JH Rayner (Mincing Lane) Ltd v Chief Collector of Taxes [1993] PNGLR 416 (18 July 1991)

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WORDS AND PHRASES - "Associated persons", Income Tax and Dividend (Withholding) Tax Rates Act 1984 - "Associate", Income Tax Act 1959.

The appellant taxpayer sought to overturn a decision of the Income Tax Review Tribunal, which upheld a determination of the Chief Collector of Taxes, who had assessed tax at the rate of 30% for the four years ended 31 December 1983 to 1986. The appellant argued that the correct rate was 10%. The appellant was a non-resident wholly-owned subsidiary of another non-resident, company, Berisford PLC. Through another subsidiary, Pauline Mari BV, Bereford PLC held a 25% shareholding in Kopi International, a PNG company. The appellant performed management and other services for Kopi International. The fees charged for those services were the subject of the assessment under dispute. If Kopi International could be shown to be an "associated person" of the appellant, then, pursuant to s 7 of the Income Tax and Dividend (Withholding) Tax Rates Act Ch 111, the higher tax rate of 30% was applicable. The case turned on the statutory interpretation of "associated person" in s 7 and "associate" in s 4 of the Income Tax Act 1959. There was no definition of "associated person" in the former act. The definition of "associate" in the latter act was the only definition approximating the phrase. The Tribunal had sought to correct an error of omission of the legislature by reading sections 4(1)(b)(iv),(v) and (vi) together, so that "person" in (vi) included "company".

1. The definition of "associated person" in s 7 of the Income Tax and Dividend (Withholding) Tax Rates Act could be ascertained from the definition of "associate" in s 4(1)(b) of the Income Tax Act 1959.

2. Departure from the clear and unambiguous wording may only be resorted to in plain and obvious cases where without correction the objective of the act itself would be totally defeated. This is especially so in taxing statutes.

3. Because of the express reference to "person" in s 4(1)(b)(iv) and "company" in s 4(1)(b)(v), the reference to "person" in s 4(1)(b)(vi) does not mean "company". Therefore, a company that is an associate of another company which is an associate of a taxpayer, is not itself an associate of the taxpayer. Put another way, a company that is an associate of an associate of the taxpayer is not itself an associate of the taxpayer.

4. The PNG company, Kopi International, was not an associated person of the appellant taxpayer; therefore, the lower rate of tax was the applicable rate.

Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297.

SHEEHAN J: J.H. Rayner (Mincing Lane) Ltd, the appellant, seeks to overturn the decision of the Income Tax Review Tribunal, made against the company on 20 October 1990. That decision upheld a determination of the Chief Collector of Taxes (hereafter Commissioner) disallowing an objection by the appellant company to an assessment.

As stated by the Income Tax Review Tribunal in the opening paragraph of its decision:

"the question in issue is whether, in each of the four (4) years ended 31 December 1983 to 1986 inclusive, income tax was payable at a rate of 10% as contended by the taxpayer company, or at 30% as assessed by the Chief Collector of Taxes on royalties derived from Papua New Guinea in each of those years".

Rayner, the appellant taxpayer liable under the assessment, is a non-resident and wholly owned subsidiary of Berisford PLC, another non-resident company which has invested in the PNG company, Kopi International Ltd. Through Pauline Marie BV, another of its subsidiaries, Berisford holds a 25% shareholding in Kopi International. The appellant, Rayner, provided "management services, expertise and market intelligence" for Kopi International.

The tax payable on the fees for those services (acknowledged to be royalties under the PNG Income Tax Act 1959) is the subject of this dispute. The Tribunal has upheld the Commissioners' assessment of 30%. Rayner contends the rate should only be 10%.

The interpretation of the Commissioner of the relevant Income Tax Act provisions stands or falls on whether the taxpayer is what s 7 of the Income Tax and Dividend (Withholding) Tax Rates Act (hereafter Rates Act) calls an "associated person" in relation to Kopi International, the company paying the royalties.

The rate of tax imposed by this Act upon income to which s 4(c) (other then assessable income from mining operation or assessable income from petroleum operation) of the Income Tax Act applies is:

(a) where the recipient is an associated person - 30% of the assessable income; or

(b) where the recipient is not an associated person - 10% of the assessable income or 48% of the taxable income whichever is the lesser".

The Tribunal found no definition of "associated person" in the Rates Act. The only definition approximating the phrase lies in s 4(1)(b) of the Income Tax Act 1959 itself. This is the interpretation section of the act. It is paraphrased as follows:

'associate', in relation to a person (in this definition referred to as the taxpayer) means:

(A) the tax payer company is, or its directors are accustomed or under an obligation to act as directed by that person or that person and another or other persons; or

(B) that person, or he and his associates (as defined) is or are able to control more than 50% of the voting rights in the tax payer company; or

(A) the other company or its directors is or are accustomed or under an obligation to act as directed by the tax payer company and/or its associates (as defined); or

(B) the tax payer company and/or its associates is or are able to control 50% of the voting rights in that other company; or

(vi) a person who is an associate of the other person referred to in (iv) above." (emphasis added).

