THE INTERNATIONAL FAMILY OFFICE – OVERVIEW SUMMARY FOR AUSTRALIA

John Balans, PatnerBalazs Lazanas & Welch LLP

INTRODUCTION

The Family Office is a rarity in Australia. In Australia great wealth is essentially a recent phenomenon. Any journal reporting on rich Australians is generally referring to families who have acquired wealth in the period since the end of the Second World War and an array of families made wealthy (or substantially wealthier) by the resources boom that has coincided with the rise of China.

Wealthy people have “back offices” that might be described as family offices. In many cases they use the same entity as a vehicle for holding substantial assets and for servicing their personal requirements, “sharing” the employees.

In this Overview, the aim is to draw attention to threshold matters regarding the stewardship of the family’s affairs. It is not intended to consider issues regarding the structures with respect to the holding of investments.

I. FORMATION OF A FAMILY OFFICE

A. Choice of Entity

Australian corporate law allows for a number of entities with legal personality such as an incorporated association, a proprietary company limited by shares or unlimited with share capital or a public company, which can be:

(i) limited by shares;

(ii) limited by guarantee; or

(iii) unlimited with share capital.

The most commonly established company is a proprietary company limited by shares or “pty ltd” (a proprietary company).

One is not limited to a company, but there is little benefit in utilising any other entity for housing a family office. One might combine a company with a trust, with the company acting as trustee, but there seems little reason for that to be done. The tax benefits most usually associated with a trust for the holding of assets are not replicated when the trustee is acting purely as a service provider for a family.

It is not strictly necessary that the entity be a locally established one. For example, a family office can be established as a foreign entity.

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B. Registration

1 Incorporation

Incorporation of a proprietary company in Australia is governed by the Corporations Act 2001 (the Corporations Act), an Act of the Federal Government. However, the place of registration is either a State or Territory and the choice of a particular State or Territory can have an impact on future dealings with the shares of the company due to stamp duty.

It is open to a person to choose as the place of registration a State or Territory which is disconnected from the place where the day to day activities of the company are pursued. So, for example, a company will often be registered in Victoria even though the company may not have any operations in Victoria. This is essentially a consequence of the stamp duty rules.

In establishing a proprietary company, it is necessary for there to be at least one person who is at least 18 and who is also ordinarily resident in Australia to act as a director and as a public officer (to take responsibility for income tax matters) of the company.

There can be a single shareholder and that shareholder is not required to be ordinarily resident.

There is no need for a secretary, but if there is to be one, he or she must be at least 18 and at least one secretary must ordinarily reside in Australia.

There is no minimum or maximum share capital, so it is not uncommon to establish a proprietary company with a share capital of just $1.

2 Foreign Entity

A “foreign company” (which is defined under the Corporations Act very broadly so that it includes many foreign entities that are not normally recognised as companies) must not carry on business in Australia unless it is registered under the Corporations Act with the Australian Securities and Investments Commission (ASIC). This requires the appointment of a local agent.

3 Australian Business Number

In addition to the Corporations Act, there is a registration system known as the Australian Business Number (the ABN). Any entity that carries on an enterprise in Australia is essentially obliged to obtain an ABN by registering with the Australian Business Register. Although acquiring an ABN is not mandatory, the tax laws effectively oblige any entity carrying on an enterprise in Australia to do so.

4 Public Officer

Essentially, every company carrying on business in Australia or deriving income in Australia from property must (unless exempted by the Federal Commissioner of Taxation (the Commissioner)) be represented by a public officer. The public officer must be a natural person who is at least 18 and ordinarily resident in Australia.

C. Taxation

There are a myriad of different taxes in Australia.

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Aside from income tax, relevant taxes include the goods and services tax (GST), fringe benefits tax (FBT), payroll tax, stamp duties, land tax, local government rates, workers compensation and the superannuation guarantee charge (SGC).

Locating a family office in Australia for non-residents makes little sense, unless the family has substantial Australian real estate assets or an active Australian business that requires local stewardship.

1 Income Tax

Income tax in Australia deals with both income and capital gains, as capital gains net of capital losses are treated as income.

