Peate v FCT

(1964) 111 CLR 443
[1964] HCA 84
111 CLR 443
38 ALJR 164
[1965] ALR 352
13 ATD 346
9 AITR 355

---

(Judgment by: Menzies J.)

Peate
v Federal Commissioner of Taxation

Court:

Judges:
Menzies J.McTiernan
Kitto
Taylor
Windeyer
Owen

Subject References:
Income Tax (Cth)

Hearing date: September 4, 5, 6, 7, 10;
Judgment date: 12 December 1962

Sydney

---

Judgment by:
Menzies J.

MENZIES J. delivered the following judgment:-

1. It is perhaps inevitable in an acquisitive society that taxation is regarded as a burden from which those who are subject to it will seek to escape by any lawful means that may be found. This is generally called tax avoidance and it is successful if by reason of what is done what is potentially taxable is put outside the effective operation of the revenue laws. Furthermore, in the absence of a special law a genuine transaction does not lose its legal effect because it was carried out to avoid, limit or postpone tax. It is the recognition of this that accounts for the legislature casting its net wide to frustrate the attempts of those confronted with tax liabilities to get round the law. As ofter as a particular loophole is closed through which it has been discovered that revenue is lost, another is likely to be found, so that as long as it confines itself to stopping gaps the legislature is always a step behind reluctant taxpayers and their ingenious advisers. It is not, therefore, surprising that Parliament has sometimes sought to anticipate tax avoidance by general laws rendering ineffectual against the Commissioner arrangements which are not shams but are entered into to avoid taxation obligations that would otherwise in due course be incurred. Such a law is s. 260 of the Income Tax and Social Services Contribution Assessment Act, to which fuller reference will have to be made later.

2. A further observation of a general character is relevant. As the law stands, taxpayers who are in business as employers or employees have found it easier than those who are not to reap advantages from some of the deductions from assessable income that are allowed in the calculation of taxable income upon which tax is assessed. The establishment and maintenance of superannuation schemes is a good instance of this. So is the provision of a wide variety of amenities from which employees obtain nontaxable benefits while the cost is in a large measure deductible from the employer's assessable income. These are often called fringe benefits. Holiday pay is again something which those who do not get it envy those who do. Such benefits, real enough as they are in ordinary circumstances, would, however, obviously be of far greater value if it could be so arranged that they should accrue to taxpayers who would in substance employ themselves in the sense that their salaries, amenities, superannuation payments, etc. would come from their own earnings. Cases such as Lee v. Lee's Air Farming Ltd. [1961] AC 12 illustrate how incorporation may be used to effectuate what can be loosely described as self-employment. So long as the employer and the employee are separate, economically as well as legally, the cost of benefits to employees (such, for instance, as holiday pay and superannuation payments) must, after allowing for the value of tax deductibility, be borne by the employer but if a person were, in effect, to provide himself with such benefits and obtain taxation deductions in his role of a self-employer, the resulting tax saving would simply be money in the taxpayer's pocket. A further refinement would, however, bring even greater advantages to a family man who, it is established, cannot achieve taxation immunity by the simple expedient of assigning his earnings to his wife and family: Parkins v. Warwick (1943) 25 TC 419 If, for instance, it were possible for a man to re-arrange his affairs so as to work for his wife and his family as he previously worked for himself with the consequence that the return which his work produced, instead of being his own income and taxable as such, would be divisible between him - as salary - and his wife and family as his employers and that his holiday pay, superannuation payments and other benefits would be tax deductions from the income which his work produced, how much more would be left in the hands of the family group after each of them had paid tax on what came to his or her hands] To achieve such a result where a man has been working in partnership with others and wishes to continue to work with those who were his partners in much the same way except fiscally would, however, necessitate the exercise of some ingenuity, not to say boldness, particularly in the case of men subject to both professional and statutory controls, e.g. lawyers or doctors.

3. It is at this point that I turn from general observations and reflections which provide no more than background to the facts of the case, which is an appeal by Dr. Peate from assessments of income tax for the years 1958, 1959 and 1960.

4. Pursuant to a deed dated 30th November 1954 nine doctors practised in partnership in Cessnock and the surrounding districts but ostensibly did so not in one group but in three groups of three. One of these groups comprised Dr. Peate, Dr. Atkinson and Dr. Spence and their principal surgery was in Main Street, Cessnock. One of the nine partners retired on 1st July 1956 and subsequently the eight doctors then in partnership orally dissolved their partnership as from 31st August 1956 but, because of arrangements then in contemplation, they found it necessary to do no more than to agree that the goodwill of the partnership should be the goodwill of the doctors individually and that outstanding fees should be collected by A. E. Westbank Pty. Limited - a company which had been incorporated on 29th June 1956 - and accounted for by that company. On the day on which the partnership was determined there was incorporated a company, W. Raleigh Pty. Limited, and, it seems, seven other similar companies. Each of these eight companies was the family company of one of the eight doctors - Raleigh being the family company of Dr. Peate - and it is sufficient for the present purposes to take Raleigh as an example of what was done in every case. The signatories to the memorandum and articles of association and the first directors were two solicitors, E. B. and W. B. Phillips, who were members of the firm of solicitors advising the doctors and doing the legal work that the acceptance of their advice entailed. W. B. Phillips was the first governing director and the memorandum of association gave the governing director for the time overriding powers. Included among the comprehensive statement of the objects for which the company was incorporated (which ran into fifty seven paragraphs) there was the following:

"(45). To carry on the business of importers and dealers in pharmaceutical, medicinal, chemical, industrial and other preparations and articles and providers of medical surgical hospital services and facilities of all kinds."

