Hollyock v. Federal Commissioner of Taxation.Judges:
Gibbs J.: This is an appeal against the decision of a Board of Review confirming assessments made by the Commissioner of income tax payable by the appellant on income derived by him during the years of income ended 30 June 1963, 30 June 1964 and 30 June 1965.
The appellant is a pharmaceutical chemist, duly licensed under the Pharmacy and Poisons Act 1910-1962 (W.A.). Until 29 September 1962 he carried on business on his own behalf as a pharmaceutical chemist in Perth under the name of ``Craven's Pharmacy''. On that date the appellant and his wife, who is not a pharmaceutical chemist, executed a deed whose provisions, being not altogether harmonious, are difficult to summarise and must be set out in full. The deed provided as follows -
``THIS DEED made the 29th day of September 1962 BETWEEN: GEOFFREY JOHN HOLLYOCK of 187 Thomas Street Subiaco in the State of Western Australia Pharmaceutical Chemist (hereinafter with his executors administrators and assigns called `the Vendor') of the one part and BEVERLEY ANNE HOLLYOCK of the same address Married Woman wife of the said Geoffrey John Hollyock (hereinafter with her executors administrators and assigns called `the Purchaser') of the other part.
The Vendor has for some time past been carrying on under the firm name of CRAVEN'S PHARMACY the business of Pharmaceutical Chemist at the corner of Barrack and Hay Streets Perth in the said State.
The Vendor has agreed to sell and the Purchaser has agreed to purchase from the Vendor as from and including the 1st day of October 1962 a one half share or interest in and to the said business and the assets and nett profits thereof.
The Purchase Price payable by the Purchaser to the Vendor will be an amount equal to a one half share of the goodwill of the said business as assessed by the Commissioner of Stamps for the payment of stamp duty hereon together with one half share of the amount by which the assets of the business (excluding goodwill) exceed the liabilities thereof as will be shown in Balance Sheet to be prepared as at the 30th day of September 1962 by A.B. PEARCE & COMPANY Public Accountants of 32 Beaufort Street Perth in the said State as Accountants for the Vendor and such purchase price will be payable without interest as hereinafter provided.
It has been agreed that the Vendor shall have no lien or other security for the purchase price referred to in the previous sub-paragraph hereof and will by these presents declare that as from and including the said 1st day of October 1962 he will stand possessed of the said business and the assets thereof and the income therefrom IN TRUST for himself and the Purchaser in equal shares.
NOW THIS INDENTURE WITNESSETH as follows -
1. The Purchaser HEREBY COVENANTS AND AGREES with the Vendor to pay to him on demand the amount of the purchase price hereinbefore set out or the balance outstanding of such purchase price from time to time PROVIDED THAT the Vendor shall refrain from making demand for such purchase price or outstanding balance thereof from time to time prior to the death of the Purchaser so long as the said business shall continue to be carried on and so long as the Purchaser does not sell assign or otherwise dispose of her beneficial interest in the said business and so long as she applies in payment or part payment of the said price her share of the income derived from the said business less a proper allowance for income taxation in respect thereof.
2. The Vendor so as to bind himself and his executors administrators estate and effects DOTH HEREBY DECLARE that he now holds and stands possessed of and will hereafter hold and stand possessed of the said business and the assets thereof and the income derived therefrom UPON TRUST absolutely for himself and the Purchaser in equal shares THE VENDOR reserving to himself as Trustee and legal owner of the said business and the assets thereof full and free right and liberty to continue to carry on the same and for that purpose to appoint Managers and other servants and if thought fit to enter into any partnership or partnerships with any person or persons in respect of his share in the capital and assets and/or of the profits of the said business and to receive reasonable remuneration for any services he may render to or for the said business and at any time to sell or join with any such partner or partners (if any) in selling the said business and the undertaking thereof and any part or parts of the assets thereof either as a going concern or otherwise at such price or prices and whether for cash or on terms and generally upon such terms and conditions as he shall think fit.''
