carried on business in the years 2004-2007 inclusive and the existence of central management and control (CM&C) in Australia. The purpose of this is to assess the valuation of Crown’s taxable income, which ultimately resulted in the objective decision to be set aside in favour of the applicant. Evaluation will be made in regards to how the case compares with previous cases and tax rulings and the likely impacts of the case on future commercial practices. Further, what the case infers about the current state of law in this area will also be discussed, as well as the potential degree of changes in modern judgements of residence and source issues within businesses not incorporated in Australia.
Past judgements and tax rulings
The facts of the case are similar to that of Malayan Shipping Co Ltd v FCT (1946), where the court held that “the mere trading in Australia by a company not incorporated in Australia will not of itself be sufficient to cause the company to become a resident”. This is true and consistent with the statutory definition of resident of Australia, and with the decision made in Crown. This is highlighted in paragraphs 57-58 as it indicates that the case does not result in new law. Moreover, in Tariff Reinsurances Ltd v Commissioner of Taxes (Vic) (1938), the contract was formed in London and the company’s profits were not “earned in or derived in or from Victoria” under s42 of the Victorian Income Tax Act 1928. This judgement is exemplified in the decision of Crown, where payments of claims to member companies were not made in Australia, thereby initiating performance (and formation) of the contract in Vanuatu. Thus, in both cases, residence and source was held to be outside Australia and that the appeal be granted.
Nevertheless, in Malayan Shipping, it was inferred that the establishment of CM&C would be sufficient that the business was being carried on and that the condition of ‘carrying on business’ is unwarranted (Dirkis 2005, p.128). This presents a departure from the statutory definition and was subsequently addressed and verified in TR 2004/15 paragraph 8, which emphasises that the two requirements form a two-tier test and are essentially distinct in determining the residence of companies not incorporated in Australia. Additionally, TR 2004/15 does not take into account the shareholder voting power test stated in s6(1), as the words ‘management’ and ‘control’ are often synonymous with one another (Dirkis 2005, p. 132). This is significant as Mr. Pattenden was the majority (ONLY?) shareholder of Crown with 100 percent (HE REPURCHASED 20% OF CONRY?) of voting power and has been at all times, the “controlling mind of Crown”. Accordingly, this constitutes a deviation from statute law, as it criticises the statutory definition of residence, despite the case not differing substantially from the facts and circumstances of those outlined in Malayan Shipping.
It is also possible to observe a serious inconsistency between the judgements of Crown and Malayan Shipping. Although it is not clearly stated in Crown that Mr Pattenden was an Australian resident for tax purposes during the years of relevance, it is highlighted that he ‘was a director throughout the period’ and ‘spent more time in Australia than in any other country’. Although it is agreeable with the ruling that the basis of Crown’s business was indeed ‘the entry into the various contracts with the member companies’, there was another business element present that has been ignored: Crown’s decisions on whether or not to pay out...