After considering the above subsection of the definition in detail and reviewing the history and structure of Kopi International, the Tribunal concluded that no one of (b)(iv) or (b)(v) or (b)(vi), on its own, could be relied upon to constitute the appellant as an "associated person" of Kopi International. At paragraph 41 of the decision, the Tribunal states:

"41. Accordingly, unless the scope of sub-para (b)(v) can be extended by reference to some other provisions in the definition, Kopi International would not have been an associate of a taxpayer company during the years in dispute".

It was argued before the Tribunal and again before this Court that such an extension was not open to the Tribunal. As the decision records, counsel for the taxpayer argued that since:

"All the definitions in s 4(1) are subject to the qualification that they apply 'unless the contrary intention appears'. Having gone to the length to which the legislature has gone in defining 'associate' and to the explicit categorisation of the parties who may answer that description, it is not difficult to conclude that the legislature has demonstrated a contrary intention...."

In any case, counsel for the appellant submitted that the exhaustive definition surely shows the legislature intended that, in determining "an associate", "company" means company and "person" means person. Any other reading of the definition, it was submitted, only leads to a nonsensical result. Counsel contended that proper interpretative construction required that, where there appears any conflict between any general and specific provisions, it must be the specific that prevails.

Counsel for the appellant also relied on the maxim of interpretation expressio unius est exclusio alterius, which translates as, use of specific words excludes the use of any other or more general words.

Wemay v Tumdual [1978] PNGLR 173 and SCR No 6 of 1984 [1985] PNGLR 31 were cited by counsel confirming that it is the actual words of a statute that must be looked at first.

"The fundamental rule for the interpretation of a statute applies in this case, viz. that the statute should be construed according to the intention expressed in the Act itself. If the words of the statute are themselves precise and unambiguous, then no more is necessary than to expound those words in their ordinary and natural sense. The words themselves are generally the best declaration of the intention of the legislature".

Counsel also referred this Court to Mairi v Tololo [1976] PNGLR 125, where the Supreme Court confirmed that taxing acts should be construed strictly. At p 139 of that case, there is a summary of long recognized authoritative statements that call for courts to follow the precise wording of taxing statutes and not to alter or supplement them by words of their own to better effect the intention of Parliament. It is said in that decision, at p 139:

"[W]e think it is incumbent upon the court to follow a well-trodden road of interpretation. This path suggests that for the imposition of a charge upon the subject to be legal, a clear and unambiguous intention must be shown in a Statute."

The Court went on to quote a well known passage from Rowlett J in Cape Brandy Syndicate v Inland Revenue Commissioners [1921] 1 KB 64 at 71:

"In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used".

"[The Crown fails] if the case is not brought within the words of the statute, interpreted according to their natural meaning; and if there is a case which is not covered by the statute so interpreted that can only be cured by legislation, and not by an attempt to construe the statute benevolently in favour of the [Crown]".

The Tribunal acknowledged (para 46) the force of the expressio unius argument and that it "supports the view that the express reference in (b)(v) to another company excludes recourse to other sub-paragraphs of the definition which deals with other parties which may be associates of a taxpayer".

It also acknowledged (para 47) that in going beyond the strict reading of sub-paragraph (b)(v) and relying on an amalgam of that sub-paragraph with (b)(iv) and (b)(vi), that could itself lead to anomalies.

However, the Tribunal was much struck by the argument for the Commissioner "that unless it is permissible to go beyond (b)(v), the definition of 'associate' is ineffective to catch the most obvious example of a taxpayer company being an associate of another company, namely, where the taxpayer company is wholly-own subsidiary of that other company".

Reluctant to accept this conclusion, the Tribunal sought assistance from Cooper Brookes (Wollongong) Pty Ltd v Federal Commissioner of Taxation (1981) 147 CLR 297, where Gibson ACJ says at p 304:

"There are cases where the result of giving words their ordinary meaning may be so irrational that the court is forced to the conclusion that the draftsman has made a mistake, and the canons of construction are not so rigid as to prevent a realistic solution in such a case".

The majority in that case went on to find there was an anomaly in the statute then under review, warranting such an interference.