Companies – resident and non-resident - are taxed at 30% (although the Government proposes to reduce the rate to 29%) under the Federal income tax. The States and Territories do not impose income tax.

Residency of a company is determined as follows:

(i) A company incorporated in Australia is always a resident.

(ii) A company incorporated outside Australia is a resident only if the company carries on business in Australia and:

(a) its central management and control is in Australia; or

(b) its voting power is controlled by Australian resident shareholders.

Sometimes companies that have their central management and control in Australia are taken to carry on business in Australia by virtue of that fact alone.

There is no specific regime for “service companies” in the context of a family office.

In determining the taxable income of the company, Australia has no transfer pricing rules in relation to related party transactions that are purely domestic, but does have extensive transfer pricing rules when international transactions are involved.

If the company is a non-resident, then the taxable income is restricted to income that has an Australian source and capital gains that relate to “taxable Australian property”. However, in determining the source of income, there are rules within the transfer pricing rules that allow the Commissioner to determine the source of income in certain circumstances.

In terms of funding the company, the company would usually look to be funded on a cost recovery basis. However, if the company is providing services on a cross border basis then there is a need, in theory, for the recovery to be on a cost plus basis. The Commissioner has issued many rulings on transfer pricing, including TR 1999/1 which sets out the rules for intra-group pricing of services. TR 1999/1 contains some safe harbours.

Dividends are taxed as ordinary income. However, because Australia uses a full imputation system, tax paid by the company is potentially creditable to residents receiving dividends. For example, if a company earns $100 (of taxable income) and pays a dividend from the after tax profit of $70, that dividend can be “fully franked” so that a resident receiving the dividend is taken to have received $100 (the $70 dividend + a $30 franking credit) and is taxed on $100 but allowed a tax credit of $30.

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Dividends paid to non-residents are subject to a withholding tax regime. The normal rate is 30%, but that rate may be reduced by a relevant double tax agreement (a DTA), usually to 15%. Moreover, to the extent that a dividend is “franked”, there is no withholding tax. So in the above example, if the recipient of the $70 is a non-resident, no withholding tax would be payable.

Australia does not have a branch profits tax. However, a tax is payable on dividends paid by a non-resident company to a non-resident to the extent that the profits of the company have an Australian source. This tax is subject to a relevant DTA. For example, the Singapore DTA prevents this tax being imposed on the dividends paid to non-residents by a Singapore resident company.

2 GST

A 10% GST is imposed on all “taxable supplies”. In providing services to the family, any family office entity is almost certainly making taxable supplies. The tax is imposed on the service provider who is required to pay 1/11th of the “price” to the Federal Government. In related party transactions, the GST is imposed by reference to the market value of the thing supplied.

GST is akin to a value added tax (VAT) and principles similar to most VATs apply. If the family benefitting from the services are locally based, then GST will be imposed and the family will generally not be able to recover the GST paid.

The export of services is often GST free, but to the extent that an exported service relates to Australian real estate or a local business the service will not always be GST free.

3 Employment Taxes

The following taxes are imposed on the entity in relation to employees (including office holders, such as directors):

(i) Withholding taxes payable in respect of salary or wages. Failure to withhold and remit the tax has severe consequences.

(ii) FBT is payable by the entity on taxable fringe benefits (and are tax free to the employee). The rate is designed to tax the benefit as if it had been received by the employee.

(iii) Employers are required to pay contributions into complying superannuation funds for the benefit of each employee around 9% of the earnings of that employee on a quarterly basis (subject to a cap). Failure to do that results in the imposition of the SGC which equates to the unpaid contributions plus a penalty and an interest charge for lost earnings on the contributions.

(iv) Payroll tax is imposed on an entity by reference to wages and salary paid, fringe benefits and superannuation contributions. As this is a tax imposed by the States and Territories, the rates vary. In New South Wales (NSW), the most populous State, the rate is 5.45%. There is also a threshold, so that up to a certain amount the payroll may be exempt from payroll tax. In NSW, the threshold is currently A$658,000.

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4 Land Tax

Ownership of business premises by the entity will involve a tax impost based on the value of the land. As the States and Territories impose land tax, the rates vary. In NSW the highest rate is 2%.

