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Peacock v. Federal Commissioner of Taxation.

Judges:
Nettlefold J

Court:
Supreme Court of Tasmania

Judgment date: Judgment handed down 9 November 1976.

Nettlefold J.: The taxpayer lodged a notice of objection dated 5th July 1973 against his assessment for income tax in respect of the financial year ending 30th June 1972. In substance the position is that the Commissioner raised the assessment on the basis that income from the partnership of Peacock, Darcey & Anderson which the taxpayer alleged was the income of his wife was income on which, for various reasons, the taxpayer was taxable. The taxpayer disputed that basis of assessment and requested the Commissioner to treat the objection as an appeal and to forward it to this Court. That appeal now falls for determination.

There is also an appeal in respect of the taxpayer's assessment in respect of the financial year ending 30th June 1973. That follows an objection dated the 29th May 1974. The determination of the appeal in respect of that financial year will follow the determination of the appeal in respect of the earlier year as the issues are the same in each case.

I should say immediately that this is not a case which turns on credit. The witnesses are responsible and honest people whose evidence is reliable.

The taxpayer is a surveyor authorised by registration under the Land Surveyors Act 1909. He has held that status since November 1953. Shortly after that, he purchased a portion of the practice of his former master surveyor, Mr. Terry. The agreement for sale is part of exhibit P1. The purchase price was £2,000.0.0 payable by instalments. The final instalment was paid on 9th December 1956. All instalments were paid by the taxpayer. The practice purchased was a general practice.

The taxpayer married on the 23rd October 1954 and that marriage still subsists. There are three children of the marriage born in 1955, 1956 and 1959.

At the time of his marriage the taxpayer's practice was very small. There was only the one employee who was engaged in the business on a ``full-time'' basis. He was a cadet, Mr. Darcey, who is now the taxpayer's partner.

At the time of his marriage the taxpayer's health was ``reasonable'' but it deteriorated over the next 4-5 years. In 1957 he was ``unable to work a great deal of the time, certainly not the physical side of the work''. At one stage he was confined to his home for nearly three months. He got down to a weight of less than 7 stone. He described himself as ``pretty severely handicapped''. He was concerned about the future of the family.

The illness continued to trouble him and it was not until some time in the early 1960s that he was ``getting back to almost full efficiency''. From the time of his marriage until that stage was reached, his wife attended to all matters of office administration or, at least, the majority of it. When he was unable to attend his office because of illness or because he was away doing survey work, his wife looked after the office.

Asked why he entered into a partnership with his wife in 1957, Mr. Peacock said that there was a number of reasons for it. The reasons he gave were: -

  • 1. He was very concerned about his health and the future of his family and he wanted Mrs. Peacock to understand the business so she could carry it on in his absence ``from illness or otherwise''.
  • 2. He wanted her to have authority over employees.
  • 3. He wanted her, if possible, to accumulate assets of her own, in her own name, ``earned by her'', and to acquire business knowledge for her own protection if something happened to him.
  • 4. And, then, as a good deal of emphasis was placed on this piece of evidence, I quote it verbatim: -
  • Q. ``Were you conscious at that time that your family, that is your wife and

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    yourself together, would pay less income tax if you each derived half of the family income than you would if one person derived the entire family income?''
  • A. ``Yes, I was quite conscious of that.''
  • Q. ``To what extent were you influenced by that knowledge?''
  • A. ``It was one of the four points that made me decide to start to go into partnership with my wife.''

He said that ``the total family earnings'' over a period - I took him to be referring to a period at about the time the partnership was entered into - were about half what he could have earned as a salaried surveyor. Asked ``why did you stick to running your own business'' he replied ``I was determined that one day I would have a business of my own and it would be sustantial, if possible. And, also, it was the only way that the wife could obtain assets, apart from gifts. She had no prospects from her own family. She had to earn it somehow.''

In 1957 the business consisted of all types of surveying work and ``quite a bit in fact that wasn't surveying''. The business was starting to grow then.

He agreed that the practice is now a large and successful one.