It was seemingly pursuant to this paragraph that Raleigh on the day after its incorporation purchased Dr. Peate's practice, library, plant, motor cars, etc. and entered into a service agreement with him. It appears from the minutes of meetings of directors that at 10.40 a.m. on 1st September W.B. Phillips reported that he had conducted negotiations with Dr. Peate for the purchase of his medical practice for 7,500 pounds and it was resolved that the company should buy the goodwill for this sum and should also buy the personal chattels required for the practice at a valuation to be agreed. The total price was eventually fixed at 9,542 pounds. Ten minutes after this meeting began and according to Dr. Peate without reference to him in the meantime, there was a second meeting of directors and Mr. W. B. Phillips reported "that in accordance with the instructions of the Board he had conveyed verbally on behalf of the Company the acceptance of the verbal offer made by Dr. Peate for the purchase by the Company of certain assets". At this second meeting the agreement between Dr. Peate and Raleigh was sealed, as was an agreement between Raleigh, Dr. Peate and Westbank. The central feature of the agreement between Raleigh and Dr. Peate was that Dr. Peate should serve the company "as Medical Practitioner in the business carried on by the Company" at a salary of 1,000 pounds per annum or other agreed sum and in so doing should obey the lawful orders of the directors. Provision was made for sick leave, holidays and overseas visits. It is desirable to quote in extenso several of the clauses which the agreement contains:

"3. During the period of his employment hereunder the Doctor shall

(a)

Observe and conform to all the laws and customs of the medical profession.

(b)

Fulfil and obey all the lawful directions and orders of the Directors of the Company from time to time and not at any time except in case of illness or other unavoidable cause absent himself from the service of the Company without the previous consent of the Directors of the Company.

(c)

Not disclose (except to the Directors of the Company) any professional secrets or any information with respect to the Directors of the Company or his family patients practice or affairs in relation to the affairs of the Company or any directions given him by the Directors of the Company.

7. (a) The Doctor hereby covenants that he will as the agent of the Company or its nominee ensure that any person to whom the Doctor renders medical or surgical treatments contracts whether orally or otherwise with the Company or its nominee that payment for such medical and surgical treatment is due to the Company or its nominee directly and even although the accounts for such services may be rendered by the Company or its nominee in the name of the Doctor AND IT IS EXPRESSLY AGREED that if the Doctor fails to carry out the terms of this covenant there shall become due and payable by the Doctor to the Company or its nominees as liquidated damages an amount equivalent to the amount of the usual fees for such treatment and in satisfaction of such liability for liquidated damages the Doctor covenants with the company that any moneys tendered or forwarded to him by any person in respect of such fees shall be the property of the company or its nominee.

(b) The Doctor hereby authorizes the Company or its nominee during the term of his employment hereunder to render in his name accounts for all medical and surgical treatment carried out or given by him during his employment and covenants that he will at the request and expense of the Company or its nominee do and agree to permit to be done all such actions and things as may be necessary or required by the Company for the purpose of ensuring payment of any account to the Company or its nominee.

9. The said Doctor agrees that he will during the term of this Agreement whenever required by the Board of Directors serve any Company or partnership carrying on a similar business to the Company as a medical practitioner during such time as the Board of Directors shall direct."

It is to be observed that clauses 7 and 9 contemplate that Raleigh might nominate a "Company or partnership carrying on a similar business" which Dr. Peate should serve and there is no doubt that Westbank was the intended nominee. Before turning to Westbank, however, it is convenient to record a little more of the affairs of Raleigh. At the second meeting of the directors on 1st September, after the resolutions relating to the agreements, Dr. Peate and his wife were appointed directors and in due course Dr. Peate was appointed governing director; W. B. Phillips then resigned as governing director and E. B. Phillips as director. Raleigh, therefore, came under the control of Dr. Peate as governing director. Mrs. Peate became the company's secretary. On 3rd September Raleigh accepted Dr. Peate's offer to make available his surgery at 230 Main Street, Cessnock, on terms that Dr. Peate should get any rent in sub-letting. This was a surgery used by Drs. Peate, Atkinson and Spence and the point of the arrangement was that Drs. Atkinson and Spence - or rather their family companies - should pay Dr. Peate rent for the premises. On 28th February 1958 W. B. Phillips, as the trustee of two settlements each of 1 pounds made by Dr. Peate's brother, R. L. Peate, on 21st November 1957 - one in favour of Dr. Peate's infant son John and the other in favour of his infant daughter Carolyn - applied for and was allotted fifteen "C" class shares and fifteen "D" class shares of 1 pounds each in Raleigh. It is doubtful whether these shares were paid for. At this point it is necessary to go back to Westbank.

