Retroactivity/Retrospectivity

The U.S. subsidiary (“CFC”) of the Australian taxpayer (“CAHPL) borrowed in the commercial paper market at a borrowing cost of about 1.2% with the benefit of a guarantee from their ultimate U.S. parent, and on-lent U.S.$2.45 billion of such funds under an unsecured Australian-dollar credit facility to CAHPL at about a 9% interest rate. CAHPL deducted such interest in computing its income for Australian purposes, and received tax-free dividends from CFC of most of CFC’s profits (based on the 7.8% spread).

The Commissioners initially denied much of the interest deductions by the Australian taxpayer (“CAHPL) for interest at a 9% rate paid to its U.S. subsidiary under the sui generis domestic transfer pricing (Division 13) rule. However, a new (Division 815) transfer pricing rule was subsequently enacted, but with retroactive effect to most of the tax years at issue. The Commissioners issued replacement assessments for three of the tax years in issue based on the Division 815 rule.

In rejecting a CAHPL submission that the assessments under the retroactive legislation were constitutionally invalid, Pagone J quoted extensively from MacCormick v Federal Commissioner of Taxation (1984) 158 CLR 622 including the quotation therein of the statement by Dixon C.J. in Deputy Federal Commissioner of Taxation v. Brown that:

Although there is no judicial decision to that effect, it has, I think, been generally assumed that under the Constitution liability for tax cannot be imposed upon the subject without leaving open to him some judicial process by which he may show that in truth he was not taxable or not taxable in the sum assessed, that is to say that an administrative assessment could not be made absolutely conclusive upon him if no recourse to the judicial power were allowed.

and then stated (at paras. 143-4):

In MacCormick it was said that it must not only be possible to point to the criteria themselves, but also to show that the way in which they are applied does not involve the imposition of liability in an arbitrary or capricious manner. In Roy Morgan the majority explained that these passages, sourced from what had been said in Brown, established that compliance with the Constitution required that liability for tax not be imposed without leaving open to the taxpayer some judicial process by which the taxpayer may show that in truth the tax was exigible or not exigible in the sum assessed… :

Division 815-A does not impose an arbitrary or incontestable tax in the sense contemplated by the authorities. … That a person may not be aware at an earlier point in time what the criteria of liability may subsequently be made to apply to that earlier point in time does not make the legislation arbitrary or incontestable… .

Before rejecting the taxpayer's submission that the enacting U.K. legislation for Article 25A of the Convention between South Africa and the U.K., which if it permitted the South African Revenue Service to collect tax debts arising prior to the coming into force of the Convention through the respondent (HMRC) of South African taxes, would thereby entail retrospective application of such legislation, Lloyd Jones LJ, in confirming the decision below, referred with approval (at para. 48) to:

the distinction drawn by Lord Rodger in Wilson v First County Trust (No. 2) [2004] 1 AC 816 at paras. 186 et seq., between retroactive operation of legislation and statutes making prospective changes to existing rights. In the present case the judge found that an enactment is not retrospective in any objectionable sense where the enactment is simply applied at a time after its commencement to a state of affairs existing at that time, even though that state of affairs came in to existence before the commencement.

In an obiter indication that ss.152(1.11) and (1.12), pursuant to which the Minister had made a retroactive redetermination of paid-up capital, should likely be interpreted restrictively, Boyle, J. stated (at para. 28) that "instinctively, it seems that retroactive determinations, like retroactive tax legislation, should be avoided except in cases where the legislator has clearly and unambiguously set out its intent to impose or permit the tax to be imposed retroactively."

Before going on to find that transactions engaged in by the taxpayer were not contrary to the general anti-avoidance rule notwithstanding subsequent retroactive amendments to that rule that expanded its potential application to transactions that the taxpayer had engaged in, Bell J. stated:

"Retroactive legislation, although within the power of Parliament is legal but undesirable. The inappropriateness of reassessing taxpayers who completed transactions in accordance with the law in force at the time of those transactions without any expectation of adverse retroactive effect is self-evident."

It was found that an amendment to s. 17(1), which replaced a requirement that loans made to non-residents have an interest rate of at least 5% by a requirement that the interest rate be the prescribed rate, should not be interpreted as having the retrospective effect of creating an obligation to increase the interest rate on existing loans to higher than 5%. Christie A.C.J. quoted Lambert J.A. who stated inter alia in Hornby Island Trust Committee v. Stormwell (1989), 53 DLR (4th) 435 (BCCA) that "... 'the legislature should not be presumed to have enacted a statute that treats those it affects, or some of them, not just adversely, but unfairly, with respect to acts they have undertaken in the past' ...".