It was put to the taxpayer in cross-examination that he knew when he entered into partnership in 1957 that it would be desirable to split his income with his wife so as to set her up and give her independent status and he agreed with that.

He agreed that from 1970 onwards Mrs. Peacock's ``participation'' had dropped off until 1973 and by that stage she was not doing a great deal. She had become unwell by that stage.

At all relevant times Mrs. Peacock has been drawing her share of profits in accordance with the partnership agreement existing from time to time.

He agreed that the firm's letterhead did not, at any relevant time, have Mrs. Peacock's name on it. And that proposition also applies to the firm's accounts. A sample of each form used by the current partnership is in evidence. Each sample bears the name ``Peacock Darcey & Anderson'' and the description ``Authorised Surveyors'' and lists only the names of the partners who are qualified persons.

At no time did Mrs. Peacock hold herself out as being an authorised surveyor.

The taxpayer was cross-examined about the firm's professional indemnity insurance. In my opinion, that evidence is of little significance. The documents are in evidence and are self-explanatory.

Clause 17 of the current deed of partnership provides: -

``17. EACH partner will take on his life a policy of assurance sufficient to cover the estimated amount payable to purchase his share in the partnership in the event of his death and assign such policy to the other partners. The amount of cover in such policy shall be reviewed from time to time so that the assurance cover on the life of each partner shall be at all times sufficient to cover the value of his interest in the partnership.''

The evidence discloses that, at any rate, in respect of the year ending 30th June 1972, each qualified partner had a policy of assurance taken out, apparently, in obedience to the requirements of the clause but Mrs. Peacock did not.

Exhibit D3 contains, inter alia, applications for registration of a business name in respect of the taxpayer's firm dated respectively 31/7/64, 1/7/67, 17/7/69, 13/7/70 and 22/6/72. In these documents the business is variously described as ``surveying'', ``surveyors'', ``land surveyors'', ``licensed surveyors'' and again ``licensed surveyors''. In each of these documents Mrs. Peacock is listed as a partner.

The taxpayer agreed that his wife did not provide any capital when she became a partner in 1957. She has not at any time made any payment to the taxpayer by way of consideration for the acquisition of a share in the business.

Asked what classes of surveying his firm had engaged in over the past decade, the taxpayer replied that they did any sort of surveying including cadastral surveying, engineering surveying and topographical and town-planning types of investigations. In the term ``engineering surveying'' he included surveys

ATC 4378

for tunnels, bridges, lighthouses, control of high-rise buildings, setting out of structural steelwork for buildings, contour surveying and ``all that nature of thing''. In his particular practice town-planning involves the planning of subdivisions of all types.

In Tasmania and throughout the Commonwealth persons who are not registered surveyors engage in town-planning. That is also the case with engineering surveying.

His firm also engages in what he described as ``estate management''. They have been involved in that a lot in the last few years. He described that work as advising clients on the best way to realise on their properties, whether by way of subdivision or otherwise, over a period of time so as to get the most advantageous result.

The firm also does, and I assume, at the relevant time did, a good deal of Titles Office searching, obtaining copies of surveys and titles for other surveyors whose offices are outside of Hobart. One employee is engaged practically full time on that.

The taxpayer estimated that 20-25 per cent of the business involved cadastral surveying and 50 per cent of it involved engineering surveying. The proportion of engineering surveying is greater now than it was in 1956 and 1957.

His view was that, to carry out engineering surveying, no academic qualifications were required but some skills were required in varying degrees depending on the precision required in the particular job in question.

In Tasmania, the Hydro-Electric Commission, Public Works Department, Forestry Department and Lands Department employ, in the main, non-licensed surveyors for surveying work other than cadastral surveying. The Hydro-Electric Commission uses unlicensed persons on dam construction work, topographical surveying, and aerial photography. In fact the only time they use their licensed surveyors is for the actual cadastral work involved in acquiring properties. His firm from time to time does surveying work, which is not cadastral surveying, for these and other organizations both public and private.