5. Westbank, incorporated on 29th June 1956, had among the multiplicity of its objects one (9) as follows: "To carry on the business of and dealers in anatomical, orthopaedic, radiological, scientific, chemical, photographical and surgical appliances of all kinds and the business of chemists, druggists and providers of medicinal (sic) surgical and hospital facilities and services of all kinds whether alone or in conjunction with any other person firm or corporation." Objects 50 and 51 cover inter alia the establishment of a superannuation fund. The subscribers were E. B. Phillips and G. C. Davies, who is a member of the firm of accountants, D. E. Rollason, Davies & Co., who were associated with the solicitors in advising the doctors. W. B. Phillips and E. B. Phillips were the first directors but on 18th August the eight doctors became directors of the company and on 20th August W. B. Phillips and E. B. Phillips resigned as directors. As the minutes record, their resignations were accepted with regret. On 31st August the two original shares were transferred, one to Raleigh and one to W. Gladstone Pty. Limited, Dr. Wiles' family company. On 1st September Westbank entered into separate agreements with Raleigh and the seven other doctors' family companies, to each of which the doctor concerned was a party. The substance of the agreement between Westbank, Raleigh and Dr. Peate was that Raleigh would for a fee arrange with Dr. Peate to serve Westbank - which was aptly called "the Operating Company" - as a medical practitioner. It was agreed that the fees should be fixed as follows:-

"From the gross income of the Operating Company there shall be deducted all the expenses incurred in conducting the Operating Company's business including any contributions to a Provident Fund to be established by the Operating Company. Fourteen per centum of the balance of the gross income after deducting the sums as aforesaid from the gross income shall be paid to the Company". Clause 6 of the agreement was the same mutatis mutandis as cl. 7 of the agreement between Raleigh and Dr. Peate which I have already quoted.

6. Here I may interpolate that I think it is quite clear that all the agreements and resolutions to which I have referred were drafted in advance to give effect to what had been agreed upon by the doctors concerned. Everythink had been arranged so that the change-over from firm to company could take place as it did on 1st September. It is also convenient here to say a little more about the service fees to be paid by Westbank to the doctors' family companies. The percentage set out in cl. 2 (i.e. 14 per cent in the case of Raleigh) represented the proportion in which the doctor concerned had shared in the profits of the partnership and during the years 1957 and 1958 Raleigh did in fact receive 14 per cent of what was distributed as service fees. As time went on there were changes: thus, in the course of the year 1959 Dr. Short withdrew and his family company, G. Dalton Pty. Limited, received only 4.235 per cent of the service fees instead of the full year's share (12.50 per cent) so that the other companies received a correspondingly larger percentage and Raleigh's share was in fact 14.993 per cent for that year. In 1960 there were more substantial changes: W. Gladstone Pty. Limited (Dr. Wiles' family company) that year received only 5.022 per cent instead of its original share of 14 per cent and Dr. Pitsch and Dr. Cook, who had previously been paid fixed salaries deductible before service fees were fixed, began to share in service fees. For the year 1960 Raleigh's share of the service fees distributed was 15.815 per cent. Returning now to Westbank's doings, at the meeting of directors on 1st September one resolution that was adopted was as follows:-

"Registration of Firm Names:

It was resolved that the Company make application to register:

(1) 'D. L. Peate, K. J. J. Atkinson, W. A. Spence'

(2) 'C. A. Wiles, B. Short, J. A. L. Allen',

(3) 'L. D. Bertinshaw, D. W. Lawson'

as business names under the provisions of the Business Names Act, 1934 and further that the Company's Solicitors be instructed to complete the necessary formalities."

The two groups of three and the one group of two here referred to were the doctors who had practised together as partners and who it was intended should do so as the employees of Westbank. I will return to this when I come to deal with accounts for fees. On 10th September the following resolution relating to the rendering of accounts was adopted:-

"Resolved that the Company use the provisions of the Agreements with Associated Companies when rendering accounts or making claims upon medical funds or public departments or like institutions if this course is more expeditious than rendering the accounts or making the claims directly in the Company name."

At the same meeting applications for shares by each of the doctors' family companies were received and it was resolved to issue 198 shares of 1 pounds each. The number applied for and allotted to each company varies from twenty-two to twenty-seven and Raleigh took twenty-seven shares in addition to the one share that it obtained by transfer. On 15th May 1957 Westbank established a superannuation fund with W. B. Phillips and D. E. Rollason as trustees for the benefit of employees of Westbank itself and those of the doctors' family companies and their dependants. On the same day Raleigh decided to pay 400 pounds into the superannuation fund - 200 pounds for Dr. Peate and 200 pounds for his wife. It is not, I think, necessary to trace the various contributions made to the superannuation fund, which by 30th June 1960 had a capital of about 14,700 pounds, of which the trustees, in the exercise of their investment powers, had lent sums to Westbank and to the doctors' family companies. It is apparent that at some point it was realized that in providing in the agreements between Westbank and the doctors' family companies that the service fees should absorb the whole of gross income less working expenses, there would be nothing left for dividends to the doctors' family companies and so, without any formal agreement, it was arranged that service fees should be fixed annually at a figure which would leave 5,000 pounds for the payment of taxes and for dividends. These altered arrangements made it possible for Westbank to pay dividends as follows: 3,750 pounds on 28th April 1958 and 31st July 1958 ; 1,425 pounds on 19th November 1958 ; 2,525 pounds on 31st July 1959 ; and 2,525 pounds on 1st January 1960. Raleigh received its due proportion of these dividends and from time to time itself declared and paid dividends, partly in cash and partly by bonus shares.

