Commissioner of Taxation (Cth) v Gulland; Watson v Commissioner of Taxation

Commissioner of Taxation (Cth) v Gulland; Watson v Commissioner of Taxation - [1985] HCA 83 - HCA 1979 case summary — Zoe

[15]

In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. The question, according to this test, is whether the arrangement, on its face, must necessarily be labelled as a means to avoid tax. That test is a useful one, and it has often been applied, but it does not provide a guide to the decision of every case. An arrangement which is not capable of explanation by reference to ordinary dealing and which on its face is obviously designed to bring about the result that less tax will be paid may nevertheless do no more than take advantage of an opportunity to reduce tax which the Act itself provides. A line of decisions illustrates that if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that s. 260 is attracted. Stephen J. in Mullens v Federal Commissioner of Taxation [1] summed up in that way the effect of the earlier authorities which included W. P. Keighery Pty. Ltd. v Federal Commissioner of Taxation [2] ; Federal Commissioner of Taxation v Sidney Williams (Holdings) Ltd. [3] ; and Federal Commissioner of Taxation v Casuarina Pty. Ltd. [4] . The subsequent authorities - Federal Commissioner of Taxation v Patcorp Investments Ltd. [5] ; Slutzkin v Federal Commissioner of Taxation [6] ; and Cridland v Federal Commissioner of Taxation [7] - are all consistent with this formulation. As Stephen J. further said in Mullens v Federal Commissioner of Taxation [8] : "Section 260 of the Act, in performing its task of "protecting the general provisions of the Act", cannot be allowed to negative the Act's specific and particular provisions " These cases apply the principle of construction expressed in the maxim generalia specialibus non derogant. They show that Lord Denning's statement in Newton v Federal Commissioner of Taxation needs to be understood subject to the qualification which I have indicated, but do not otherwise detract from the authority of that statement. 1. (1921) 29 C.L.R. 464, at p. 473. 2. (1958) 98 C.L.R. 1, at p. 8; [1958] A.C. 450, at p. 466. 3. (1976) 135 C.L.R. 290, at p. 318. 4. (1957) 100 C.L.R. 66. 5. (1957) 100 C.L.R. 95. 6. (1971) 127 C.L.R. 62. 7. (1976) 140 C.L.R. 247, esp. at pp. 298-299. 8. (1977) 140 C.L.R. 314. 9. (1977) 140 C.L.R. 330. 10. (1976) 135 C.L.R., at p. 319.

[17]

it is not a charging section; all it does is to entitle the commissioner when assessing the liability of the taxpayer to income tax to treat any contract, agreement or arrangement which falls within the description in the section as if it had never been made. Any liability of the taxpayer to pay income tax must be found elsewhere in the Act. There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made. Secondly, the avoidance of tax (by which I mean to include any of the purposes mentioned in s. 260) need not be the sole purpose of the arrangement. In Hollyock v Federal Commissioner of Taxation [10] I respectfully dissented from the view, apparently accepted as correct in Mangin v Inland Revenue Commissioner [11] , that the avoidance of tax must be the sole or at least the principal purpose of the arrangement, although I considered that it would not be enough to justify the application of the section that tax avoidance was an inessential or incidental feature of the arrangement. Subsequently, in Europa Oil (N.Z.) Ltd. v Inland Revenue Commissioner [12] , Lord Diplock said: the section in any case does not strike down transactions which do not have as their main purpose or one of their main purposes tax avoidance. It does not strike down ordinary business or commercial transactions which incidentally result in some saving of tax. There may be different ways of carrying out such transactions. They will not be struck down if the method chosen for carrying them out involves the payment of less tax than would be payable if another method was followed. In such cases the avoidance of tax will be incidental to and not the main purpose of the transaction or transactions which will be the achievement of some business or commercial object 1. [1976] 1 W.L.R. 464, at p. 475; [1976] 1 All E.R. 503, at p. 511. 2. (1971) 125 C.L.R. 647, at p. 657. 3. [1971] A.C. 739, at p. 751. 4. [1976] 1 W.L.R., at p. 475; [1976] 1 All E.R., at p. 512.

