Key reasons for the Full Federal Court’s decision
With regards to the first two grounds of appeal, all three judges agreed with the primary judge’s interpretation of S.770-10, being that the section is concerned with “an amount that is all or part of an amount included in your assessable income”, and not with “all or part of an amount that is all or part of an amount included in your assessable income.”
In this regard, the Court said that it was clear from the language in S.770-10 and, in turn, S.102-5, that only the net capital gain had been “included in” the taxpayer’s assessable income. Under the method statement in S.102-5, the net capital gain was calculated firstly by reducing the gross capital gains by the taxpayer’s capital losses and then by 50% under the CGT general discount, as the gains related to investments that were held for at least 12 months.
Consequently, the Court found that, contrary to the taxpayer’s submission (and agreeing with the Commissioner), all that S.770-10 included in FITO was the amount of US tax the taxpayer had paid “in respect of” the net capital gain, and not the capital gains that made up the calculation.
For completeness, the Court noted that although legislative notes do not have operative effect, Note 2 to S.770-10 (reproduced earlier) supported the Commissioner’s proportionate approach.
As to the taxpayer’s alternative argument, the Court was split 2:1, with Logan J dissenting. His Honour found that Article 22(2) of the DTA applied to relieve double taxation “in respect of” the whole of the gains derived from the USA, and not the discounted capital gains calculated under Australian law as concluded by the primary judge of the Federal Court. Consequently, Logan J agreed with the taxpayer that the primary judge erred in concluding that Article 22(2) only allowed a credit for the tax paid on the discounted capital gain. Ultimately, however, this did not assist the taxpayer as Article 22(2) only prevailed to the extent of any inconsistency with S.770-10. And in this regard, the majority of the Full Federal Court found there was no inconsistency.