5 Stamp Duty

This is another tax imposed by the States and Territories. It has been transformed from a tax on documents to a transaction tax that is generally imposed on real estate acquisitions, indirect real estate acquisitions when land holding companies or trusts are acquired and transfers of business assets, including motor vehicles. Duty is often imposed on an ad valorem basis at rates of as much as 7%.

6 Rulings

The Commissioner maintains an extensive rulings program for taxes that he administers and encourages taxpayers to obtain private binding rulings whenever there is doubt about the application of the tax rules.

II IMPACT OF REGULATION

A. Financial Services

The provision of certain financial services may require licensing under the Corporations Act. Broadly, the Corporations Act requires people who carry on a business of providing financial services to hold an Australian Financial Services (AFS) licence (unless they are covered by an exemption or are authorised to provide those financial services as a representative of another person who holds an AFS licence).

The provision of financial services includes:

(a) providing financial product advice;

(b) dealing in a financial product;

(c) making a market for a financial product; and

(d) providing a custodial or depository service.

However, such conduct will only be a financial service if the services are provided in relation to a financial product.

There are a number of exemptions. For example, a person is taken not to provide financial product advice if they only express an opinion or recommendation about the allocation of a person's funds among certain types of product and do not express an opinion or recommendation as to a specific financial product or class of financial products.

Outside of those organizations such as the Myer Family Company, which provides services to unrelated third parties and not just to the Myer Family, family offices will rarely require a licence.

B. Anti-Money Laundering

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In relation to money-laundering and the financing of terrorism, there have been significant reforms aimed at addressing the risk of money laundering in Australia and the threat to national security caused by the financing of terrorism. The reforms seek to implement Australia’s international obligations including a commitment to bring our AML/CTF regime in line with the international standards as set out by the Financial Action Task Force on Money Laundering.

A legislative framework has been put in place through the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. The Act currently covers the financial sector including banks, credit unions, building societies and trustees and extends to casinos, totaliser wagering service providers, bookmakers and bullion dealers.

A second tranche of reforms will cover real estate agents, dealers in precious metals and dealers in precious stones and a range of non-financial transaction provided by accountants, lawyers and trust and company service providers.

As part of the anti-money laundering rules, the Australian Transaction Reports and Analysis Centre performs the following roles:

(a) monitoring the compliance of Australian businesses with the anti-money laundering and counter-terrorism financing legislation; and

(b) carrying out intelligence activities and providing financial information to State, Territory and Federal law enforcement, security, social justice and revenue agencies, such as the Australian Taxation Office.

C. ASIC

The Corporations Act requires the following entities (amongst others) to lodge financial reports with ASIC:

(a) public companies;

(b) large proprietary companies;

(c) small proprietary companies that are foreign controlled;

(d) registered foreign companies; and

(e) small proprietary companies that ASIC directs to lodge financial reports (usually where significant sums of money are involved).

There are a number of limited exceptions to the financial reporting requirements; for example, where the entity and its related entities fall below certain thresholds published as Class Orders by ASIC.

Foreign companies that are registered as under the Corporations Act are also required to lodge financial statements, although it may be possible to avoid the obligation to lodge if the entity is covered by a Class Order that provides relief from the obligation to lodge.

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D. Exchange Control

Australia no longer applies any exchange controls.

E. Tax Agency Services

A person, partnership or company is not entitled to charge a fee for preparing an income tax return or transacting business on behalf of a taxpayer in taxation matters unless they are registered as a tax agent or BAS Agent with the Tax Practitioners Board.

An exemption exists for services provided to a related entity. III EFFECTIVE MANAGEMENT

Australia does not rely on the concept of “the place of effective management” as a basis for taxation. The expression appears in many of Australia’s DTAs in the article dealing with residency and is usually relevant only if under a DTA there is an issue of dual residency of an entity (aside from an individual).1

The concept of “central management and control” is, however, of great significance in relation to:

(a) companies incorporated outside Australia;

(b) trusts; and

(c) limited partnerships.