[21]

The arrangement in the present case, considered objectively as is thus required, may well seem to be characterised by several purposes and effects, some of them unconnected with taxation, including the protection of individual members of the group against liability for negligence; the making of superannuation provision for employees, including doctors employed to assist the group; the better organization of the group's activities and particularly its methods of accounting; and the making of provision for the doctors' families But the question remains, whether the overt acts that were done under the plan are fairly explicable without an inference being drawn that tax-avoidance is a purpose of the arrangement as a whole. Menzies J. thought they were not, and with respect I agree. The arrangement bears ex facie the stamp of tax-avoidance. An understandable purpose of providing for the doctors' families, and doing so quite honestly, is perfectly evident; but what is equally evident is a purpose of doing so by a method which will divert income away from the participating doctors to or for the benefit of their families, to the end that a substantial part of the tax might be avoided which would have been incurred if the income had first been derived by the doctors and then applied by them for the benefit of their families. The question that then arose was what remained when s. 260 had annihilated that arrangement. Menzies J. (whose decision was affirmed on appeal to the Full Court) answered this question as follows. He said [18] : What is left then is a group of doctors practising together but without any formal agreement of partnership, using Westbank to receive all fees paid, to provide services for the group, to pay group expenses and to make distributions of what remained in agreed proportions and using their family companies to receive those distributions and to pay the individual expenses of practice. On this basis the assessable income of the doctors as a group was the total of gross fees earned. In the Judicial Committee this question of the effect which the section had once it applied caused the greatest difficulty in the case and caused Lord Donovan to dissent. The majority of the Board, although agreeing with the conclusion reached by Menzies J. and the Full Court, gave rather different reasons for doing so; Viscount Dilhorne said [19] : He [the Commissioner] was therefore entitled to treat the partnership as continuing until, if in fact it had been in existence it would have been dissolved by operation of law. Until then he was entitled to treat the income in fact received by A.E. Westbank Pty. Limited as if it had been received by the partnership, and to treat as the appellant's share the same percentage of the net income of that company as he was entitled to of the income of the partnership; that is, the same percentage as that provided in the service agreement between the appellant, Raleigh and Westbank. 1. (1958) 98 C.L.R. 1; [1958] A.C. 450. 2. (1964) 111 C.L.R. 443; (1966) 116 C.L.R. 38; [1967] 1 A.C. 308. 3. (1964) 111 C.L.R., at 469. 4. (1964) 111 C.L.R., at p. 461. 5. (1966) 116 C.L.R., at p. 44; [1967] 1 A.C., at p. 332.

[24]

Then it was said that Peate v Federal Commissioner of Taxation is distinguishable, for two reasons. First, it was said that in Peate v Federal Commissioner of Taxation the company could not lawfully carry on a medical practice and further that the patients would not be entitled to a tax deduction for the fees which they paid to the company, whereas in the present cases the trustees are all members of the medical profession. In Peate v Federal Commissioner of Taxation [24] , Menzies J. did refer to this aspect of the matter and in Hollyock v Federal Commissioner of Taxation [25] (a case of a pharmaceutical chemist), I regarded a similar consideration as important. However, none of the members of the Full Court or the Judicial Committee in Peate v Federal Commissioner of Taxation appear to have relied on this circumstance and it was plainly not the determining consideration in the case. Further, it was submitted that standards of ordinary and acceptable conduct have changed since Peate v Federal Commissioner of Taxation was decided two decades ago and practices then unacceptable in a profession are now tolerated for the very reason that persons engaged in a profession would otherwise be in a position of disadvantage, from a taxation point of view, when compared with tradesmen and proprietors of small businesses. There is truth in that statement. However, when Lord Denning in Newton v Federal Commissioner of Taxation spoke of "ordinary business or family dealing" he intended to refer to what was normal or regular, rather than to what had become common or prevalent; in any case, that reference was made by way of contrast to the words "without necessarily being labelled as a means to avoid tax" and it is the latter words which give the clue to Lord Denning's meaning: see Mangin v Inland Revenue Commissioner [26] . In my opinion the arrangements made by Mr. Watson, like those in Peate v Federal Commissioner of Taxation, bear on their face an indication of a purpose to avoid tax. It is true that the arrangement revealed other purposes as well, namely the desire to make adequate provision for the superannuation of Mr. Watson and to benefit the members of his family. I do not think that the attempt to obtain deductions for contributions to the superannuation fund should be treated as merely another attempt at tax avoidance. It would have been possible, theoretically at least, for Mr. Watson to provide for himself a superannuation scheme while he remained self-employed, but unless he were an employee, contributions to the superannuation scheme would not have been tax deductible. As at present advised I do not consider that s. 260 would have frustrated an arrangement made by Mr. Watson to become an employee for the purpose of enabling his employer to have the benefit of the deductions allowed by s. 82AAC of the Act, even if the employer were a company or trust which he himself controlled. However, the arrangements in fact made, went far beyond what was necessary to take advantage of the tax benefit provided by s. 82AAC. The creation of the unit trust, and the allocation of units in the trust to the trustees of the family trust, together with the employment agreement, viewed objectively, can only be regarded as an attempt to split the income from Mr. Watson's practice, and thus to avoid tax which Mr. Watson would otherwise have paid, or to alter the incidence of the tax payable on that income. I am unable to agree that tax avoidance was an inessential or incidental feature of the arrangement. At the very least it was one of the main purposes of the arrangement and s. 260 accordingly applies.