Likewise, the Tribunal decided in this matter that there is an anomaly in the definition of "associate" in the Income Tax Act. At para 52 of its decision, the Tribunal says:

"In my opinion the words of the definition of 'associate', when read in their context and having regard to the definition of 'person' and the declaration in s 4(9) of the Act, are far from clear and unambiguous. For that reason I think I am justified on what has been said in Cooper Brookes in trying to give effect to what I discern to be the intention of the legislature. I appreciate that the fact that, literally interpreted, the definition of 'associate' would not apply to a subsidiary/parent relationship, is a slender reed on which to hand a departure from literal interpretation and one that may well be counter balanced by Mr Hack's point about sub-para (b)(v) being rendered unnecessary. Each of those points however only serves to underline, in my view, the ambiguity of the definition. I would prefer, of course, to have some judicial guidance as to the interpretation of the definition and I readily confess that I am far from certain that I have reached the correct conclusion".

It was on this reasoning that the Tribunal determined to use both sub-paragraphs, (b)(iv) and (b)(vi), in the definition of "associate" in conjunction with sub-para (b)(v) to determine whether a taxpayer is associate of another company.

Having determined that there was an "association", the Tribunal then had to consider whether, through any combination of those sub-paragraphs, the evidence in this case showed that the taxpayer was obliged or accustomed to act as directed by any associate company. That is, by either Pauline Marie, Berisford, or Rayner.

The Tribunal accepted that, on examination of the voting rights of the shareholders, Kopi International was not obliged to act as directed by any associate. On the question as to whether Kopi was accustomed to act as any of its associated companies directed or wished, the Tribunal "formed the impression" that the PNG shareholders were content to "go along" with the wishes of the associate company. That impression, coupled with one decision of the directorate of Kopi (decided by casting vote of the chairman), made it difficult for the Tribunal to accept that the Kopi International would have been allowed to act independently of the wishes of Berisford (para 59). The Tribunal, therefore, upheld the Commissioners' assessment of a tax rate of 30%.

When questions arise as to the interpretation of an act, the sole issue for the Court is to ascertain the true construction of a statute. There are, of course, various rules of construction, but these are not rules of law. They are aids only.

The maxim expressio unius personae vel rei est exclusio alterius (to express one thing is to exclude another) is one such rule. It is an extension of another Latin maxim, expressum facit cessare tacitum (to state a thing expressly ends the possibility that something inconsistent with it is implied). Both maxims may be seen as essentially statements that support the principle of following the literal and ordinary meaning of words in any particular statutes. They embody the principle that no inference is proper if it goes against the express words Parliament has used. [See Bennion, Statutory Interpretation (Butterworths) 1988 reprint p 843].

In Mairi v Tololo, cited above, the Supreme Court determined that statutes imposing taxes or fees call for strict interpretation. In so doing, it was following a rule of construction that is historic throughout Commonwealth jurisdictions. It was not establishing a rule of law.

All statutes must be construed to give effect to the intention of the legislature. As that intention is to be gathered from the language employed (and taxing statutes are not any different in this regard), courts will always look for express and clear language in statutes which confer or take away legal rights, impose taxes or charges, or alter clearly established principles of law or, indeed, legislate with regards to the jurisdiction of courts.

The Australian High Court and the English House of Lords have both made very strong statements against interfering with the plain and ordinary meaning of statutory provisions. That injunction is to be held paramount, even if a statutory provision is seen on close examination (and depending on view point) to be "inadequate" or not totally "comprehensive" in some respect or another.

Both courts, however, have left a door open to enable the judge to find solutions where totally irrational or anomalous results will defeat the statute and the perceived intention of Parliament. It is within the jurisdiction of this Court to adopt that course too. But it must be remembered that the overriding theme of the many decisions throughout Commonwealth jurisdictions shows the continuing emphasis on the need for courts (and tribunals for that matter) to be wary of supplying "solutions" to supposed statutory deficiencies, and remind them that that is the function of the legislature.

The decision to assign additional words or to interfere with the actual wording of a statute is, of course, never lightly taken. The difficulty facing courts is whether the solution to a perceived error, anomaly, or ambiguity is sufficiently clear to warrant the court supplying a solution to ensure the intent of the act is not frustrated, rather than draw attention to it for correction by legislation. In the Cooper Brookes case cited above, although confirming the general rule of following the words of an act, the decision was taken to correct what was seen to be an anomaly in the statute under review. The court was not unanimous. That, perhaps, illustrates the difficulties in determining the point at which courts should refrain from supplying drafting alterations and leave correction to Parliament.

The difficulties in reaching a balance have been stressed in the leading English decision of the House of Lords in Stock v Frank Jones (Tipton) Ltd [1978] 1 All ER 948. That decision, confirmed by the House of Lords in R v Bloxham [1982] 1 All ER 582, was also followed by the Court of Appeal in R v West Yorkshire Coroner [1982] 3 All ER 1098. While recognising the interpretive role of the courts, it was emphasised that such a course is to be undertaken only in the most obvious of cases.

In Stock v Frank Jones, there is a lengthy but telling passage from Lord Simon at p 953.