7. Some evidence was given about the way in which the practice was carried on after 1st September 1956. At some time a plate with the name A. E. Westbank Pty. Limited was added to the doctors' plates at the surgeries and, after what appears to have been a considerable time, notices that the doctors were employees of the company to whom fees were payable were exhibited at the surgery in Main Street. About the same time Dr. Peate and Miss O'Connor, who was an employee at the Main Street surgery, began telling some of the patients who came to the surgery that the doctors were employees of Westbank and fees were payable to the company. Accounts for medical services were in the first instance sent out from the Main Street surgery, as had been done previously, in the names - D. L. Peate, K. Atkinson, W. A. Spence - which it will be observed is not exactly the same as one of the business names registered by Westbank but this, I think, was the result of inadvertence. Receipts were similarly headed. Considerably later on the name A. E. Westbank Pty. Limited was stamped on such accounts and receipts. I am inclined to think that immediately after the incorporation of Westbank the change was in general glossed over but later on and at a time I cannot fix there was a change of policy and the notices to which I have referred were put up, in the Main Street surgery at any rate, and some intimation of the change was made to patients. I have the evidence of Dr. Peate and Miss O'Connor about this, which I am prepared to accept as a not very exact statement of what they said, but I have no evidence about what was done by other doctors at the Main Street surgery and I have no evidence at all about what was done at surgeries other than that at Main Street, Cessnock. Over the period with which I am concerned, not only did Commonwealth departments and authorities, State departments and authorities, municipal clinics, hospitals, union funds and insurance companies (whose payments made up half of the income of the practice) pay by cheques payable to the doctors or one of them personally, but most of the patients did so too. It seems that some patients at least were troubled about obtaining deductions for fees paid for medical services as provided by s. 82F of the Income Tax and Social Services Contribution Assessment Act, which is in terms confined to payments to a legally qualified medical practitioner, but such concern as there was was in some measure at least allayed by showing the patients an unidentified newspaper cutting stating that the Federal Government would ensure that medical expenses paid to doctor companies were allowed as taxation deductions and that, if necessary, legislation would be introduced to bring this about. There is no doubt, however, that under the section as it stood and still stands medical fees payable to a company such as Westbank were and are not deductible. It is clear that all fees paid either in cash or by cheque, whoever was the payee, were paid into Westbank's banking account. Where necessary the doctors endorsed cheques to enable this to be done.

8. There are a few matters of minor importance that I should add to complete the statement of facts. First, for her services as secretary of Raleigh, Dr. Peate's wife was paid an agreed salary of 1,200 pounds per year, later increased to 1,300 pounds. Secondly, during the years with which I am concerned, Westbank itself had no telephone number but each doctor retained his own number. Thirdly, it seems that Westbank did demand payment of fees and did sue a number of persons for medical services rendered by it and in some cases obtained judgment upon default summonses. Fourthly, Westbank did arrange employer's indemnity policies covering its employees. Fifthly, Westbank introduced an up-todate system of bookkeeping and constituted itself a group employer for the purpose of the collection of income tax by instalments deducted from wages. Sixthly, although Westbank originally had practically no assets apart from debts owing to it by the doctors' family companies and sundry debtors, later on it did acquire some property for use as surgeries. Seventhly, some patients knew and some patients did not know of the change that had been made. It appears that some of the foregoing facts were proved to forestall a submission, which was not in the event made, that Westbank was nothing but a facade behind which things went on exactly the same as previously.

9. It is now convenient to refer to the taxation returns that were made by Westbank, Raleigh and Dr. Peate and the assessments that were issued. Up to the year 1957 Dr. Peate made returns showing as his professional income a share in the medical partnership of which he was a member, doing so on a cash basis. In 1957 his return showed such an item for the period to 31st August, and for the period thereafter a salary from Raleigh of 953 pounds with tax deductions of 107 pounds. It also showed losses on the sale of his library, furniture, car, etc. to Raleigh on 31st August. With a minor adjustment, tax was assessed upon the net income as returned for 1957. In its return of income for the year 1957 Raleigh showed 4,100 pounds approximately as income from fees and claimed as deductions from its income consisting of the service fee paid by Westbank, salaries of 953 pounds paid to Dr. Peate and to his wife and 400 pounds contributed to Westbank's superannuation fund for Dr. Peate and his wife. The Commissioner disallowed the superannuation fund payments and 503 pounds of the salary paid to Mrs. Peate. Raleigh objected and in 1960 its objections were allowed. Westbank's return for 1957, showing about 43,000 pounds for fees and a deduction of about 29,400 pounds for service fees, was also accepted except for a deduction of 1,000 pounds contributed to the superannuation fund. Objection to this disallowance was allowed in 1960. In 1958 Dr. Peate's return showed as his only professional income a salary of 1,560 pounds paid by Raleigh, which was described as carrying on the industry of "medical services". The Commissioner did not assess tax upon this return. Instead he went to Westbank's return, made on a credit basis, and starting with the net income as returned, 5,013 pounds, he added the superannuation payments, 1,200 pounds, and service fees, 41,574 pounds, to arrive at a net income of 47,787 pounds and then treated 14 per cent of this, namely 6,690 pounds, as Dr. Peate's income. The basis of this assessment was that the partnership of the doctors continued and that Westbank and Raleigh were but its agents. The Commissioner, in a letter of 25th August 1959, explained the basis of the assessment saying it was based "on the understanding that services to patients are personally rendered by members of the partnership and that the accounts for services rendered and acknowledgments of fees received are issued in the firm's name. In these circumstances, any amounts received by the company are considered to represent the application of income after it has been derived by the partnership". In assessing Dr. Peate, the Commissioner dealt with deductions that were not covered by starting from Westbank's net income - which, it may be observed in passing, was arrived at after deducting payments to outside doctors - in the following terms:-

"Consistently with this adjustment the amount of 5,820 pounds shown in the return of W. Raleigh Pty. Ltd. as fees received has been excluded, the expenses claimed in the return of W. Raleigh Pty. Ltd. adjusted as under have been allowed as deductions and the amount of 1,560 pounds shown in your own return as salary from W. Raleigh Pty. Ltd. has been excluded in ascertaining your assessable income.