[29]

there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act. Section 260 is not directed to tax on income to which the taxpayer is entitled only by reason of the actual transaction into which the parties have entered. Later, however, Barwick C.J. went on to say [31] : Again, it is otherwise if, by reason of an antecedent transaction or situation, the taxpayer was already subject to tax in respect of an income which that antecedent transaction or situation produced or would produce, or was not or would not be entitled to any deduction in the situation created by that antecedent transaction. In such a situation the avoidance of the impugned transaction, because it represented an endeavour to cast what had already been agreed into a form which avoided or lessened the amount of tax otherwise payable, would expose the antecedent situation which did not carry any right to a deduction. Just as there must be income, not derived from the impugned transaction but derived from the antecedent transaction between the parties which, when that transaction is struck down, is exposed as producing assessable income, so, in my opinion, in relation to a deduction, the avoidance of the impugned transaction must disclose a transaction or situation which did not entitle the taxpayer to a deduction. This latter passage shows in my opinion that in the earlier passage the learned Chief Justice was using "antecedent transaction" to refer to an antecedent situation as well as to an antecedent transaction. In any case, however, there is nothing in s. 260 that supports the view that that section can apply only when there has been an antecedent transaction between parties. An arrangement will, for example, be within the section if it alters the incidence of income tax in a case in which the only relevant antecedent circumstance is that the taxpayer is in receipt of income. The cases of Mr. Watson and Dr. Gulland cannot be distinguished on the ground suggested by Toohey J. 1. (1976) 135 C.L.R., at p. 302. 2. (1977) 140 C.L.R., at p. 326. 3. (1977) 140 C.L.R., at p. 338. 4. (1976) 135 C.L.R., at p. 302. 5. (1976) 135 C.L.R., at pp. 302-303.

[35]

This appeal, like Watson v Federal Commissioner of Taxation raises questions concerning the application of s. 260 of the Income Tax Assessment Act 1936 Cth, as amended ("the Act"), to a case in which medical practitioners, carrying on business in partnership, sell their business to trustees and thereafter work in the practice as employees, with the result that a portion of the fees earned by their work, less expenses, is available for distribution among the beneficiaries of the trust, who include their respective wives and children. There are, however, some points of distinction between Mr. Watson's case and the present, and it will be necessary to consider whether the distinction is material. The facts are fully set out in the judgment of Dawson J. The taxpayer, Dr. Pincus, had carried on a partnership, in equal shares, with Drs. Backstrom, Richardson and Seet at two surgeries, Stafford Road and Stafford Heights. Drs. Pincus and Richardson worked at Stafford Road and Dr. Backstrom worked at Stafford Heights, while Dr. Seet worked at both surgeries. The partnership was dissolved. The assets appertaining to Stafford Road were sold to Dr. Backstrom as trustee of a unit trust, the beneficiaries of which were the families of Drs. Pincus and Richardson by way of family trusts and the assets appertaining to Stafford Heights were sold to Dr. Richardson as trustee of a unit trust, the beneficiaries of which were the families of Drs. Backstrom and Seet. Thereafter, Dr. Backstrom (as trustee) employed Drs. Pincus and Richardson (full time) and Dr. Seet (part time) at Stafford Road, and Dr. Richardson (as trustee) employed Drs. Backstrom (full time) and Seet (part time) at Stafford Heights. The decision to dissolve the partnership was first made by Dr. Pincus because he was dissatisfied with the manner in which the partnership was conducted. When he discussed, with his advisers, the arrangements which should be made it was suggested to him that he create a trust scheme which would provide himself and his family with superannuation benefits. In fact, the unit trust did institute a superannuation scheme, although not until some months later. The Commissioner invoked s. 260 of the Act and it was held in the Full Federal Court that he was entitled to do so [35] .