"What is incontestible is that the court is a mediating influence between the executive and the legislature on the one hand and the citizen on the other. Nevertheless it is essential to the proper judicial function in the constitution to bear in mind: (1) that modern legislation is a difficult and complicated process, in which, even before a bill is introduced in a House of Parliament, successive drafts are considered ... (2) that the bill is liable to be modified in a Parliament ... whose members are answerable to the citizens who will be affected by the legislation; ... a judge is not so answerable; (3) that in a society living under the rule of law citizens are entitled to regulate their conduct according to what a statute has said, rather than by what it was meant to say or by what it would have otherwise said if a newly considered situation had been envisaged; (4) [that the letter should be given priority in any contradiction between the letter and the spirit of the law] ... (5) that Parliament may well be prepared to tolerate some anomaly in the interest of an overriding objective; (6) that what strikes the lawyer as an injustice may well have seemed to the legislature as no more than the correction of a now unjustifiable privilege or as a particular misfortune necessarily or acceptably involved in the vindiction of some supervening general social benefit; (7) that the Parliamentary draftsman knows what objective the legislative promotor wishes to attain, and he will normally and desirably try to achieve that objective by using language of the appropriate register in its natural, ordinary and primary sense; ... (8) that Parliament ... can ... (rectify) by legislation; this is far preferable to judicial contortion of the law to meet apparently hard cases with the result that ordinary citizens and their advisers hardly know where they stand.

In regard to taxing statutes, (3) above constitutes a significant argument for strict construction.

"I wish, however, to add a few words of my own on the 'anomalies' argument. Counsel for the appellants sought to give the words a meaning other than their plain meaning by drawing attention to what he called the 'anomalies' which would result from giving effect to the words used by Parliament. If the words used be plain, this is, I think, an illegitimate method of statutory interpretation unless it can be demonstrated that the anomalies are such that they produce an absurdity which Parliament could not have intended, or destroy the remedy established by Parliament to deal with the mischief which the Act is designed to combat".

"If the words used by Parliament are plain, there is no room for the 'anomalies' test, unless the consequences are so absurd that, without going outside the statute, one can see that Parliament must have made a drafting mistake .... But mere 'manifest absurdity' is not enough: it must be an error (of commission or omission) which in its context defeats the intention of the Act".

The central theme of the rules of interpretation of statutes, therefore, remains that words be given their normal and ordinary sense and that the meaning of statutes and their provisions are to be determined from the actual wording of the legislature. For all that this may be hedged around by decisions which permit courts to endeavour to ascertain the intention of Parliament in cases of anomalous or irrational results, these decisions do not in any way derogate from the principal rule. Departure from the clear and unambiguous wording may only be resorted to in plain and obvious cases where, without correction the objectives of the act itself would be totally defeated.

That is not the case here. The simple fact of the matter is that, in the view of the Commissioner and the Tribunal, interpretation of the definition of "associate" in the Act, does not include what they say is the most obvious example of a taxpayer company being associate of another, namely, a wholly owned subsidiary. To the Commissioner and to the Tribunal that renders the literal meaning of the words used "far from clear and unambiguous".

That simply is not so. There may have been an error of omission; it may even have been a deliberate omission; but the fact that the Commissioner or the Tribunal thought that wholly-owned subsidiaries should have been included does not make ordinary words anomalous. It certainly does not justify the strain on the wording of the statute that the Commissioner and the Tribunal were compelled to exercise, to justify the use of sub-paragraphs (b)(iv), (v) and (vi) in a way which was itself anomalous. When the prime rule of interpretation, to let the words used speak for themselves, is coupled with the historic refusal of courts to apply "corrections" to the supposed defects of taxing statutes, the need to refrain from interfering in the what is plainly the legislative process is clear.

It is obvious that the Tribunal was meticulous in considering all matters placed before it and undertook considerable research before reaching its decision. And, with great respect, the frankness displayed by the Tribunal when confronted with the difficulties of ascertaining the appropriate principles of interpretation illustrates a truly judicial approach.

However, the Tribunal itself recognised that its departure from the literal interpretation to one using contradictory and anomalous terms was on shaky grounds. It is my view that too great a reliance was placed on subsidiary rules which "permit" interference with the actual written words, rather than on the first general rule of interpretation. This is what has lead the Tribunal into error, departing from plain and ordinary words in an endeavour to supply corrections for what it perceived to be an omission in the act; an omission that cannot be said to be totally irrational or anomalous but, at worst, merely an omission.

In the result, the appeal is allowed and the determination of the Tribunal set aside.

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Papua New Guinea Law Reports

JH Rayner (Mincing Lane) Ltd v Chief Collector of Taxes [1993] PNGLR 416 (18 July 1991)

PNG Law Reports 1993