A. Companies

The approach taken in Australia, as noted above, is to treat companies incorporated outside of Australia as residents if they carry on business in Australia and have their central management and control in Australia.

The Commissioner has interpreted the residency rules in ruling TR 2004/15 as establishing a need to satisfy two requirements2 when the company is not incorporated in Australia:

1 That the company carries on business in Australia.

2 The central management and control is in Australia.

The decision in Malayan Shipping v FCT (1946) 71 CLR 1563 has often been interpreted as laying down a rule that a company is a resident if its central management and control is in Australia as, by definition, a company that has its central management and control in Australia carries on business in Australia. Whilst that is a misreading of the decision, the risk is obvious.

1 There is recent UK case law on the concept – see Smallwood v HMRC [2009] EWHC 7772 Perhaps there is a third requirement, that of incorporation which seems to have been glossed over. 3 Cases cited can be viewed at www.austlii.edu.au – where access is also available to Canadian and UK

cases that are cited.

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A common approach is to rely on nominee directors to avoid having central management and control in Australia, although case law tells us that that approach does not always achieve the desired outcome. As always, the issue comes down to the facts; see for example: Wood v Holden [2006] EWCA Civ 26, Esquire Nominees Limited v FCT (1973) 129 CLR 177 and HMR&C v Smallwood [2010] EWCA Civ 778.

In Smallwood, Lord Justice Patten adopted the useful summary of Lord Justice Chadwick in Wood v Holden. Patten LJ said at [59]:

The importance of the case for present purposes lies in the analysis by Chadwick LJ of what is capable of constituting management and control of a company by persons who are not its directors. Referring to the treatment of this issue by Park J at first instance, he said this:

“[26] At para [26] of his judgment the judge had examined four cases in which (as he said) the courts had recognised the considerations to which he had just alluded. Those cases were Re Little Olympian Each Ways Ltd [1995] 1 WLR 560, Esquire Nominees Ltd v Comr of Taxation (1973) 129 CLR 177, New Zealand Forest Products Finance NV v Comr of Inland Revenue [1995] 2 NZLR 357 and Untelrab Ltd v McGregor (Inspector of Taxes) [1996] STC (SCD) 1. He accepted, of course, that each of those cases was decided on its own facts; but 'they do have some common features which … are relevant to the present case'. He identified those features at para [27]… They all involved persons based in one jurisdiction (commonly a high tax jurisdiction) causing companies to be established in other jurisdictions (commonly low or no tax jurisdictions). In all the cases the companies so established were intended to fulfil particular purposes which were ancillary to the activities of the persons who caused them to be established. In all the cases the local managements did not take initiatives, but responded to proposals (described in some passages in the judgments as instructions) which were presented to them. In all the cases they did implement the proposals, and it is obvious that, when the foreign companies had been established, the confident expectation was that they would implement the proposals. In general, although large amounts of money may have been involved, the functions which the companies were established to fulfill did not involve much regular activity, so there was no great need for frequent exercises of central management and control. …

[27] In my view the judge was correct in his analysis of the law. In seeking to determine where 'central management and control' of a company incorporated outside the United Kingdom lies, it is essential to recognise the distinction between cases where management and control of the company is exercised through its own constitutional organs (the board of directors or the general meeting) and cases where the functions of those constitutional organs are 'usurped'—in the sense that management and control is exercised independently of, or without regard to, those constitutional organs. And, in cases which fall within the former class, it is essential to recognise the distinction (in concept, at least) between the role of an 'outsider' in proposing, advising and influencing the decisions which the constitutional organs take in fulfilling their functions and the role of an outsider who dictates the decisions which are to be taken. In that context an 'outsider' is a person who is not, himself, a participant in the formal process (a board meeting or a general meeting) through which the relevant constitutional organ fulfils its function."

B. Trusts

A trust, wherever it is formed, is regarded as an Australian resident trust for income tax purposes for an income year (1 July to the next 30 June) if one or more trustees are Australian residents or the central management and control of the trust estate is in Australia at any time in an income year.