[48]

Section 260 of the Act, in performing its task of "protecting the general provisions of the Act", cannot be allowed to negative the Act's specific and particular provisions, of which s. 77A is one. To so understand s. 260 would be wholly out of accord with general principles of statutory interpretation. Menzies J. recognized this when he remarked, in Ellers Motor Sales Pty. Ltd. v Federal Commissioner of Taxation [40] , that it was not to be thought that the specific provision of which the taxpayer had there taken advantage "was given merely to be taken away by the operation of s. 260", and see Federal Commissioner of Taxation v Casuarina Pty. Ltd., especially per Gibbs J. [41] . As a taxpayer may choose to organize his affairs in such a way as to take advantage of tax benefits provided by the "specific and particular" provisions of the Act, a principle - the "choice principle" - gives expression to the scope of s. 260. Mason J. in Cridland v Federal Commissioner of Taxation [42] stated the principle in these terms: [it] proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s. 260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage. As this enunciation of the principle recognizes, the choice principle operates only to the extent necessary to give effect to a "specific provision" of the Act. The choice principle gives expression to the scope of s. 260 ascertained by reading down the words of the section in order to allow other and specific provisions of the Act to have their intended operation. The choice principle is inapplicable when the arrangement does not attract a tax benefit conferred by a specific provision but is an arrangement which, as in the present cases, seeks to divert income from one taxpayer to another. Having ascertained the scope of s. 260 it is necessary to consider what is the condition of its operation on cases which do not depend on a specific provision of the Act. 1. (1953) 88 C.L.R. 285, at p. 319. 2. (1976) 135 C.L.R. 290, at p. 319. 3. (1969) 121 C.L.R. 665, at p. 677. 4. (1971) 127 C.L.R. 62, at p. 105. 5. (1977) 140 C.L.R. 330, at p. 339.

[50]

The section, does not prohibit the disposition of property. Its office is to avoid contracts, &c., which place the incidence of the tax or the burden of tax upon some person or body contemplated by the Act. If a person actually disposed of income-producing property to another so as to reduce the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely, upon the new owner. Although a simple disposition of income-producing property does not attract the operation of s. 260, a larger transaction of which a disposition of property forms a part may be caught: see Hancock v Federal Commissioner of Taxation [44] . The distinction between arrangements upon which s. 260 operates and those upon which s. 260 does not operate when both classes of arrangements have the effect of avoiding tax is not easily gleaned from an examination of the text of that section. But it can be said that an arrangement which has the effect of avoiding tax is not within the section unless the avoidance of tax is a purpose for which the arrangement was made. Section 260 does not operate on an arrangement unless it has a purpose as well as the effect of avoiding tax. (We can put aside arrangements which have or purport to have a purpose of tax avoidance but which do not have or purport to have a corresponding effect, for the avoiding of such an arrangement would leave the position of the taxpayer vis-à-vis the Commissioner unaffected.) If it can be predicated of an arrangement that among the purposes for which it was made is the purpose of avoiding tax then, provided that purpose is a substantial, not merely incidental, purpose of the arrangement, it is an arrangement on which s. 260 operates: Hollyock v Federal Commissioner of Taxation [45] . To predicate of an arrangement that a purpose for which it was made is the avoidance of tax, something more is needed than a purpose to achieve what the arrangement is apt to effect if the arrangement is apt to effect a variety of consequences only one or some of which is the avoiding of tax. In Newton v Federal Commissioner of Taxation [46] Lord Denning, delivering the judgment of the Privy Council, said: In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. A purpose of avoiding tax is not taken to exist when the means adopted to carry the arrangement into effect are fairly referable to ordinary business or family dealing and the avoidance of tax is merely incidental. If a purpose of avoiding tax is found to exist, the arrangement is caught by s. 260 even though the advancing of ordinary business or family interests is one of the purposes and one of the effects of the arrangement. After the passage which I have cited from Newton, their Lordships went on to give instances of cases where it was thought that nobody could predicate of the arrangement that it was made for the purpose of avoiding tax in the sense which their Lordships had stated. Some of those instances, notably W.P. Keighery Pty. Ltd. v Federal Commissioner of Taxation [47] , were in truth examples of cases which fell outside the net of s. 260 not because they did not answer the test of purpose but because the case was covered by a specific provision of the Act and s. 260 was inapplicable on that account. 1. (1921) 29 C.L.R. 464, at p. 473. 2. (1961) 108 C.L.R. 258, at p. 283. 3. (1971) 125 C.L.R. 647, at p. 657. 4. (1958) 98 C.L.R. 1, at p. 8; [1958] A.C. 450, at p. 466. 5. (1957) 100 C.L.R. 66.