The effect of this was that Raleigh was wholly disregarded and some of the deductions that had been claimed were attributed to Dr. Peate himself, and Westbank was disregarded except to the extent that in starting from its net income Dr. Peate was given the advantage of a proportion of the moneys which it had spent and which it claimed as deductions. In the result Dr. Peate was assessed to tax on a taxable income of 4,298 pounds instead of his return of taxable income of 1,232 pounds. Similar assessments were made for the years 1959 and 1960 and, although the figures involved were different, it is not necessary to examine these differences, as the bases of both returns and assessments were the same as I have explained for the year 1958. In 1959 Dr. Peate's taxable income as returned was 1,399 pounds and as assessed 3,243 pounds. In 1960 Dr. Peate's taxable income as returned was 1,735 pounds and as assessed 3,574 pounds. Dr. Peate objected to these three assessments and upon his objections being disallowed he requested they be treated as appeals to this Court.

10. At the hearing of these appeals a good deal of attention was given to certain provisions of the Medical Practitioners Act of New South Wales and, although ultimately I do not think that my conclusions upon the questions that were argued are vital to my decision upon Dr. Peate's objections, I do think that some reference to the Act is necessary. The covenants by Dr. Peate to allow Raleigh and Westbank to use his name for the collection of fees and the resolution of the 10th September 1956 are, of course, to be explained by ss. 35, 36 and 41B which allow a registered person to sue and forbid a person not registered from suing for charges for medical or surgical services and which no doubt engendered what I consider was a well-based apprehension that no matter what was agreed between the companies, doctors and the patients, neither Raleigh nor Westbank could sue for medical services. Mr. Jenkins, relying upon Pharmaceutical Society v. London and Provincial Supply Association (1880) 5 App Cas 857 and Law Society v United Service Bureau Ltd. (1934) 1 KB 343 , argued that "person" in the Act wherever it is used means a natural person and not a corporation and that the Act is, therefore, silent about corporations suing for medical services. It is clear that in some sections the word "person" means a natural person only (e.g. those relating to registration and qualifications therefor) but it is just as clear that in some sections it means corporations as well as natural persons (e.g. ss. 43, 45 and 46.) The sections relating to suing for medical services, therefore, may or may not apply to corporations and the conclusion I have reached is that the Act means that only registered persons can sue for fees. The language of ss. 35 and 41B, taken together, not only warrants this conclusion, but indicates it, and I see no reason to cut down the meaning of a word apt to describe a corporation as well as a natural person when to do so would, I think, be contrary to the policy of the Act and would allow an unregistered person, by the simple device of forming a company and becoming its servant, to enforce payment for medical services. Cases decided upon different statutes are of little assistance in construing this Act which, as I have said, does clearly in some places use "person" to cover a corporation as well as a natural person.

11. The next question is whether there has been any departure from the Act in the sending out of accounts and receipts in the name of Westbank and by publishing both in writing and by oral statement that Westbank is carrying on a medical practice. The oral communications that I refer to are those by Dr. Peate and Miss O'Connor to patients and the writings are the notices exhibited in the surgery at Main Street. One notice, for instance, states:-

"This practice is run as a Medical Services Company. The Doctor is really an employee of the Company and you pay the Company for his services. That is why the receipt has A. E. Westbank Pty. Limited on it".

It was contended for the Commissioner that ss. 27 (2), 42 (2) and 43 (2) warrant an affirmative answer to these questions. Section 27 (2) makes it infamous conduct in a professional sense for a registered person knowingly to enable an unregistered person to engage in professional practice "as if that person were duly qualified and registered". I do not think this provision has any application here. Dr. Peate did not hold Westbank out as a duly qualified registered person. Section 42 (2) forbids an unregistered person from advertising himself to be willing to practise medicine or surgery or to perform any medical or surgical services. It seems to me it might well be said that Westbank did advertise that it would perform medical and surgical services but, after some hesitation, I have come to the conclusion that s. 42 is one of the sections of the Act that relates only to natural persons. Sub-section (1) clearly does; so does sub-s. (2) (b). Sub-section (3) is a slight indication that sub-s. (2) (a) is similarly limited and the use of the word "himself" in that part of the sub-section supports this view. Upon the whole, therefore, because Westbank is a company and not a natural person I do not think that any breach of s. 42 (2) (a) was involved in its advertising that it would perform medical or surgical services through its employee doctors. Section 43 (2) provides that every person who exhibits or publishes any placard, billhead, receipt form or document used in connexion with any business practice or profession whereby any person advertises or holds himself out contrary to the provisions of s. 42 shall be guilty of an offence and publication by spoken words is stated to be a forbidden publication. Had Westbank committed an offence under s. 42 (2) I would have thought Dr. Peate and Miss O'Connor would probably have committed offences under s. 43 (2) but, having come to the conclusion that there was no offence under s. 42 (2), there can, I think, be no offences under s. 43 (2). It was also argued that there were breaches of s. 41A but I am not prepared to accept this argument. My conclusion is, therefore, that the Act did no more than prevent both Raleigh and Westbank from suing for fees for medical services. Whether the insistence when it occurred that fees were payable to Westbank and not to the doctor personally would prevent the formation of any contract upon which the doctors could sue is something about which I express no opinion.

12. I am now in a position to consider Dr. Peate's objections to the assessments that were made and these in substance amount to this: that his only income - and the only income to which he was entitled under the arrangements outlined - was his salary from Raleigh, despite the fact that his labours as a professional man produced substantially more, and that the arrangements made and each step which was taken leading to the foregoing result were not only real and legally effective but were not to any extent void against the Commissioner or in these proceedings by reason of s. 260.