According to the evidence of the appellant, the deed was executed to provide his wife with an income in the event of his death and to minimise death duties and without any thought of its effect on his taxation position. A balance sheet which was prepared as at 30 September 1962 by the public accountants mentioned in the deed showed that the business had assets totalling £10,641, including goodwill valued at £6,000, and liabilities of £8,542. The Commissioner of Stamps assessed duty payable on the deed on an amount of £4,536, being one half of the total of the following items: capital of appellant £2,099; secured liabilities £6,973. The Commissioner of Stamps did not expressly assess the amount of goodwill but it seems that his acceptance of the balance sheet figure of £2,099 as representing the capital of the business amounted to an implied assessment of goodwill at the figure shown in the balance sheet. If this was so, the consideration under the agreement would have been £3,000, since the assets of the business apart from goodwill were exceeded by the liabilities. Whatever the legal position may have been, however, the parties to the deed seem to have agreed or assumed that the wife owed the appellant £5,321 as the purchase price of the half share of the net assets. This sum represented one half of the total of the value of the capital of the business plus the amount of the liabilities. In fact the appellant's wife had made no payment in respect of the purchase price and the income to which she is said to be entitled under the deed has not been applied in payment thereof.
After the deed was executed the appellant continued to carry on the business for a few months. He and his wife then went overseas, leaving the business in the control of a manager. After their return the appellant again ran the business for a short period but he then commenced a full-time university course and again put the business in the hands of a manager. Accounts subsequently kept in the name of ``G.J. Hollyock as Trustee for G.J. and B.A. Hollyock'' show equal drawings of profits by the appellant and his wife but in fact the wife drew no profits from the business. The appellant alone operated on the bank account,
ATC 4204from which he made regular withdrawals of money which he paid to his wife for household expenses as he had done before the deed had been signed. In March 1964 the appellant and his wife purchased a house as tenants in common and it appears that some of the price payable on the purchase of the house was paid out of the bank account which was maintained in the name of the business, although the evidence does not disclose how much was paid from the account for this purpose.
In respect of each of the years of income in question the Commissioner has assessed the appellant to tax on the basis that the net income of the pharmacy business was wholly derived by the appellant and therefore formed part of his assessable income. The appellant, on the other hand, contends that since 1 October 1962 his wife has, by virtue of the deed, been beneficially entitled to one half of the business and the income derived therefrom and that he has accordingly derived only a one-half share of the net income.
Various arguments were advanced on behalf of the Commissioner in support of the assessment. It was submitted that the agreement embodied in the deed was illegal and void as being designed to effect a purpose forbidden by the Pharmacy and Poisons Act 1910-1962. Reference was made to two sections of the Act, sec. 16, which provides that no pharmaceutical chemist shall practise or carry on business as a pharmaceutical chemist, or either as agent, employee or otherwise be engaged with any other person in the practice or business of a pharmaceutical chemist, except, inter alia, under the authority of a licence from the Council of the Pharmaceutical Society of Western Australia, and sec. 44, which subject to immaterial exceptions forbids any person other than a pharmaceutical chemist to carry on the business of a chemist and druggist or pharmaceutical chemist. Alternatively it was submitted that the agreement, even if valid, was not effectual to divest the appellant of his right to receive the income from the pharmacy business. Finally and most strongly the Commissioner relied on the provisions of sec. 260 of the Income Tax Assessment Act 1936 as amended (Cth) (``the Act'').
In reply to the argument based on illegality it was said on behalf of the appellant that, notwithstanding the deed, the business continued to be carried on by the appellant so that no breach of sec. 44 was occasioned, and that since the appellant was duly licensed sec. 16 was in no way infringed. I am inclined to think that the appellant is correct in these contentions although it is unnecessary finally to pronounce on the point because, assuming the deed to be valid, the appellant's attack on the assessment nevertheless cannot succeed.
There is something to be said for the view that quite apart from sec. 260 the entire income derived from the business was income derived by the appellant and that the trust only operated on the income after he had earned it and had become liable to pay tax on it. In
Peate v. F.C. of T. (1962-1964) 111 C.L.R. 443 at p. 446 Menzies J. said that it is established that a family man "cannot achieve taxation immunity by the simple expedient of assigning his earnings to his wife and family:
Parkins v. Warwick (1943) 25 T.C. 419". The present case is not one in which there was an assignment of income earned but it presents obvious analogies. However, like Menzies J. in Peate v. F.C. of T. supra, at pp. 458-459, ``I see no point in attempting to decide this matter independently of sec. 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''. I shall therefore assume that apart from sec. 260 the deed is valid and effectual and that the provisions of Div. 6 of Pt. III of the Act would be applicable.