Mr. Peacock explained that when he used the term cadastral surveying, in effect, he meant all surveying that affects the boundaries of and rights in land for title purposes. But, even with that class of work, a good deal of the work preliminary to the final plan is done by persons who are not registered surveyors.

During cross-examination Mr. Peacock said that there is a lot of ``sub-professional'' work done by persons described as surveyors. But he agreed that there is a body of surveyors who regard themselves as carrying on work of a professional nature. He agreed that the work which he and his two qualified partners did would ``by and large'' be regarded as professional work. He and his two male partners are members of ``The Institution of Surveyors, Australia, Tasmanian Division'', and regard themselves as bound by its relevant Code of Ethics. That body has no disciplinary powers over its members except, of course, speaking generally, power to remove a person's name from its membership list or supend him from membership.

In re-examination Mr. Peacock said that in one year, after he had entered into the partnership agreement with his wife, there was a ``credit squeeze'' and there was very little surveying work to do and they relied on all sorts of other work which had nothing to do with surveying.

When he entered into the agreement with his wife in 1957 he had not sought any advice on the income tax implications of the agreement.

I turn now to the partnership documents. The original partnership document is dated 20th August 1957 and is in the form of a deed made between the taxpayer and his wife. It recited that the taxpayer ``has heretofore carried on the profession of a surveyor and has entered into a tenancy agreement'' of certain premises which are identified. It recited an agreement ``to carry on the said profession in partnership as hereinafter appears.'' In substance, the operative part if as follows: -

  • ``1. That the parties hereto shall carry on in partnership under the name of A.C. Peacock the profession of surveying from the first day of July 1957 and thereafter and until the partnership is determined as hereinafter appears.''
  • ``2. Place of business.''

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  • ``3. The capital of the partnership shall be £3,855.19.0 provided by Anthony Cripps Peacock and any additional capital required shall be provided in equal shares by the partners unless otherwise agreed from time to time.''
  • 4. Usual provision as to accounts.
  • ``5. The partners shall be entitled in equal shares to the profits of the firm and the profits for each year shall be distributed accordingly and each partner shall be entitled to be paid his share of any year's profits at any time after the preparation of the balance sheet for that year, less any amount due to be paid by him as capital or for a prior loss. Losses shall be borne equally by the partners.''
  • ``6. Each partner shall devote such time as may be from time to time mutually agreed upon to the conduct of the business of the partnership.''
  • ``7. It is expressly agreed and declared that under no circumstances, at any time, or any place will the said Elizabeth Ann Peacock by any word act or writing hold herself out to be a qualified surveyor.''
  • 8. Usual clause as to banking funds to which is added the provision ``Cheques may be drawn by either partner or by both as may from time to time be agreed upon''.
  • 9. Usual clause as to drawings.
  • ``10. The partnership may be dissolved by either partner at any time by three months prior notice in writing given to the other partner. In the event of a dissolution from whatever cause each partner shall be entitled to the whole amount of his capital contribution to the partnership and after payment to each of them of that amount in full the assets of the partnership shall be divided equally between the partners.''
  • 11. Clause whereby the male partner gave permission to the partnership to use the premises of which he was the tenant and provision for reimbursement in full of all rent paid by him.
  • 12. Clause binding each partner not to sell or charge his share in the business without the written consent of the other partner.
  • 13. Usual arbitration clause.

By an agreement dated 1/7/64 the partners sold to Mr. Darcey a share in the goodwill and other assets of the firm for £2,700.0.0 payable within 5 years. Mrs. Peacock received her half share of that sum. On the same date a deed of partnership was entered into between Mr. & Mrs. Peacock and Mr. Darcey. The deed described the partnership business as that of surveying. The firm name was to be ``A.C. Peacock & M.G. Darcey''. It provided for an equal distribution of profits.

