Tax Debts and Foreign Currency Notice – Currency Denomination Not Relevant: Commissioner Wins Battle But May Lose the War

The Full Federal Court has unanimously allowed the Tax Commissioner’s appeal and held that s 255 notices requiring a company to retain out of Canadian currency sufficient funds to meet a taxpayer’s Australian income tax liability were effective: FCT v Resource Capital Fund IV LP & Ors [2013] FCAFC 118, Full Federal Court, Allsop CJ, Gordon and Jagot JJ, 22 October 2013.

The Commissioner might have won this particular court battle but comments made by the Court may not please him – see below.

The taxpayers in the case (RCF IV and RCF V) were limited partnerships formed in the Cayman Islands. They owned shares in an Australian company (Talison) which they sold to a third party. The amounts payable to the taxpayers were denominated in Canadian currency and were payable out of a Canadian bank account maintained by Talison. There was no obligation on Talison to pay the taxpayers in Australian dollars. The Commissioner issued notices under s 255 of the ITAA 1936 requiring Talison, as “a person having the receipt control or disposal of money belonging to” the taxpayers, to retain from that money, and to pay to the Commissioner, the amounts the taxpayers were assessed to pay. The relevant amounts were expressed in Australian currency. At first instance, the Federal Court held that the s 255 notices were ineffective and the Commissioner appealed.

The principal issue in the appeal was in essence whether the reference to “money” in s 255 was confined to Australian currency or does it include foreign currency?  The Full Federal Court allowed the Commissioner’s appeal finding that “money” should be read in s 255 as including a debt which the recipient of the notice owes to the non-resident taxpayer, whether or not that debt is denominated in Australian dollars.

So the Commissioner won his appeal. But there’s a “but”! Judge Gordon said the tax owed is a personal liability for the tax payable by the non-resident taxpayer to the extent of any amount that the controller has retained, or should have retained, under s 255(1)(b).  The amount retained is fixed.  That amount in foreign currency, regardless of any change in exchange rates, does not alter.  “For example, if at the time of the receipt of the notice under s 255, the Australian dollar had parity with the US dollar and a controller was required and authorised to retain US$100 and he did, the amount retained would be US$100.  The fact that by the time the tax was due, the Australian dollar had devalued against the US dollar may be put to one side.  The amount the controller retained was and remained US$100. The fact that less tax may be paid is ultimately to the detriment of the non-resident taxpayer and the Commissioner.” A sting in the tail for the Commissioner it would seem!

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