It is unnecessary to set out the provisions of sec. 260 or to refer to all of the many cases in which an endeavour has been made to solve its ``notorious difficulties''. On behalf of the appellant much reliance was placed on
D.F.C. of T. v. Purcell (1920-1921) 29 C.L.R. 464. In that case the owner of certain pastoral holdings declared himself a trustee of them for himself, his wife and his daughter equally, but reserved to himself very wide powers of management, control and investment, and it was held that the declaration created a trust which was valid and binding and not affected by the provisions of sec. 53 of the Income Tax Assessment Act 1915-1916 (Cth) which was in terms similar to sec. 260. Knox C.J. said (at p. 466) that the section ``does not extend to the case of a bona fide disposition by virtue of which the right to receive income arising from a source which theretofore belonged to the taxpayer is transferred to and vested in some other person''. In the same case Gavan Duffy and Starke JJ. said (at p. 473): ``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''. This decision was mentioned with apparent approval in
Newton v. F.C. of T. (1958) A.C. 450. In that case their Lordships stated (at p. 466) the following test
ATC 4205for the application of sec. 260: ``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''. Their Lordships went on to give illustrations of this statement, including the following: ``Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax: see D.F.C. of T. v. Purcell''. If this were intended as a universal proposition it would be too wide, for it must depend on all the circumstances whether one can predicate of a trust that it was created to avoid tax, but it cannot be supposed that it was so intended. Their Lordships had already remarked (at p. 465) that the word ``arrangement'' in sec. 260 comprehends ``not only the initial plan but also all the transactions by which it is carried into effect - all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else''. (See also
Bell v. F.C. of T. (1951-1953) 87 C.L.R. 548 at p. 573.) Declarations of trust which have the purpose of avoiding taxation must be within the scope of the section, and
Mangin v. I.R. Commr. 1970 ATC 6001, 2 W.L.R. 39 affords a recent example of trusts made by a father in favour of his wife and children that were struck down by the New Zealand section equivalent to sec. 260.
It is clear that sec. 260 is not concerned with motives, so that it is irrelevant if in the present case the ends which the appellant hoped to achieve did not include the avoidance of tax. The purpose of the arrangement must be ascertained by looking at the arrangement itself, i.e. by considering the overt acts by which the plan which forms part of the arrangement is carried into effect (see Newton v. F.C. of T., supra, at p. 465;
Hancock v. F.C. of T. (1959-1961) 108 C.L.R. 258 at p. 283; Peate v. F.C. of T., supra, at p. 469). Further, it was held in Newton v. F.C. of T., supra, that sec. 260 will apply even where the avoidance of tax is not the sole purpose of the arrangement. Their Lordships said (at p. 467): ``It is clear from this analysis that the avoidance of tax was not the sole purpose or effect of the arrangement. The raising of new capital was an associated purpose. But nevertheless the section can still work if one of the purposes or effects was to avoid liability for tax. The section distinctly says `so far as it has' the purpose or effect. This seems to their Lordships to import that it need not to be sole purpose''. In Hancock v. F.C. of T., supra, also, an arrangement was held to be void as against the Commissioner although the avoidance of tax was not its sole purpose. In that case Dixon C.J. (at p. 278) with whom Windeyer J. agreed) and Fullagar J. (at p. 271) regarded the avoidance of tax as an ``essential feature'' of the arrangement there under consideration. Kitto J. (at p. 283) said: ``If an arrangement has been a means for the avoidance of tax, the fact (if it be a fact) that it has been a means to other ends as well does not prevent the application of sec. 260'' (and see also at p. 292). Menzies J. said (at p. 297) that ``Newton's case decided that the section can apply if to avoid the receipt of taxable dividends is only part of the purpose and effect of the arrangement''. In Peate v. F.C. of T., supra, (at p. 476), Taylor J. said that the arrangement there held void as against the Commissioner ``had other ends in view such as the making of provision for the appellant's wife and children'', and added: ``But avoidance of tax was the means to those ends and a diminution in the appellant's tax was not merely an incident of what might be regarded as an ordinary family settlement''. He went on to say that avoidance of tax was ``at the very heart of the arrangement which was about as far removed as possible from any concept of ordinary business or family dealing''. These authorities clearly establish that the avoidance of tax need not be the sole purpose of an arrangement within sec. 260. However, in Mangin v. I.R. Commr., (1971) supra (at p. 47), their Lordships explained the passage from Lord Denning's judgment in Newton's case, supra (at p. 466), which I have already set out, by saying that the clue to Lord Denning's meaning lies in the words ``without necessarily being labelled as a means to avoid tax'' and then said -
``Their Lordships think that what this phrase refers to is, to adopt the language of Turner J. in the present case,
- `a scheme... devised for the sole purpose, or at least the principal purpose, of bringing it about that this taxpayer should escape liability on tax for a substantial part of the income which, without it, he would have derived'.''