[68]

The test enunciated in Newton closely corresponds with the approach which had been adopted by Isaacs J. and Starke J. in their judgments in Jaques v Federal Commissioner of Taxation [64] ; (cf. per McTiernan J. in Hooker-Rex Pty. Ltd. v Federal Commissioner of Taxation [65] . It was subsequently applied in a series of cases in this Court to invalidate steps in arrangements which bore ex facie the stamp of tax avoidance: see, in particular, Hancock v Federal Commissioner of Taxation [66] ; Peate v Federal Commissioner of Taxation [67] and, on appeal to the Privy Council, [68] ; Mayfield v Federal Commissioner of Taxation [69] ; Mayfield v Federal Commissioner of Taxation [No. 2] [70] ; Millard v Federal Commissioner of Taxation [1] ; Franklin's Selfserve Pty. Ltd. v Federal Commissioner of Taxation [2] ; Hollyock v Federal Commissioner of Taxation [3] . Nowhere in the judgments in any of these cases does one find any mention of Keighery or any consideration of the significance of the Judicial Committee's reference to Keighery in the judgment in Newton. In none of them was it suggested, let alone held, that the effect of that reference was to preclude the application of the Newton test to any case in which the taxpayer had created a set of affairs whose legal form would attract some liability to tax under the terms of the Act. During the period in which these cases were decided, there was no relevant mention of Keighery nor consideration of the effect of their Lordships' reference to that case in their judgment in Newton in the volumes of the Commonwealth Law Reports except in the judgment of Menzies J. in Ellers Motor Sales Pty. Ltd. v Federal Commissioner of Taxation [4] and that of McTiernan J. in Hooker-Rex Pty. Ltd. v Federal Commissioner of Taxation [5] . In the Ellers Motor Case, Menzies J., without expressly referring to Newton, applied Keighery to preclude the application of s. 260 to avoid the conversion of a private company into a non-private company. In the Hooker-Rex Case [6] , McTiernan J. expressed the conclusion that the test laid down by the Privy Council in Newton "must limit the application of" the central passage in the majority judgment in Keighery. Implicit in that conclusion was the view that any approval of Keighery which could be implied from the mention of the case in Newton was confined to the bare proposition for which it was cited as authority and that the content of that proposition was limited by the context provided by the fourth and first sentences of the relevant extract of their Lordships' judgment (see above) and the actual decision in Newton. McTiernan J.'s view that the Privy Council's judgment in Newton had limited the authority of Keighery was further explained and was applied by his Honour in his dissenting judgment in Federal Commissioner of Taxation v Casuarina Pty. Ltd. [7] . It was, however, rejected by the other four members of the Court in that case. The decision in Keighery's Case was expressly affirmed and it was stressed that the authority of Keighery had "not been weakened by the decision or the reasons in Newton or by the later cases in this Court" (per Walsh J. [8] , with whom Barwick C.J., Owen and Gibbs JJ. agreed).