13. For the Commissioner the assessments were supported in the first place on the footing that all the fees that were received by the doctors or by Westbank were in fact payment for services performed by the doctors and were in law the income of the doctors and all that was done by the doctors in relation to fees was to observe the covenant at the end of clause 6 (a) of the Westbank agreement and treat moneys received by them as fees as the property of Westbank. So it was argued that all the fees that were paid constituted income "derived by the doctors" for the purposes of s. 17 of the Act. In support of this contention it was emphasized that only doctors could earn some of the fees that were paid and that only doctors could sue for any of the fees that became payable. Moreover, some reliance was placed upon the facts that all governmental and institutional fees were paid by cheques payable to the doctors and that most of the private fees that were paid by cheque were paid by cheques in which a doctor and not the company was named as payee. This argument, which leaves s. 260 out of account, is formidable and if it stood alone would require very serious consideration, but there are substantial difficulties in the way of accepting it. For instance, I find it difficult to regard every payment of fees that was made to Westbank as income of the doctors and, as an illustration, I take the case of a patient who paid fees to Westbank because he accepted both the statement that the services for which he had to pay were rendered by the doctor, not on his own account but as the servant of Westbank, and the position that fees were payable not to the doctor but to Westbank. It may be that this happened but rarely but it did, I think, happen sometimes. Furthermore, it would, taking the documents at their face value, be difficult to infer a partnership between the doctors although it is clear that none of the doctors was practising on his own. However, I see no point in attempting to decide this matter independently of s. 260 if the case falls within its scope, for in that event that section, without the Commissioner or Court "invoking" its operation, is part of the law that has to be applied and, so far as the Commissioner is concerned and in these proceedings, its operation would require some things that were done to be disregarded notwithstanding that for other purposes their legal effect would remain unimpaired. It is desirable, therefore, to decide whether s. 260 applies and, if it does, with what effect.

14. In view of recent decisions, it is unnecessary for me to re-state the meaning and effect of this section. Its application depends upon whether there is here an arrangement having the purpose or effect of avoiding a liability for tax that would otherwise fall upon Dr. Peate. The facts stated indicate this purpose and this effect, for despite other reasons that were advanced by Dr. Peate for so much of what was done as consisted in putting Westbank in the place of the partnership, when all that was done is looked at and in particular when the role of Raleigh is examined, there is a strong prima facie case that the purpose and effect of what was done was to obtain increased tax deductions from assessable income and to divide what would otherwise have been Dr. Peate's taxable income between himself, his wife and his children. For Dr. Peate it was argued, however, that this conclusion should not be drawn. First, taking the language of Lord Denning in Newton v. Federal Commissioner of Taxation [1958] AC 450 , at p 466; (1958) 98 CLR 1 , at p 8 , it was contended that it cannot be predicated by looking at what was done that the arrangement was to avoid tax and that it was explicable "by reference to ordinary business or family dealing". To arrange for the formation of a company in which all the shares would be held in trust for two children and then that Dr. Peate should transfer his professional practice, his books and his instruments to that company and become its servant in the practice of his profession upon the terms of the agreement to which I have already referred is not, to my mind, explicable by reference either to ordinary business or ordinary family dealings even when due weight is given to the circumstance that Dr. Peate, upon his becoming governing director, really had control of the company. There is little similarity between this case and Purcell's Case (1921) 29 CLR 464 where, a man having declared that he held certain property in trust for his wife and daughter, it was held, rightly in the view of the Privy Council, that the declaration was not avoided by s. 260. Nor do I think that the War Assets Case (1954) 91 CLR 53 shows that what took place here was an ordinary business transaction. Lest, however, it should be thought from my emphasis upon the part played by Raleigh that it is only the interposing of Raleigh between Dr. Peate and Westbank that prevents the arrangement as a whole being regarded as an ordinary business transaction, I should say that this is not my view. It is true that I do regard the incorporation of Raleigh and the seven other doctors' family companies as colouring everything that was done here but, even without this, I would have concluded that it was not an ordinary business transaction for a body of professional men who are entitled to sue for fees for medical services to transfer their practices, their libraries and their instruments to a company which could not sue for fees and to become that company's servants in the conduct of their profession, particularly in the circumstance that, to the extent to which patients paid fees to the company, their expenditure was not deductible under s. 82F. What, outside a profession, might be regarded as an ordinary business transaction may, within a profession, have an altogether different appearance. In the second place, although in the face of the decisions it could not be argued that s. 260 does not apply to future income, Mr. Jenkins did seek to limit its application to income derived from sources of income already in existence and it was pointed out that in cases such as Bell, Newton and Hancock when the arrangements were made the companies concerned had already in hand the funds from which the dividends that were treated as the income of the taxpayer were eventually paid. This submission is, I think, directly in conflict with the recent decisions of this Court in Millard v. Commissioner of Taxation (1962) 108 CLR 336 and Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation (1962) 111 CLR, at pp 432-436 . In the former case Taylor J. held that s. 260 applied when a bookmaker carried on his business as a paid servant of a company he had formed and had returned his salary as his income. The decision was that the profits of the business gained after the introduction of the new order was the income of the bookmaker himself. In this case s. 260 was applied to what became profits but what were at the time of the arrangement moneys in the pockets of punters. In the later case Owen J. applied s. 260 to an arrangement for future business whereby the profits of the taxpayer were to be reduced by interposing between it and the supplier of goods another company which charged the taxpayer more than the supplier's price. From the judgments it does not seem that the point taken before me was taken in either case but, independently altogether of the authority in these cases, I do not regard it as a good argument and consider that s. 260 can apply to prospective income from future personal exertion as well as to prospective income from property. The language in which (a), (b), (c) and (d) of s. 260 is expressed affords no support for the appellant's argument. In Newton's Case [1958] AC 450 ; (1958) 98 CLR 1 , their Lordships, in disposing of an argument that the avoidance with which s. 260 is concerned is nothing beyond the displacement of an accrued liability, said:-