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There is no Australian case law on what constitutes central management and control of a trust estate. There is, however, some recent case law on what is the “trust estate”. For example, Gordon J Leighton v FCT [2010] FCA 1086 said at [35]:

Consistent with those authorities, I accept that the expression “trust estate” in Div 6 of Pt III refers to trust property which gives rise to the income derived by the trustee.

Recently, the Canadian courts have been focused on the issue of where is a trust resident for the purposes of Canadian income tax, including the double tax treaty between Canada and Barbados. The case, Garron v The Queen 2009 TCC 450, known as St Michael Trust Corp v The Queen 2010 FCA 309 on appeal (collectively referred to as Garron), considered the issue by first holding that a trust may reside where the central management and control is actually exercised, notwithstanding that the trust is not a person because for income tax purposes it is treated as though it were a person.

A point to note is that the judges in Garron refer to the residency of a trust by reference to where it is centrally managed and controlled, whereas in the Australia legislation the question posed is where is the central management and control of the trust estate.

The following extract from St Michael is worth noting:

[67]           Some of the factors listed above are common characteristics of ordinary trusts and, considered in isolation, would not be sufficient to locate the management and control of the Trusts anywhere but the residence of the St. Michael Trust Corp. For example, the fact that the beneficiaries have the right to appoint a protector who has the power to replace the St. Michael Trust Corp. as trustee is a common safeguard in a trust indenture and would not by itself be enough to find the beneficiaries to be in control of the property of the Trusts. The same could be said of the fact that St. Michael Trust Corp. and the beneficiaries employ common advisers, or the fact that the beneficiaries took it on themselves to advise the St. Michael Trust Corp. and even urged St. Michael Trust Corp., however strongly, to undertake a particular transaction. Indeed, the appointment of a trustee with little investment experience in a trust that requires the property to be invested might not be significant, provided that the trustee has the power to retain others for advice and, in the end, is the one making the decisions.

[68]           However, there is a line to be drawn. On one side of the line are recommendations, even strong ones, by the beneficiaries to the trustee, leaving the trustee free to decide how to exercise the powers and discretions under the trust. In that case, the trustee is still managing and controlling the trust.  On the other side of the line the beneficiaries are really exercising the powers and discretions under the trusts, managing and controlling the trusts, and displacing the appointed trustee.  As mentioned above, on which side of the line a case falls is a factual question, requiring consideration of the evidence in its totality. [69]           Justice Woods took into account some normally neutral facts, such as the existence of a protector and reliance on common advisers, and combined them with a considerable body of evidence of the surrounding circumstances to conclude that on the facts of this case, the line was crossed. In my view, it was reasonably open to her to reach that conclusion. [70]           Indeed, what else is to be made of the common understanding of the parties, as found by Justice Woods, that decisions in relation to the sale of the Trusts’ interests in PMPL, the investment of the cash proceeds received on the sale, the making of distributions to the beneficiaries, and the taking of appropriate action to minimize the tax burden of the Trusts would be made by Mr. Garron and Mr. Dunin and implemented by St. Michael Trust Corp.? What else explains the lack of documentary or other evidence that St. Michael Trust Corp. took an active role in assessing any of the important decisions relation to the disposition of the property of the Trust? What is the explanation for the professed lack of interest on the part of Mr. Garron and Mr. Dunin of the

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capabilities of St. Michael Trust Corp. to manage trust assets, except in relation to the work ordinarily done by someone with accounting and tax expertise? What is the explanation for the paucity of evidence as to the formation and operation of the Trusts and the failure to call key witnesses?

 The comment at paragraph [67] is interesting, but it does not follow that Australian courts will take the same approach:

For example, the fact that the beneficiaries have the right to appoint a protector who has the power to replace the St. Michael Trust Corp. as trustee is a common safeguard in a trust indenture and would not by itself be enough to find the beneficiaries to be in control of the property of the Trusts.