On 19/9/69 the partners sold to Mr. Anderson a one-quarter share in the goodwill and assets of the business. Mrs. Peacock received her share of the sale price. By a deed of the same date Mr. Anderson was taken into partnership with the other three partners. The business was described as ``surveyors, town planners and any other business mutually agreed upon''. The firm name was to be ``Peacock Darcey & Anderson''. Each partner had power to sign cheques. Profits were to be divided 20 per cent to Mr. Peacock, 20 per cent to Mrs. Peacock, 35 per cent to Mr. Darcey and 25 per cent to Mr. Anderson. The partnership was to continue until determined by notice as provided in the deed. By a supplemental agreement of the same date it was agreed that, if Mrs. Peacock retired from the partnership or died while Mr. Peacock remained a partner he was to have first option to purchase her share on the terms and conditions set out in the partnership deed. In the event of the death or retirement of Mr. Peacock it was agreed that Mrs. Peacock should forthwith retire from the partnership and Mr. Darcey and Mr. Anderson were to have the option to purchase the share of both Mr. & Mrs. Peacock upon the terms and conditions set out in the partnership deed.

It was this partnership agreement of 1969 which was still in operation during the years covered by the assessments in issue in this case.

The balance sheets as at 30/6/72 and 30/6/73 are in evidence. Each shows substantial sums standing to the credit of Mrs. Peacock both on capital account and current account.

I do not get any assistance from the evidence of Mr. James.

Mrs. Peacock's evidence is to the effect that, prior to her marriage, she had experience as a typiste-stenographer and as a secretary. There

ATC 4380

is no suggestion that she has ever studied surveying or acquired any skill in that field.

From the time of her marriage she did all her husband's accounts and assisted him by doing clerical work.

She said that in 1957 her husband was practically completely bedridden for three months and he was not able to work for much of the year. When he was working most of his work was country work. When doing that work, ordinarily, he would be away for a week to ten days at a time. At that time, there was not sufficient work to keep the apprentice fully occupied. She did all the non-technical clerical work.

She gave evidence of her ``objectives'' in entering into the partnership agreement. They were: -

  • 1. Because of the state of her husband's health she wanted to ``establish myself'' so that she could have some income and support her children, if necessary.
  • 2. She felt she could ``do the business side of it'' which she said she was trained to do and ``start to very slowly establish myself''.
  • 3. She wanted to be a partner because it gave her authority to employ staff and gave her status with them.

1957 was the year in which she held the gravest fears about her husband's health. But he had substantially overcome his health problem by 1960. However, it is an asthmatic condition and, hence, recurrent.

In the first year of the partnership the earnings were very low. Her share did not compare very well with what she could have earned in her former employment.

She agreed that she was aware at the time the partnership agreement was entered into that the sharing of income would reduce income tax. But she denied that that was her reason for entering into it.

In cross-examination, she agreed that her activities in the business were designed to assist her husband in carrying on his survey business.

She said the idea of forming a partnership came quite a lot from her.

She also gave evidence that she hired staff on the behalf of the business, made financial decisions and assisted in the business in other ways.

It should be noted that she presented as a woman of intelligence who had a strong personality.

I have not paid any attention to the 54th report of the Commissioner of Taxation as I regard it as irrelevant.

I do not think that the evidence of Mr. Darcey adds anything of much significance. His assessment of the proportion of the firm's work which fell into different categories of surveying differed somewhat from that of Mr. Peacock but I do not think that anything turns on that difference.

I have sought to summarize the effect of the evidence as the parties submitted it, notwithstanding the fact that I regard some of it of doubtful relevance.

Directions in law on section 260

Section 260 provides: -

``Every contract, agreement or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly: -

(a) altering the incidence of any income tax:

(b) relieving any person from liability to pay income tax or make any return;

(c) defeating, evading or avoiding any duty or liability imposed on any person by this Act; or

(d) preventing the operation of this Act in any respect, be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.''

The problem in this case is whether the evidence discloses a ``contract, agreement or arrangement'' which had or purported to have ``the purpose or effect'' of ``avoiding'' a liability imposed on the taxpayer by the Act. One cannot resolve that problem without first

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going through the cases which construe the section. There are many glosses on the text and they are not all consistent.