[77]

The Court has made it quite plain in several decisions that a taxpayer is entitled to create a situation to which the Act attaches taxation advantages for the taxpayer. Equally, the taxpayer may cast a transaction into which he intends to enter in a form which is financially advantageous to him under the Act. W.P. Keighery Pty. Ltd. v Federal Commissioner of Taxation and Federal Commissioner of Taxation v Casuarina Pty. Ltd. amply demonstrate this and are, in my opinion, very relevant to the resolution of this case. Also the general principle established by Inland Revenue Commissioners v Duke of Westminster [26] , must always be kept in mind. The Privy Council in Inland Revenue Commissioner (N.Z.) v Europa Oil (N.Z.) Ltd. [No. 1] [27] said " in a matter of taxation it is necessary to consider and respect the legal form in which the concession", i.e. the transaction "was embodied. Their Lordships have no need to restate the principle laid down in such cases as Inland Revenue Commissioners v Duke of Westminster." His Honour proceeded to add a qualification to the general proposition that s. 260 did not apply to avoid the creation by a taxpayer of a "legal form" to which the Act attaches taxation advantages [28] . That qualification was that the provisions of s. 260 could apply to a case where " the actual transaction into which the parties have entered involves the taxpayer in liability to tax or does not afford the taxpayer some benefit in taxation, such as a deduction, and that transaction is cast into another form which, if effective, would relieve the taxpayer of tax" [29] (emphasis added). Otherwise, the effect of Mullens was to establish that, for the purposes of s. 260, it is to legal form, rather than substance, that consideration must be given and respect paid. In its emphasis on legal form and disregard of substance, the approach of Barwick C.J. appears to me to be contrary to the general approach adopted by Isaacs J. in Jaques (see, particularly, Isaacs J.'s reference to "factitious liability" and "factitious payment" [30] ) and to the general approach to be discerned in the Privy Council's judgment in Newton [1] (particularly, at pp. 8-9). 1. (1976) 135 C.L.R., at p. 298. 2. [1936] A.C. 1. 3. [1971] A.C. 760, at p. 771. 4. (1976) 135 C.L.R., at pp. 298-299. 5. (1976) 135 C.L.R., at p. 298. 6. (1924) 34 C.L.R., at p. 360. 7. (1958) 98 C.L.R. 1.

[79]

the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to tax, or subject him only to less tax than some other form of transaction might do. Inland Revenue Commissioners v Duke of Westminster [5] , too easily forgotten, is still basic in this area of the law. There is no room in that area for any doctrine of economic equivalence. To the legal form and consequence of the taxpayer's transaction, which in fact has taken place, effect must be given: see Inland Revenue Commissioner (N.Z.) v Europa Oil (N.Z.) Ltd. [6] . As the above passage makes clear, this statement of a "choice" theory has nothing to do with a legislative intent to give a choice between specific alternatives. It is a general "choice" of legal "form" to which "effect must be given". Aickin J. [7] quoted extensively from the judgment of Barwick C.J. in Mullens including the statement that s. 260 will not apply "if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act" (per Barwick C.J. in Mullens [8] ). Aickin J. added [9] that, in his opinion, that was equally the position "where the actual transaction is one which stands wholly outside the operation of" the Act. His Honour also quoted [10] , with approval, that part of the judgment of Stephen J. in Mullens in which Stephen J., having referred to the situation where, as in Keighery [11] , "the Act offers to the taxpayer a choice of alternative tax consequences", said [12] : So, too, if no question arises of a choice between two courses of conduct but, instead, the Act offers certain tax benefits to taxpayers who adopt a particular course of conduct; the adoption of that course does not establish any purpose or effect such as is described in s. 260. Instead, an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will then represent a due and proper incidence of tax, there will be no relief from, or defeating of, liability to tax and the Act will have the very operation which the legislature intended. Aickin J. commented [13] : That principle equally applies in a case of receipts with which the Act simply does not deal, i.e. capital receipts, save such as are for the purpose of the Act deemed to be income. To adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act, notwithstanding that such course is adopted with full knowledge of the provisions of the Act and with a conscious intention that the proceeds should not fall within the operation of the Act. The third member of the Court in Slutzkin, Stephen J. [14] , while adding some comments of his own, indicated general agreement with the reasons for judgment of Barwick C.J. and Aickin J. 1. (1977) 140 C.L.R. 314. 2. (1976) 135 C.L.R. 290. 3. (1977) 140 C.L.R., at p. 319. 4. [1936] A.C. 1. 5. [1971] A.C. 760. 6. (1977) 140 C.L.R., at p. 326. 7. (1976) 135 C.L.R., at p. 302. 8. (1977) 140 C.L.R., at pp. 326-327. 9. (1977) 140 C.L.R., at p. 327. 10. (1957) 100 C.L.R. 66. 11. (1976) 135 C.L.R., at p. 318. 12. (1977) 140 C.L.R., at p. 327. 13. (1977) 140 C.L.R., at p. 322.

