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: Windeyer J.)
Peate
v Federal Commissioner of Taxation
Judges:
Menzies J.
McTiernan
Kitto
Taylor
WindeyerOwen
Subject References:
Income Tax (Cth)
Judgment date: 12 December 1962
Sydney
Judgment by:
Windeyer J.
WINDEYER J. I need not repeat the facts in detail.
2. It was argued that the arrangement that the taxpayer and his associates made was outside the operation of s. 260. Doubtless several elements of the total scheme could, for the participants in it, have other advantages than the avoidance of a liability for income tax. And when, with the advice of their advisers, they concerted and entered into the scheme they had some of those advantages in mind. But that does not redeem their arrangement and what was done under it from the provisions of s. 260. Moreover, in so far as those ulterior advantages do not themselves depend upon the avoidance of taxation they can be enjoyed. Section 260 makes the arrangement void as against the Commissioner of Taxation only: it does not impair whatever be the validity and effect of it and of its subordinate transactions as between the parties. In this respect s. 260 is a new form of response to the attempts of taxpayers to escape by lawful means from the tax-gatherer's net. It is not altogether fanciful to see the section as a parallel with the Statute of Uses and its reference to "divers and sundry imaginations, subtle inventions and practices". For, just as in Tudor times men sought to separate the enjoyment of the profits of land from the legal title to it and so to avoid the burdens of the old feudal dues, so in modern times men have sought to have the enjoyment or the disposition of the produce of their labour or their capital without the burden of the levy which the state imposes. In each case the legislature intervened to frustrate their designs.
3. A taxpayer may legitimately regard it as a business-like action so to arrange his affairs in the interest of himself and his family as to reduce his liability for taxes. But that does not mean that whatever method he adopts to that end can itself be said to be explicable as an ordinary business or family dealing putting it outside s. 260. It was argued that the arrangement in this case did not in one of its aspects differ essentially from the mere carrying on by a company of a trading business formerly carried on in partnership and in another aspect from the management and investment of capital assets by a private company and the distribution among shareholders of the income periodically arising. The resemblances seemed to me remote. Whatever may be said of the company, Westbank Pty. Limited separately regarded, the combined and inter-related activities and purposes of it and its companion Raleigh Pty. Limited are certainly remarkable and out of the ordinary.
4. A proprietary company, controlled by one man, has to-day taken the place of John Doe, William Roe and others who at an earlier time came out of ink-wells in attorneys' offices to do acts in the law of which law-abiding citizens might have the benefit while avoiding disadvantageous consequences. By incantations by typewriter, the obtaining of two signatures, payment of fees and compliance with formalities for registration, a company emerges. It is a new legal entity, a person in the eye of the law. Perhaps it were better in some cases to say a legal persona, for the Latin word in one of its senses means a mask: Eripitur persona, manet res.
5. Raleigh Pty. Limited was upon its creation at once obedient in its mind and its actions to the bidding of its governing director. He was a solicitor, who with his partner had subscribed the memorandum of association (each for one share) as desirous of themselves being formed into a company. The expressed objects for which, according to the memorandum, the company was established range from buying and selling all forms of property, manufacturing a great variety of goods to building and running ships and aeroplanes, and so forth and so on - stated with much elaboration and some tautology in fifty-seven paragraphs. Tucked away among them was paragraph 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". Relying on this disingenuous phraseology the company commenced a form of business, surely odd. Pursuant to plan, it first bought, or purported to buy, what was said to be the taxpayer's goodwill of the practice he had formerly carried on in partnership with the other medical practitioners who were participants in the plan, and also his surgical instruments, furniture in his surgery, and motor car. He, being then in law without the equipment he needed to carry on his profession, a few minutes later covenanted "to serve the company as medical practitioner in the business carried on by the company" for a salary and to obey the lawful orders of the directors: the deed further provided that he would during the term of the 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". Accordingly he became, at the direction of Raleigh Pty. Limited, a servant of Westbank Pty. Limited. The two companies had been begotten and born at the same time. For a medical practitioner to enter into an agreement to become the paid servant of a company which was to make it its business to hire him out as a servant of another company is surely not an ordinary business dealing. If it were not that we can look further and see what was really intended and what occurred I would have said that a statement of Lord Atkin's was apposite at this point: "I had fancied", his Lordship said, "that ingrained in the personal status of a citizen under our laws was the right to choose for himself whom he would serve: and that this right of choice constituted the main difference between a servant and a serf": Nokes v. Doncaster Amalgamated Collieries Ltd. [1940] AC 1014 , at p 1026 But, of course, the appellant was in no danger from his subjection to the dictates of Raleigh Pty. Limited, because no sooner had he become its servant on these terms then he became in substance and effect its master. That occurred in this way: the governing director, the solicitor who had formed the company, resigned, and the appellant thereupon became governing director with complete and overriding powers under the memorandum. This was pursuant to the pre-arranged plan.
6. It is not in legal theory impossible or incompatible for a person to be both governing director in sole control of a company and servant of that company or its agent to contract on its behalf, "always assuming", said Lord Morris, "that the company was not a sham": Lee v. Lee's Air Farming Ltd. [1961] AC 12 , at p 26 If a company is duly incorporated and registered under the Act and the proper records are kept in due form and the prescribed returns are made, it continues to exist as a legal entity. In that sense it is a reality not a sham. But I though that in the argument for the appellant too much was made of this. The cat that the monkey employed to pull the chestnuts from the fire was a real cat. And other cats' paws have been real too. Straw bail were real men.
7. Whatever philosophical theory, if any, one entertains of the nature of corporate personality, not much assistance for questions such as arise in this case is got by emphasizing that in law a company is an entity distinct from its members. What is important is the function that the company in fact performs and which it was created to perform. It is not necessary for the application of s. 260 to find that the case is one for "lifting the veil". As to this, see Professor Gower's Modern Company Law, 2nd ed. (1957) chap. 10. To the authorities and articles there cited I would add the decision of the Court of Appeal in Tunstall v. Steigmann (1962) 2 QB 593 There Ormerod L.J. said that any departure from the strict observance of the principle laid down in Salomon's Case [1897] AC 22 , "if indeed any of the instances given can be treated as a departure, has been made to deal with special circumstances when a limited company might well be a facade concealing the real facts" (1962) 2 QB, at p 602 Whether that description could be used of Raleigh Pty. Limited I do not consider; for I prefer to regard that company not as a facade or screen but as one of the instruments by which the appellant and others sought to carry their plan into effect. I agree with my brother Taylor that it, Raleigh, was like an assignee to whom the appellant had assigned the future income which Westbank Pty. Limited was to collect as the fruits of his practice of his profession, such assignment to Raleigh being upon condition that it would deal with the moneys it got as he, the appellant, directed. That seems to be substantially the only part Raleigh had to play. Nevertheless its business was treated as sufficiently important to justify it paying a salary of 1,300 pounds a year to the appellant's wife. What services she had to perform for Raleigh is not very clear, because the taxpayer had become the servant of Westbank and the details of his medical practice, appointments with patients and so forth, were no concern of Raleigh.
8. I have made these remarks about Raleigh because it sheds a light upon the purpose and effect of the whole arrangement in which it was created to play and did play a part. But I agree with Menzies J. that it is not the interposition of Raleigh that brings the arrangement within s. 260. That comes about, not because of some particular element in the arrangement or of any of its subordinate transactions but from a consideration of it as a whole.
9. Of other matters discussed in the argument I need say no more than that I agree in what my brothers Kitto and Taylor have written. I agree that the appeals should be dismissed.