I begin with
Newton & others v. F.C. of T. (1958) 98 C.L.R. 2. There is a number of relevant propositions to be found in that case and they are: -

  • 1. The word ``avoid'' is used in the section 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. p.7.
  • 2. ``The word `purpose' means not motive, but the effect which it is sought to achieve - the end in view. The word `effect' means the end accomplished or achieved.... In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect - which it does - irrespective of the motives of the persons who made it.... 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.'' p.8.
  • 3. The section can still work if one of the purposes or effects was to avoid liability for tax.

I would turn from Newton's case directly to
Ashton & anor. v. Commr. of I.R. (N.Z.) 75 ATC 6001; (1975) 1 W.L.R. 1615 because, in that case, some of the propositions in Newton's case are reaffirmed but one proposition was re-examined. From Ashton's case I take the following: -

  • (a) If an arrangement has a particular purpose, then that will be its intended effect. If it has a particular effect, then that will be its purpose and oral evidence to show that it has a different purpose or different effect to that which is shown by the arrangement itself is irrelevant to the determination of the question whether the arrangement has or purports to have the purpose or effect of in any way altering the incidence of income tax or relieving any person from his liability to pay income tax.
  • (b) Their Lordships criticised the following words in Newton's case which I have set out in proposition 2 (above) ``by looking at the overt acts by which it was `implemented'''. As to that their Lordships said ``If Lord Denning meant that one can derive guidance as to the purpose or effect of the arrangement from the conduct of the parties after it has been made their Lordships cannot agree... whether the purpose or effect of the arrangement was that stated in section 108 must in their Lordships' opinion be determined only by reference to the arrangement and not by reference to the parties' subsequent conduct.'' ATC at p. 6005; W.L.R. at p. 1621.
  • (c) The inclusion of the words ``so far as'' show that tax avoidance need not be the sole purpose. If one of the purposes and effects of the arrangement is to avoid a liability for tax it matters not what other purposes or effects it may have, the section applies.
  • (d) An arrangement which can properly be regarded as an ordinary business or family dealing is not to be regarded as entered into for the purpose or to have the effect of tax avoidance even though the ordinary dealing may result in less tax being paid than would otherwise be exigible. Tax avoidance is not the purpose of such a transaction. ATC at p. 6006; W.L.R. at p. 1622.

I go back from Ashton's case to
Mangin v. Commr. of I.R. (N.Z.) 70 ATC 6001; (1971) 2 W.L.R. 39, another decision of the Privy Council. There, there is a proposition which creates some difficulty. At ATC p. 6006-07; W.L.R. p. 47, after citing a passage from Newton's case which is set out above, their Lordship said: -

``In their Lordships view this passage, properly interpreted, does not mean that every transaction having as one of its ingredients some tax saving feature thereby

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becomes caught by a section such as sec. 108. If a bona fide business transaction can be carried through in two ways, one involving less liability to tax than the other, their Lordships do not think that sec. 108 can properly be invoked to declare the transaction wholly or partly void merely because the way involving less tax is chosen. Indeed in the case of a company, it may be the duty of the directors vis-a-vis their shareholders so to act. Again, trustees may in the interests of their beneficiaries, deliberately choose to invest in Government securities issued with some tax-free advantage, and to do so for the express purpose of securing it. They do not fall foul of sec. 108. The clue to Lord Denning's meaning lies in the words `without necessarily being labelled as a means to avoid tax'. Neither of the examples above given could justly be so labelled. 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'.''

Their Lordships added: -

``The present case clearly exhibits such a scheme.''

One should turn from that case to
Hollyock v. F.C. of T. 71 ATC 4202; (1971) 45 A.L.J.R. 572, a decision of Gibbs J. In that case his Honour said (ATC p. 4205-06; A.L.J.R. p. 575) he could not accept that the words of Turner J., quoted above, expressed completely the effect of sec. 260. His Honour went on: -

``To say that the section applies only to arrangements whose sole purpose is tax avoidance would be contrary to the decision 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 seem to me to be opposed to the reasoning on which these 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 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.''

