Federal Commissioner of Taxation v. Everett.

Judges: Barwick CJ
Stephen J
Mason J

Murphy J

Wilson J

Court:
Full High Court

Judgment date: Judgment handed down 27 February 1980.

Murphy J.

The real question is whether the Federal Parliament intended to allow the income-splitting device adopted by the taxpayer to divert (for tax avoidance) some of his income derived from personal exertion (as a solicitor in a partnership). The Income Tax Assessment Act 1936 (Cth.), as amended, provides:

``6(1)...

`income from personal exertion' or `income derived from personal exertion' means income consisting of earnings, salaries, wages, commissions, fees,... the proceeds of any business carried on by the taxpayer either alone or as a partner with any other person...''

``19 Income shall be deemed to have been derived by a person although it is not actually paid over to him but is... dealt with on his behalf or as he directs.''

``92(1) The assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income...''

``96 Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate.''

In my opinion, this case should not be approached through the technicalities of New South Wales partnership law. This is a taxation case, not an equity case. The answer lies in the interpretation and application of


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Federal Parliament's intention. Acts imposing taxation are not to be construed according to the technicalities of real or personal property (see
Lord Saltoun v. Advocate-General (1860) 3 & 4 Macqueen's Reports 281 ;
I.R. Commrs. v. Gribble & Ors. (1913) 3 K.B. 212 ;
The Earl of Zetland v. The Lord Advocate (1878) 3 App. Cas. 505 at p. 511 ; In
re Parkes' Settlement (1956) 1 W.L.R. 397 at p. 403 ). And tax laws should be applied in the light of the commercial and economic realities.

I agree with the finding of Mr. Justice Deane in this case that:

``... As a matter of substance and reality, any partnership profits were primarily the result of the personal exertions of the four members of the partnership and the taxpayer's share of them was his agreed share of the fruits of those personal exertions. If attribution be necessary, any share of profits which the taxpayer became entitled to receive should be attributed primarily to his personal exertions as a member of the firm....''

The taxpayer, by personal exertion, earned his share of profits as a member of the partnership; he remained a partner but transferred certain limited rights to his wife. In regard to the share of profits, what Mrs. Everett obtained depended upon her husband's personal exertion to earn his share of profits. Anything she would receive (apart from a share of the surplus on division of partnership assets on dissolution), would be a result of her husband's personal exertion. His assignment to her of 6/13ths of his share of the profits was an attempt to divest himself of income from his personal exertion before that income was derived. In my opinion, the provision dealing with income derived from personal exertion should be read with those dealing with trust income so that what in reality is income from personal exertion is not able to be diverted for tax purposes by a device such as that adopted here.

In
Spratt v. Commr. of I.R. (N.Z.) (1964) N.Z.L.R. 272 , Mr. Justice Henry said:

``No taxpayer can, by way of assignment, escape assessment of tax on income resulting from his personal activities - such income always remains truly his income and is derived by him irrespective of the method he may adopt to dispose of it.''

(at p. 277).

In
Johnstone v. Commr. of I.R. (N.Z.) (1966) N.Z.L.R. 833 , Mr. Justice Tompkins cited Mr. Justice Henry's statements in Spratt's case, then went on to say:

``Furthermore, in
Arcus v. Commr. of I.R. (N.Z.) (1963) N.Z.L.R. 324 , Hardie Boys J., gave the example of a taxpayer who assigns £ 100 of his income annually to a grocer in return for a promised supply of £ 100 worth of goods and said at p. 332: `I see in such a scheme no different application of income than the appellant has here sought to achieve in respect of his benefactions; but in neither situation is there such an alienation as to make the income no longer that of the taxpayer; in each case it is the taxpayer himself applying his income to destinations of his own choosing.' Although the last two cases were not dealing with partnerships I do not think this makes any difference, as the profits of a partnership are the result of the joint efforts of the partners.''

(at p. 839).

In
Kelly v. Commr. of I.R. (N.Z.) (1970) N.Z.L.R. 161 , Mr. Justice Woodhouse said:

``A final issue should be mentioned. It relates to the third of the grounds relied upon by the Commissioner to the effect that the income depended upon the services of the appellants and so was necessarily derived by them personally. I think that this must be so. The partnership earnings were dependent upon the organization and personal effort of the partners. The gross income of the businesses necessarily was earned by and belonged to the partners and unless it could be said that those businesses were being carried on as such for the beneficiaries (a suggestion which the documents specifically reject) then I am unable to avoid the conclusion that the appellants in their capacity as partners derived the residual net income or profit....''

(at p. 165).

In
Peate v. F.C. of T. (1962-1964) 111 C.L.R. 443 , Mr. Justice Menzies said:


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``... 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 ....''

(at p. 446).

See also Mr. Justice Gibbs in
Hollyock v. F.C. of T. 71 ATC 4202 at pp. 4204-6; (1971) 125 C.L.R. 647 at pp. 653-4 .

The Act is based on graduation of tax for individual taxpayers and the evident legislative policy is to require those who are more financially able (as measured by their income) to pay at a higher rate than those less able. It would be remarkable if Parliament had intended its policy to be so easily defeated by a device or loophole capable of widespread application. The respondent contended that the device, although available to professional and business people generally, was not available to everyone; he claimed that the ordinary salary and wage earner could not avail himself of it because Truck Act provisions, which require payment in full of earnings to an employee, have been carried into most industrial awards and agreements. I have no doubt that, as the law stands, such a device is not available to salary and wage earners.

The Income Tax Assessment Act should not be construed to impute an intention to Parliament to have its main purpose defeated by an income-splitting device which tends to defeat its policy of graduated tax rates, is available only to the professional and commercial classes, and allows the burden of taxation to be shifted increasingly from those taxpayers most able to afford it to those less able.

The appeal should be allowed.


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