"Their Lordships cannot accept this submission. They are clearly of opinion that the word 'avoid' is used in its ordinary sense - in the sense in which a person is said to avoid something which is about to happen to him. He takes steps to get out of the way of it. It is this meaning of 'avoid' which gives the clue to the meaning of 'liability imposed'. To 'avoid a liability imposed' on you means to take steps to get out of the reach of a liability which is about to fall on you. If the submission of Sir Garfield Barwick were accepted, it would deprive the words of any effect: for no one can displace a liability to tax which has already accrued due, or in respect of income which has already been derived" (1958) AC, at p 464; (1958) 98 CLR, at p 7

It appears to me that in 1956 Dr. Peate and the other doctors did what they did to get out of the way of taxation which was in prospect if they were to carry on their professional practice in partnership as they had theretofore and that this, in the circumstances stated, is sufficient to meet the test propounded by their Lordships. I conclude, therefore, that s. 260 applies.

15. The next question is how much of the arrangement and what was done to carry it out is void against the Commissioner in assessing Dr. Peate and in these proceedings. It seems to me that it was the making of the agreements with Westbank and the making of Dr. Peate's agreement with Raleigh which effectuated the tax-avoiding purpose with regard to Dr. Peate. These agreements must, therefore, be disregarded.

16. 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 assessing Dr. Peate the Commissioner has rightly given him the advantage of the group expenses paid by Westbank but has excluded from those expenses the contributions made by Westbank to its superannuation fund for the benefit of employees. In so far as these payments relate to employees and dependants of employees - the doctors not being employees - I see no reason why these payments should not be allowable deductions under s. 66 of the Act in the same way as other expenses of the practice paid on behalf of the doctors as a group by Westbank. I think, therefore, the Commissioner was wrong in disallowing such superannuation payments made by Westbank to its staff before calculating Dr. Peate's income by reference to Westbank's figures.

17. On the basis that the agreements to which I have referred are void as against the Commissioner, the calculation of Dr. Peate's income for the years with which I am concerned is not an altogether easy matter and I am not at all sure that I understood the refinements of the method adopted by the Commissioner which, as I followed it, was for the year 1958 to treat Dr. Peate as entitled to 14 per cent of what Westbank received less what it paid as expenses, and for the later years to take separately each period after a change in the identity of those receiving service fees and calculate Dr. Peate's income for that period by obtaining the proportion of service fees Raleigh received during the period and applying it to Westbank's receipts less expenditure for the same period. I agree with the Commissioner that the service fees that were paid by Westbank do provide the key to the proportions in which each doctor became entitled to share in what was left after expenses paid by Westbank had been deducted and that no question about dividends arises. What ought to have been done was, I think, to take the proportion which amounts paid as service fees to Raleigh each year bore to total service fees paid in that year as the proportion in which Dr. Peate was entitled to share in the total fees less expenses paid by Westbank of that year. The data for obtaining this proportion appears on Exhibit BB and according to the calculations there shown Dr. Peate was entitled to 14 per cent in 1958, 14.993 per cent in 1959 and 15.815 per cent in 1960. From the figures so reached the deduction of expenses of practice which the Commissioner transferred from Raleigh to Dr. Peate were correctly allowed. Here, however, contributions to the Westbank superannuation fund for the benefit of Dr. Peate and Mrs. Peate were rightly disallowed nor do I think that the Commissioner made any error in allowing only a proportion of the sums paid to Mrs. Peate for her services.

18. It was argued for Dr. Peate that if the appeal on the main point failed, as it has, at least his assessments should be on a cash basis rather than on the credit basis derived from Westbank's figures, and statements were tendered to show his income on the basis of fees actually paid. It seems to me that in assessing as he did on a credit basis the Commissioner followed the only course that was open to him in the circumstances and I do not propose to direct him to re-assess on a cash basis. My order will not, however, preclude him from doing so should he see fit to do so. On the figures before me it would seem that were the assessments to be made on a cash basis, Dr. Peate would be appreciably better off for the year 1958 but in very much the same position for the years 1959 and 1960.

19. The order that I propose to make is to remit the assessments to the Commissioner for amendment by (1) including in the deductions allowed to arrive at the net income of Westbank for the years 1958, 1959 and 1960 payments to the superannuation fund made by it for the benefit of its employees and their dependants and (2) treating the taxpayer as entitled to the difference between the amounts paid to or credited by Westbank as fees and the amounts paid by it on account of the expenses of the medical practice in which such fees were earned in the following proportions - 14 per cent, 14.993 per cent and 15.815 per cent for the years 1958, 1959 and 1960 respectively. The appellant, having substantially failed, must pay the costs of the appeals.