His Honour went on to hold that, on the facts of the case before him, avoidance of tax was one purpose, but an essential purpose, of the arrangement and what was done was not capable of explanation by reference to ordinary business or family dealing. He found it necessary to label the arrangement as a means to avoid tax.

One of the propositions stated by Kitto J. in
Hancock v. F.C. of T. (1959-1961) 108 C.L.R. 258 at p. 283 is relevant to the problem which arises in this case and it has been seen as a useful expansion of an earlier formula (as to that, see the dissenting judgment of Lord Wilberforce in Mangin's case (supra) at ATC p. 6010; W.L.R. p. 52). In view of observations in later cases I do not cite it verbatim but state the effect of it as I understand it. The word ``arrangement'' comprehends an original plan and all the transactions by which it is carried into effect. If the arrangement, so understood, is capable of explanation by reference to ordinary dealing such as business or family dealing, without necessarily being labelled as a means to avoid tax, the arrangement does not come within the section. For myself, I would suggest that it is significant to note that his Honour used the expression ``ordinary dealing'' such as business or family dealing. In determining whether an arrangement between a taxpayer and his wife is to be characterized as an ``ordinary'' dealing, it is wrong to approach it in the same way as one would approach a deal between two businessmen. The circumstance that the arrangement may be regarded as favourable to the wife, and not one which the taxpayer would be willing to make with a stranger, does not, of itself,

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require the conclusion that the arrangement is anything other than an ordinary dealing.

It is clear from
Peate v. F.C. of T. (1962-1964) 111 C.L.R. 443 and on appeal to the Privy Council 116 C.L.R. 38 that sec. 260 can apply to prospective income from future personal exertion as well as to prospective income from property.

I apply the above propositions in deciding this case subject, however, to the following observations: -

  • 1. The criticism in Ashton's case of the words of Lord Denning in Newton's case ``by looking at the overt acts by which it was implemented'' cannot, I think, have any practical effect on the decision in this case. And, in any event, the apparent conflict has little practical effect when what the word ``arrangement'' comprehends is understood as Kitto J. explained it in Hancock's case (supra).
  • 2. In view of the observations of Gibbs J. in Hollyock's case (supra) I do not apply the proposition of Turner J. (supra) in Mangin's case (supra).

I turn now to the argument of the Commissioner. It was contended that the partnership agreement entered into in 1957 was illegal or tainted with illegality. To determine that question one must turn to the Land Surveyors Act 1909. In my opinion, neither the making of the agreement nor the performance of it was rendered illegal by that Act. Section 14 of that Act is to be construed literally and in context. So construed, it does not render illegal anything which was done here. The agreement did not require Mrs. Peacock to do anything which would amount to practising as a surveyor; nor did it require her to make any authorized survey. The scope of the phrase ``practise as a surveyor'' is limited by the context. There is nothing in the Act to suggest that the preamble falls short of an adequate statement of the purpose of the Act. It says that it is ``An Act to provide for the registration of land surveyors and to regulate the practice of such surveyors.'' On the contrary, a consideration of the contents of the Act confirms the accuracy of the preamble. So, it is confined to ``land surveyors''. The scope of that term may be the subject of some dispute but that is not a dispute which it is necessary to resolve in this case. The scope of the prohibition in sec. 14 must be determined in the light of the true meaning of the word ``practise''. Mrs. Peacock did not ``practise'' as a surveyor because she did not hold herself out as a person having either skill or knowledge in the area of land surveying. Nor did she do any work which could be described as land surveying.

The agreement of 1957 did not evidence any agreement to do anything which is expressly or impliedly prohibited by the statute. Due weight must be given to cl. 7.

It was submitted for the Commissioner that, at no stage, was there any partnership in fact. I reject that argument. The evidence establishes that Mrs. Peacock was a partner in the business in question at all relevant times from 1957 onwards. And she was a partner in accordance with the ordinary conception of partnership stated in sec. 6 of the Partnership Act 1891 which is ``the relation which subsists between persons carrying on business in common with a view to profit''. That is established by the terms of the various partnership agreements and the acts of performance done under them.