[84]

The effect of the decisions and judgments in Mullens and Slutzkin was to deprive s. 260 of much of what one would have thought was its intended operation. With due respect to those who have seen the matter differently, it appears to me that the approach of Barwick C.J. in Casuarina [21] , which was adopted and developed in Mullens [22] and Slutzkin [23] , unjustifiably divorced the provisions of s. 260 itself from the other provisions of the Act. Thus, the statement of Stephen J. in Mullens [24] that "an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will have the very operation which the legislature intended" disregards the significance of s. 260 to the legislative intent to be discerned in the Act. Again, the emphasis which Barwick C.J. and Aickin J. placed, in their judgments in Slutzkin [25] , upon legal form to the exclusion of substance disregards the important function which s. 260, with its emphasis on "purpose" and "effect", was plainly intended to serve in the Act as a whole. The propositions for which Slutzkin is authority - viz. that, in the application of s. 260, effect must be given to "the legal form and consequence of the taxpayer's transaction" (per Barwick C.J. [26] ) and that "[t]o adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act" (per Aickin J. [27] ) - seem to me to deprive s. 260 of most of its intended operation by effectively confining it to cases where the impugned transaction was properly to be seen not as an effective new transaction but as merely "cloaking" (per Mason J. in Cridland [28] ) some "antecedent" and " actual " transaction or state of affairs " between the parties ", "for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act" (per Barwick C.J. in Mullens [29] , quoted by Aickin J. in Slutzkin [30] ). Mason J. was doing no more than stating the obvious when he referred to "the very restricted operation conceded to s. 260" by the "settled" construction of the section: Cridland [31] . The ineffectiveness of the section, in the light of what had been established by the judgments in Mullens and Slutzkin, led his Honour to take the step of pointing out [31] that more than twenty years had passed since Kitto J. had drawn attention to the need for legislative reform of its provisions. Mason J.'s pointed reference to that call for legislative reform was made in a judgment with which, as has been mentioned, the four other members of the Court concurred.

[98]

When one comes to apply the "settled" construction of s. 260 to the facts of the present case, the outcome is inevitable. As a matter of legal form, Dr. Gulland was not, at the relevant times, carrying on practice as a sole practitioner. His former practice was carried on by him and Dr. Burke as trustees of the "practice trust". The sole beneficiary of that trust was the trustee of another trust ("the family trust"). Dr. Gulland's medical activities were performed by him in his capacity as an employee of the practice trust. Assessments to tax of the trustees and Dr. Gulland on the basis of the legal structure which Dr. Gulland had chosen to erect would, without the intervention of s. 260, reflect "the tax consequences of the course of conduct which the taxpayer has in fact adopted" (per Stephen J. in Mullens [56] ). Both Dr. Gulland and the practice trust would "become liable for the amount of tax appropriate under the terms of the Assessment Act to the state of affairs obtaining at the date made relevant by that Act for the ascertainment of [their] liability" (Casuarina [57] ). That being so, the steps taken to bring about that state of affairs cannot "qualify as action under s. 260 to achieve any one of the four purposes or effects described in the section" [57] . In that regard, it is to be noted that the case is plainly not one in which "the actual transaction into which the parties have entered involves the taxpayer in liability to tax or does not afford the taxpayer some benefit in taxation, such as a deduction, and that transaction is cast into another form" (Mullens [58] ). The only relevant transactions into which "the parties" entered were those which produced the "state of affairs obtaining at the date made relevant by [the] Act" (Casuarina [57] ). Those transactions were real, actual and effective. The plain effect of this Court's more recent decisions, the authority of which the Commissioner has not sought to challenge, is that "effect must be given" to "the legal form and consequence" of those transactions (Slutzkin [59] ).