With great respect, I cannot accept that the words which Turner J. used (see (1970) N.Z.L.R. 222 at p. 236) to refer to the facts of the case before him, but which their Lordships adopted as indicating the meaning of Lord Denning's remarks, express completely the effect of sec. 260. To say that the section applies only to arrangements whose sole purpose is tax avoidance would be contrary to the decisions in Newton's case and Hancock v. F.C. of T., supra. To hold that tax avoidance should be the principal purpose of the arrangement would
ATC 4206seem to me to be opposed to the reasoning on which those decisions rest, and would introduce into sec. 260 a refinement which is not suggested by the words of the section itself, and which would tend to increase, rather than remove, the difficulties to which the section gives rise, by requiring the courts to weigh one purpose against another and to decide which was predominant. An arrangement may, for example, be designed to secure both the avoidance of income tax and the avoidance of death duties - each purpose may be equally important - and in such a case the arrangement does not in my opinion escape from sec. 260 simply because it cannot be held that the avoidance of tax is the principal purpose of the scheme. On the other hand, if tax avoidance is an inessential or incidental feature of the arrangement, that may well serve to show that the arrangement cannot necessarily be labelled as a means to avoid tax.
The arrangement in the present case, considered objectively, can be seen to have several purposes, including the making of provision for the appellant's wife and the avoidance of death duty, but the avoidance of tax is clearly one of those purposes, and an essential purpose. Moreover, what was done does not seem to me capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax. An important feature of the case is that the business which the appellant declared that he held in trust was one that could lawfully be carried on only by a pharmaceutical chemist, so that it remained necessary for the appellant to carry on the business and his wife could not lawfully join with him in carrying it on. As Menzies J. said in Peate v. F.C. of T., supra, at p. 460: ``What, outside a profession, might be regarded as an ordinary business transaction may, within a profession, have an altogether different appearance''.
Millard v. F.C. of T. (1962) 108 C.L.R. 336 provides another example of a case in which the business whose income was the subject of the arrangement avoided by sec. 260 - that of a bookmaker - could only be carried on by a person who had the necessary registration. The conclusion appears to me inevitable that one purpose of the arrangement was to divide the income from the appellant's business in order to reduce the amount of tax that would become payable on it. Finally, it is not possible to regard this case as one in which the appellant has simply disposed of income-producing property. It is true that a considerable quantity of trading stock was included in the assets of the business, but the income derived by the appellant was derived from carrying on the business, and the trading stock yielded income only because the business was carried on.
For the reasons I have given I hold that the execution of the deed formed part of an arrangement that was void as against the Commissioner by reason of sec. 260.
The present case does not give rise to difficulties as to the application of sec. 260 such as led to the dissenting judgment of Lord Donovan in the Judicial Committee in Peate v. F.C. of T. (1967) 1 A.C. 308. Once the arrangement whose purpose was to avoid tax is annihilated, what clearly remains in the present case is that the appellant received the entire income from the pharmacy business. It follows that the assessment was right and that the appeal should be dismissed.
Appeal dismissed with costs. Usual order as to exhibits.