And then it was submitted, in relation to the period from the formation of the partnership in 1957 until the formation of the new partnership in 1964, ``the earning of the money was done by Mr. Peacock, he was the one who derived the income''. But this argument does not correctly apply the meaning of the word ``derived'' which is ``obtained'' or ``got'' or ``acquired'' (
F.C. of T. v. Clarke (1927) 40 C.L.R. 246 at p. 261). There is a distinction to be drawn between acts which must be done to make it possible for income to be derived and the deriving of it. Having regard to the evidence, it simply is not true to say that the taxpayer ``obtained'' or ``got'' or ``acquired'' the income the subject of the dispute in this case. And you do not refute that proposition by contending that, but for his efforts, a part of the income, be it large or small, could not have been obtained by anyone.

In support of the proposition that sec. 260 of the Act justifies the assessments in this case, the Commissioner's argument points to many aspects of the matter. Emphasis is placed on the unusual nature of the arrangement. It is contended that practising surveying is a professional activity and surveyors in Australia regard themselves as a body of

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professional men. In that regard, reference is made to the code of ethics of the Institution of Surveyors, Australia, and their constitution and by-laws. It is emphasised that, in order to practise as a land surveyor in Tasmania a person must obtain registration and to obtain that he will need to show, speaking in the broad, that he has pursued some course of study of a relevant body of specialised knowledge and, no doubt, has had some practical experience. And, again speaking in the broad, in all the areas of surveying in which this firm engaged, specialised knowledge and skill were required in order to do the work. And Mrs. Peacock neither had, nor held herself out as having, the necessary knowledge, skill or experience to do surveying work. Her only qualifications are as a Secretary. Reference was made to the taxpayer's evidence as to the factors which led him to enter into this arrangement with his wife and to his evidence to the effect that, at the time of the original agreement in 1957, he hoped to build up the business. Great emphasis was placed on what the taxpayer said concerning the thought he gave to income tax at the time. Indeed, that evidence was said to be ``absolutely critical''.

It was pointed out that the death of either party to the deed of the 20th August 1957 would have brought the partnership to an end. And, in addition to that, it was said that it would have been impossible for her to carry on the business if he had died because she was not qualified.

The purpose of accumulating assets in her name was said to be consistent with a purpose of tax avoidance.

As to acquiring business knowledge, it was submitted that, if she continued on afterwards as before, it could not really have done much as far as her business knowledge was concerned.

And, then there was a submission which it is important to summarize fairly fully, and what follows is the summary of that. The effect of the annihilation of the agreement is that, thereafter, Mr. Peacock is regarded in law as being the sole proprietor of the business. Sometimes there are problems as to how sec. 260 is to apply. If you just go straight to 1972 and 1973 you might have those sorts of problems. For example, if the 1969 partnership agreement were looked at in isolation and she was treated as not being capable of being a partner and eliminated, then her share might have to be split between all the other parties. It might be said that, because of that, it would not be a proper case to invoke sec. 260. But the answer to all this is that you go back to 1957 and avoid the 1957 deed. That leaves Mr. Peacock as being the sole proprietor. Then you follow that through. In 1964, where he and his wife purport to deal with Mr. Darcey, the first deed being void as against the Commissioner you treat Mr. Darcey as dealing with Mr. Peacock alone. As far as the Commissioner is concerned the taxpayer continued to derive all the income. And then that follows on into the 1969 agreement. You can lump the husband and wife together in the sense of saying, well, they are still entitled to 40 per cent but that is derived by the taxpayer and it does not affect the other partners. ``And that is why it is important in our submission to go back to 1957, that is the scheme or arrangement that is entered into and that is struck down. And if thereafter you treat what is described as being a partnership between Mr. & Mrs. Peacock as being a business carried on by Mr. Peacock alone, and then when Mr. Darcey joins it is still being carried on instead of by Mr. & Mrs. Peacock and Mr. Darcey rather by Mr. Peacock with Mr. Darcey but in the same proportions as Mr. Peacock and Mrs. Peacock would have had''.