[141]

Its office is to avoid contracts, &c., which place the incidence of the tax or the burden of tax upon some person or body other than the person or body contemplated by the Act. If a person actually disposed of income-producing property to another so as to reduce the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely, upon the new owner. But any agreement which directly or indirectly throws the burden of the tax upon a person who is not liable to pay it, is within the ambit of s. 53. This approach was subsequently reflected in the decision in W.P. Keighery Pty. Ltd. v Federal Commissioner of Taxation [25] . In that case the appellant company was brought into being as a non-private company by the allotment of redeemable preference shares in order that it might receive dividends as a shareholder in a private company upon which tax would otherwise have been imposed under Div. 7 of Pt III of the Income Tax and Social Services Contribution Assessment Act 1936-1952. It was held that this was a course which was open under the provisions of the Act, Dixon C.J., Kitto and Taylor JJ. [26] pointing out that: Because this is so, an attempt by the commissioner to rely upon s. 260 in the present case in order to avoid only the applications for and allotments of the redeemable preference shares would be an attempt to deny to the appellant company the benefit arising from an exercise which was made of a choice offered by the Act itself. The very purpose or policy of Div. 7 is to present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act. For that simple reason the attempt must fail, and the commissioner cannot rely upon s. 260 in order to treat as void any more extensive set of facts, for an attempt to do so could not stop short of including the incorporation of the appellant company itself. A similar approach is to be seen in Federal Commissioner of Taxation v Casuarina Pty. Ltd. [27] , Mullens v Federal Commissioner of Taxation [28] , Slutzkin v Federal Commissioner of Taxation [29] and Cridland v Federal Commissioner of Taxation [30] . In the last of these four cases, Mason J., with whom the remainder of the Court agreed, said [1] of the principle underlying the Keighery Case that: It is not confined to cases in which the Act offers two alternative bases of taxation; it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s. 260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage. 1. (1921) 29 C.L.R. 464. 2. (1921) 29 C.L.R., at p. 473. 3. (1957) 100 C.L.R. 66. 4. (1957) 100 C.L.R., at pp. 93-94. 5. (1971) 127 C.L.R. 62. 6. (1976) 135 C.L.R. 290. 7. (1977) 140 C.L.R. 314. 8. (1977) 140 C.L.R. 330. 9. (1977) 140 C.L.R., at p. 339.

[204]

There is, I think, no reason why Peate's Case should no longer be regarded as having been correctly decided. Whilst the interpretation of s. 260 has undergone some vicissitudes during the twenty or so years since that case was decided, its authority has not been challenged. Nor does it seem to me the principles which were sought to be applied in that case are other than in accord with those principles which have been laid down in later cases. True it is that limits to the application of s. 260 have been identified which may now be more apparent than they were at the time of the decision in Peate's Case. Thus in Cridland v Federal Commissioner of Taxation [31] , Mason J. was able to refer to "the very restricted operation conceded to s. 260 by the course of judicial decision". However, the restrictions are but a recognition of the fact that s. 260 does not deny a taxpayer a choice which is offered by the Act itself unless there is something other than the making of such a choice to indicate that a contract, agreement or arrangement has the purpose or effect of avoiding tax in a way which is prohibited by the section. It is only by the adoption of such an approach that it has been possible to reconcile s. 260 with the rest of the Act. That approach was, however, clearly laid down in W.P. Keighery Pty. Ltd. v Federal Commissioner of Taxation [32] some time before the decision in Peate's Case and there was no suggestion in the latter case of any divergence from it. Rather, the decision in that case is an example of a taxpayer seeking to avail himself of the choices offered by the Act by means of a contrived scheme which could only be explained upon the basis of tax avoidance. It was a scheme which did not aid the taxpayer in the practice of his profession or in the ordinary organization of his affairs and constituted a quite extraordinary arrangement when viewed apart from the provisions of the Income Tax Assessment Act. Because the arrangement went beyond the simple exercise of a choice offered by the Act in seeking to avoid tax, s. 260 was held to apply and to deny to the taxpayer the choice which he would otherwise have had. It is that circumstance which distinguishes Peate's Case from Keighery's Case and the cases which followed it: see Federal Commissioner of Taxation v Casuarina Pty. Ltd. [33] ; Mullens v Federal Commissioner of Taxation [34] ; Slutzkin v Federal Commissioner of Taxation [35] and Cridland v Federal Commissioner of Taxation. There is no inconsistency and no reason to suppose that the decision in Peate's Case is no longer good law.

At a glance

Court

Decision date

Before

Source

Judgment (218 paragraphs)