In ASIC v Carey and Others (No 6) (2006) 153 FCR 509, French J (as he then was) followed and extended the approach of the Family Court in holding that certain persons had contingent interests in trust property, saying:

38 The Full Court of the Family Court of Australia in In the Marriage of Ashton [1986] FamCA 20; (1986) 11 Fam LR 457 considered a case in which the husband was appointor of a family trust. He had the power to remove and appoint the trustee and could appoint himself. The trustee had the power to alter the terms of the trust at will. He was not a beneficiary of the trust but had received income from it. He was found to be ‘in full control of the assets of the trust’. There were ‘good grounds for saying the trust is no more than the husband’s alter ego’. Strauss J said (at [14]):

‘In the result, having regard to the powers and discretions which the husband has, and having regard to what had in fact taken place, for the purposes of s 79 [of the Family Law Act 1975 (Cth)], the husband’s power of appointment, and all the attributes it carries with it, amounts to de facto ownership of the property of the trust.’

39 A similar trust arrangement existed in In the Marriage of Goodwin (1990) 101 FLR 386. The trial judge had found that the reality in that case was that no person other than the husband had any real interest in the property or income of the trust except at the will of the husband. In upholding the trial judge, the Full Court said (at 392):

‘... we have no doubt that his Honour was entitled to find that the trust property was in reality the property of the husband in the present case. The husband had the sole power of appointment of the trustee which was a creature under his control and he was a beneficiary to whom the trustee could make payments exclusive of other beneficiaries as the husband saw fit.’

Whilst that was said in a different context, it should, at the very least, be a pointer to how the courts may approach the issue of central management and control of a trust estate.

The Commissioner’s views can be gleaned from his ruling on the meaning of “Australian superannuation fund” in ruling TR 2008/9. Those views reflect the approach taken in Garron (whilst obviously pre-dating the case). The Commissioner’s position is extensively discussed in that ruling from [109] onwards.

C. Limited Partnerships

Under Australian income tax legislation, if a limited partnership or limited liability partnership is carrying on business in Australia or is centrally managed and controlled in Australia, then it is deemed to be a resident company regardless of where that partnership is formed.

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D. Permanent Establishment

It is worth noting that having a “place of management” or an office in Australia is an issue if the entity is resident in a country with which Australia has a DTA as the DTAs invariably provide that a “place of management” and an “office” are permanent establishments and that, of course, creates a liability to Australian tax for profits attributable to that permanent establishment.

IV INFORMATION

A. Commissioner’s Powers

The Commissioner has extensive powers in relation to the gathering of information. In relation to income tax:

1 The Commissioner has full and free access to all buildings, places, books, documents and other papers for any purposes of the income tax Acts and he can make extracts from or copies of any such books, documents or papers.

2 The Commissioner may by notice in writing require any person to:

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

(b) attend and give evidence and produce all books, documents and other papers in that person’s custody or control.

In relation to (b), the Commissioner may require the information or evidence to be given under oath or affirmation.

3 The Commissioner may issue an “offshore information notice” to a taxpayer seeking information or documents that are offshore. If the notice is not complied with then the Commissioner’s consent is required if the taxpayer later wants to introduce that material in evidence. However, the Commissioner must consent if a refusal would have the effect for the purposes of our Constitution of making any tax or penalty incontestable.

The Commissioner’s powers are limited in that the Commissioner’s powers are subject to a privilege, such as legal professional privilege. The Commissioner cannot obtain access to communications that are subject to privilege.

B. Privilege

Aside from legal professional privilege (in respect of which there is no doubt about its application), the courts are currently dealing with issues concerning the privilege against spousal incrimination and whether confidential accounting advices that are covered by the Commissioner’s “Guidelines to Accessing Professional Accounting Advisors’ Papers” can be protected.

In relation to the privilege against spousal incrimination, the matter is currently before our highest court, the High Court of Australia – see Australian Crime Commission v Stoddart & Anor [2011] HCATrans 44 for details of the arguments put before the Court.

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On the issue of an accountant’s work papers and the “Guidelines’, the matter has been the subject of litigation involving a very high profile individual, Mr Paul Hogan – see Stewart v The Deputy Commissioner of Taxation [2011] FCA 336, a decision handed down on 8 April 2011. Whilst there is no “privilege” that is relevant here, the decision accepts that the issue of procedural fairness may arise (although no such issue arose in that case) requiring the Commissioner to allow a taxpayer to be heard as to whether the Commissioner can access the material that he has nominally allowed to be “protected from disclosure” under the Guidelines.