And then reference was made to the fact that Mrs. Peacock's name was not on the letterhead of the firm or on the accounts of the firm. Reference was also made to the registration forms under the Business Names Act and the facts relating to professional indemnity insurance. And, finally, reliance was placed on the fact that Mrs. Peacock did not contribute any capital.

The question whether the arrangement between the taxpayer and his wife is void as against the Commissioner because of the operation of sec. 260 is, in the end, a question of fact. But, of course, in order to reach a correct conclusion, one must apply the law correctly. But to emphasise that, in the end, it is a question of fact I have sought to separate the directions in law from the ultimate finding of fact.

ATC 4385

One must consider the agreement made in 1957. One may have regard to the surrounding circumstances. It must be kept in mind that what is important is not what the parties to the agreement now, almost 20 years later, say their purpose was; one must look at the agreement and determine what its purpose was. The motives of the parties are irrelevant. One may have regard to the fact that, at that time, the business was small although, no doubt, the parties entertained the hope and, probably, the expectation that it would expand. The taxpayer had serious health problems. When he was able to work, the work was of such a nature that it took him away from the office a good deal and for substantial periods at a time.

Mrs. Peacock had neither the knowledge nor the skill to do any kind of surveying work. But she could do administrative work, make decisions and assist generally in the business. She had the capacity to make a significant contribution to the business and I believe that she has done so. From the beginning, she exercised the authority which the agreement gave her and the terms of the agreement have been obeyed. By virtue of the agreement, Mrs. Peacock became liable to the creditors of the firm and, as a member of the firm, liable both in tort and contract.

It is said that it was an unusual agreement. But one has to be careful about that submission. If the parties were strangers it would, indeed, be unusual. But, speaking in the broad, it is not unusual for a businessman to take his wife into partnership and that is so even in cases where the business involves the exercise of technical skill. And the need to do so may be greater if he is ill and away from his business premises from time to time. But it was said that this was a professional practice, practising surveying being a professional activity. Whether the business was a professional business is a question of degree and, of course, of fact. What the evidence discloses is that the term ``surveying'' covers a wide variety of work a good deal of which, according to accepted notions, would not be regarded as professional work although, of course, some skill is required to perform it. A good deal of the work which the firm has done is work which is often done by people who would not regard themselves as professional workers. And, apparently, back in 1957, work was done which was not surveying work at all. But, those things having been said, I have no doubt that the nature of the business and the fact that she was not qualified as a surveyor are very relevant facts as are the other matters submitted by the Commissioner. But at the end of the day the critical question is whether the agreement in 1957 is capable of explanation by reference to ordinary dealing without necessarily being labelled as a means to avoid tax. On the whole, I conclude that it is capable of such an explanation and it was not void as against the Commissioner. Having reached that conclusion, it is clear that there is nothing in the subsequent history of the relationship which creates a situation falling within sec. 260. The new partnership agreements in 1964 and 1969 were just ordinary transactions in the history of the business. New partners were taken in as the business expanded.

I accept that, if one took the view which the Commissioner takes of the agreement made in 1957, there would be no obstacle to treating the agreements of 1964 and 1969 as transactions carrying into effect the plan made in 1957. The later agreements would then be seen as part of the ``arrangement'' struck down by sec. 260 (compare Kitto J. in Hancock's case (supra) p. 283 proposition (1)). But once you accept the view that the agreement of 1957 was a bona fide agreement unaffected by sec. 260, it is not then possible to treat the later agreements as affected by sec. 260. Once she became a partner in the business no significance attaches to the fact that he allowed the relationship to run on and that is so notwithstanding that new partners came in and fresh deeds were executed. She had acquired a financial interest in the business and her exclusion would have involved a substantial payment. No inference can be drawn from the fact that he refrained from taking steps which would have subjected him to such a liability.

The position is, then, that the evidence does not disclose any contract, agreement or arrangement falling within sec. 260.

For these reasons, each appeal is allowed. Each assessment is to be amended to accord with these reasons.


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