Tax Treaty Interpretation : Whether 'Income Tax' Includes Tax on Capital Gains

Virgin Holding SA v. Commissioner of Taxation was a decision in the Federal Court of Australia in late 2008. It concerned a very important issue in the interpretation of the Australia-Swiss double taxation conventions. This was whether the term "income tax" included tax on capital gains. The Australian Tax Office had long taken the stance that it did not. The Australian Tax Office viewed double tax agreements concluded prior to the introduction of capital gains tax in 1986 as having no application to, or importantly, no restriction upon, their assessment of capital profits. Effectively, the approach regarded the definition of "income tax" in a static way, limiting the definition to the taxes imposed at the date of the signing of a double tax convention. Edmonds J in the Federal Court disagreed with this approach and held that the term "income tax" encompassed a subsequently imposed capital gains tax. This case note considers the implication of this decision from a New Zealand perspective, concluding that the approach of a New Zealand court would be very similar. If this is correct, the decision has wide-ranging implications to the decision New Zealand might make in respect of the introduction of any new taxes, such as a capital gains tax. In particular, it raises the key issue that the International double tax conventions concluded by New Zealand may prohibit the taxation of capital gains in respect of movable property, where the disposition is made by entity which has no permanent establishment a New Zealand