20. From this decision the appellant appealed to the Full Court.

21. Hermann Jenkins Q.C. (with him R. B. Murphy), for the appellant. If at common law or under the Medical Practitioners Act, 1938-1957 (N.S.W.) there is no bar to a corporation providing medical services through doctors, then the doctors stand in no different situation from engineers, electricians or plumbers. All of them can form companies and become employed by the companies. It is unusual in the case of doctors, but there is no difference in principle. It is an every day experience for a person self-employed or employed by a partnership to form a limited company and then become employed in the company and draw profits therefrom. Section 260 of the Income Tax and Social Services Contribution Assessment Act 1936 does not strike at such an arrangement because the moneys are still taxed in one form or other. It is a choice allowed by the Act. Newton v. Federal Commissioner of Taxation [1958] AC 450 ; (1958) 98 CLR 1 does not cover such a case. Davies v. Makuna (1885) 29 Ch D 596 shows that it is permissible for an unregistered person, whether a body corporate or a natural person, to employ doctors. Section 260 cannot apply to any arrangement or agreement which affects income in prospect only. It has no application to a contract, agreement or arrangement whereby a taxpayer alters his method of earning future income. The section applies to a case where there is money in existence upon which a tax is about to fall and that is the extent of its operation. (He referred to Federal Commissioner of Taxation v. Newton (1957) 96 CLR 577 , at p 665) Menzies J was in error in his conclusions as to what was left if the agreements between W. Raleigh Pty. Ltd. and the appellant and W. Raleigh Pty. Ltd. the appellant and A. E. Westbank Pty. Ltd. were disregarded. His Honour said that there was left a group of doctors practising together. What was in fact left was, inter alia, ownership of the disputed moneys, income moneys, by Westbank or Raleigh, and no right or title to possession of those moneys by the appellant. Even when these agreements are annihilated one still does not find in the hands of the taxpayer moneys which the Commissioner is entitled to treat as income derived by the taxpayer. The course of action taken in this case did not result in any of the moneys being free of tax. It was the exercise of a free choice by the appellant and those concerned, but all the money became subject to tax. It was a choice allowed by the Act. Westbank pays tax, Raleigh pays tax, and the appellant pays tax. There is no conversion of income into capital at any stage. For the Commissioner to attribute to the appellant moneys which went to Raleigh and which went to Westbank he has to go beyond saying that there is left a group of doctors practising. He has to say that there is left a group of doctors in partnership.

22. M. H. Byers Q.C. (with him J. R. Gibson), for the respondent. We adopt the reasons and conclusions of Menzies J. When one comes to the question of what was the purpose of this arrangement it is relevant to have regard to whether what was sought to be done reflected on the one hand some sort of normal business transaction or on the other, even apart from the provisions in the agreement, something so unusual or artificial that its whole purpose must have been the avoidance of tax. The evidence discloses that it was never intended that Raleigh should carry on a medical practice. The essential part of the scheme which attracts s. 260 is that part which prevents the doctors deriving the income in question. The savings the doctors sought to achieve were savings by way of income tax and they hoped to use that product in superannuation and the like. That is the essence of the scheme, which will not work unless the doctor ceases to derive income other than a salary. If the agreements are annihilated it cannot be said that Westbank derived the income, because all the company got was the payments. The company applied these towards the expenses of carrying on the practice and thereafter they go to the private companies which are formed pursuant to the arrangement for the very purpose of receiving this proportion and of applying it in a particular way. If you find an obligation imposed upon the patient to pay someone other than the doctor then that can be treated as a direction within the meaning of s. 19 or alternatively as a payment on the doctor's behalf. If s. 260 applies to make "derived" an item which but for the arrangement would not be derived by the taxpayer, then it must follow that the arrangement which is struck down by s. 260 is an arrangement which prevents the taxpayer deriving the income. The arrangement is a thing which prevents the income being derived. (He referred to Hancock v. Federal Commissioner of Taxation (1961) 108 CLR 258 , at p 283)

23. (KITTO J. "Derived" only means "obtained or got or acquired": Federal Commissioner of Taxation v. Clarke (1927) 40 CLR 246 , at p 261 .)

24. Once it is shown that there was a distribution of an agreed proportion of the income from the eight doctors' efforts, then the result is that if the service agreements are struck out between the doctors, their private companies and Westbank, and the contracts made with the patients, there are coming into Westbank sums of moneys from a general practice. These are distributed in agreed proportions. The result is that the assessable income of the group is what comes in to Westbank. The things that are struck out are the agreements between the family companies and the doctor, the agreements between the family companies, the doctors and Westbank, and the contracts made with the patients that the sums due for treatment should be owed to Westbank. What is then left is that the partnership has been dissolved, the doctor continues to treat patients in the same place and under the same conditions, the patient pays, the payments go to Westbank, Westbank pays the group expenses, Westbank pays to the respective family companies the amount remaining after payment of the group expenses in the proportions settled by the partnership agreement, the family company pays out of the sums it receives the doctor's individual professional expenses and the family company enters into agreement with the respective doctor to pay him a salary. As an alternative, it is submitted that the initial step in the arrangement indicates that in fact the income was applied on behalf of the doctors within the meaning of s. 19, that is when one strikes out the essential parts. (He referred to Millard v. Commissioner of Taxation (1962) 108 CLR 336 , at p 338 ; Mayfield v Commissioner of Taxation (1961) 108 CLR 303 , at pp 320, 321 ; Mayfield v. Commissioner of Taxation (No. 2) (1961) 108 CLR 323 , at pp 333, 334) Reference to the Medical Practitioners Act, 1938- 1957 shows that a number of things which the doctors in this case did could only be done by a registered medical practitioner: ss. 40, 41, 41A and 44. These sections permit and only permit a registered person to treat people, for example, for certain diseases. If it is right to say that they are employees of the company, what they did they did for the company. This tells against the conclusion that the payment for these services was income derived by the company.

25. Hermann Jenkins Q.C., in reply.

Cur. adv. vult.