There is also currently a debate about whether the Government should extend a privilege to tax advice documents of accountants. The Assistant Treasurer, in a speech on 6 April 2011, said that whilst it is by no means a foregone conclusion [that privilege will be extended], there are cogent reasons for a robust debate on the issue.

C. Exchange of Information

Australia is very focused on the exchange of information. All of Australia’s DTAs contain articles dealing with exchange of information. The DTAs are being updated so that the exchange of information article in the major DTAs is in line with the current standard in the OECD Model (see article 26 of the Model Tax Convention on Income and on Capital).

In addition, Australia has entered into TIEAs (Taxation Information Exchange Agreements) with the following “havens”, although not all of these are currently operative:

Anguilla Antigua and Barbuda Aruba Bahamas Belize Bermuda British Virgin Islands Cayman Islands Cook Islands Dominica Gibraltar Grenada Guernsey Isle of Man

Jersey Marshall Islands Mauritius Monaco Montserrat Netherlands Antilles Samoa San Marino St. Kitts & Nevis St Lucia St. Vincent and the Grenadines Turks and Caicos Islands Vanuatu

D. Illegally Obtained Information

Another matter currently in dispute in Australia is whether the Commissioner can use evidence obtained illegally (from the perspective of the source country). The issue has arisen in a slightly unusual way in that a husband and wife, Mr and Mrs Denlay, are challenging the issuing of assessments when the Commissioner has accessed illegally obtained material and used that material as a basis for his assessments.

The Denlays lost at first instance – see Kevin Denlay v Commissioner of Taxation [2010] FCA 1434 and Mirja Denlay v Commissioner of Taxation [2010] FCA 1435 – when they challenged the assessments that had been issued because the Commissioner had come to obtain copies of

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documents originating from the LGT Group in Liechtenstein. The documents had been provided by the notorious Mr Kieber.

In challenging the assessments, the Denlays argued that there had been a breach by the Commissioner of our Criminal Code – section 400.9 – because the material provided had been stolen.

In upholding the assessments, the judge, Logan J, held that the Commissioner had a duty under the income tax Acts to assess the income of taxpayers from “any other information in his possession, or from any one or more ... sources” and had to enjoy “full and free access for that purpose”. Consequently, the Commissioner could not then be in breach of s 400.9 if the alleged breach was undertaken with a justification at law. His Honour went on to say:

Here, such laws as Mr Kieber may have or did violate to obtain the information were not even the laws of any Australian jurisdiction. A fortiori in this case, the innocent receipt by the Commissioner of the information and its subsequent use for assessing means that the assessment should not be quashed.

One very interesting, but seemingly erroneous aspect of his Honour’s reasoning was that:

In any event, it would be incongruous if material illegally obtained could, depending on the exercise of a judicial discretion which took into account competing public interests: Bunning v Cross [1978] HCA 22; (1978) 141 CLR 54, be used in the exercise of the judicial power of the Commonwealth yet be unusable at all in the exercise of the executive power of the Commonwealth.

The taxpayers have appealed. The appeals were heard on 31 March 2011. The judgments have been reserved.

E. Tax Reporting

The lodgment of an income tax return is generally required on an annual basis. One part of the tax return, known as Schedule 25A, requires the reporting of international transactions in a summary form. The following appears on the web site of the Australian Taxation Office:

If you answered yes on your partnership, trust, company or fund tax return to a question that asked if the aggregate amount of your transactions or dealings with international related parties was more than $1 million, complete section A of Schedule 25A and lodge it with the appropriate tax return. The aggregate amount of the dealings is the total amount of all dealings, whether on revenue or capital account, and includes the balance of any loans or borrowings outstanding with international related parties.

If you answered yes on your partnership, trust, company or fund tax return to a question about an overseas branch, an interest in a foreign company, a foreign trust, a foreign investment fund or a foreign life insurance policy, complete all questions in section B of Schedule 25A 2010 and lodge it with the appropriate tax return.

If you answered yes to both questions, complete sections A and B and lodge Schedule 25A 2010 with the appropriate tax return.

John Balazs13 April 2011

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