Federal Commissioner of Taxation v. Pincus.
Judges:Fox J
Fisher J
Beaumont J
Court:
Full Federal Court
Fox, Fisher and Beaumont JJ.
This is an appeal by the Commissioner of Taxation of the Commonwealth of Australia (``the Commissioner'') against a decision of the Supreme Court of Queensland given on 30 March 1984 [reported at 84 ATC 4187]. That Court allowed the appeal of David Fabian Pincus (``the taxpayer'') against an amended assessment of income tax for the year of income ended 30 June 1979 (``the year of income''), which amended assessment was issued pursuant to the provisions of subsec. 170(2) of the Income Tax Assessment Act 1936 (``the Act''). The trial Judge held that the Commissioner had correctly applied the provisions of sec. 260 of the Act but held that the issue of the amended assessment was not authorised by subsec. 170(2) of the Act. The taxpayer cross-appealed against the finding of the trial Judge that sec. 260 avoided the arrangements into which he had entered.
In his return of income for the year in question the taxpayer disclosed by his amended return dated 5 December 1979 assessable income which included $23,000 being salary paid by ``Stafford Road Medical Practice'' and $9,817 being ``Share of Partnership - Pincus, Backstrom, Richardson and Seet''. On 21 May 1980 the Commissioner issued an assessment based on this return which disclosed an amount of $93.81 as refundable to the taxpayer.
On 11 March 1983 the Commissioner issued to the taxpayer an amended assessment which disclosed an amount of $8,134.51 as payable by him. By the adjustment sheet which accompanied the amended assessment the Commissioner identified the alteration which he had made as follows:
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``$
Taxable income
previously assessed 28,045
Add:
Share of net income -
Stafford Road Medical
Practice 14,404
-------
Taxable income as
shown in attached
notice of amended
assessment $42,449
-------''
The taxpayer objected to this amended assessment and upon the objection being disallowed requested that it be treated as an appeal and forwarded to the Supreme Court of Queensland. That Court allowed the taxpayer's appeal.
It is appropriate at this stage to relate happenings which occurred subsequent to the end of the year of income although these matters are not strictly relevant to the arrangements which the Commissioner contended attracted the application of sec. 260.
By return of income dated 23 November 1979 Dr. D.L. Backstrom as trustee of the ``Stafford Road Medical Centre Trust'', being the Stafford Road Medical Practice identified by the taxpayer in his return for the year of income ending 30 June 1979, returned the net income of that trust as $28,808. On 21 April 1980 the Commissioner issued an adjustment sheet in respect of that return to Dr. Backstrom which indicated that the net income of the medical practice, namely $28,808 as returned, was assessed as to be the income of Dr. Backstrom. This amount was added to the taxable income returned by Dr. Backstrom in his personal return by an assessment dated 2 May 1980. Dr. Backstrom objected to this assessment. The objection, on 16 September 1981, was disallowed and he then requested that his objection be treated as an appeal and forwarded to the Supreme Court of Queensland. However, prior to the hearing of the appeal the Commissioner issued an amended assessment on 28 February 1983 and excised from the personal return of Dr. Backstrom this amount of $28,808. As earlier mentioned, the assessment of the taxpayer was on 11 March 1983, amended to increase his taxable income by one-half of the amount of $28,808, namely $14,404. It appears that the original assessment of Dr. Backstrom as trustee of the Stafford Road Medical Centre Trust was prompted by an instruction dated 27 March 1980 from the First Assistant Commissioner in Canberra and the amended assessment by a letter to the Deputy Commissioner in Brisbane dated 21 February 1983 from the Senior Assistant Commissioner in Canberra.
All of these matters and the contests between the parties to this appeal and cross-appeal arose out of the following circumstances.
Prior to the commencement of the year of income the taxpayer, a medical practitioner, was in partnership with Dr. Backstrom, Dr. Richardson and Dr. Seet. They had been partners since 1975. On 14 August 1978 the taxpayer and Dr. Richardson worked at a surgery at Stafford Road, Dr. Backstrom worked at Stafford Heights and Dr. Seet worked at both places. By early 1978 the taxpayer had become dissatisfied with the manner in which the partnership was being conducted in that he did not consider all the partners were making an equal contribution. The taxpayer's brother suggested to him that two trusts be established; one with Dr. Backstrom as trustee of a practice at Stafford Road and one with Dr. Richardson as trustee of a practice at Stafford Heights. Neither of the trustees would be employed in the particular practice of which he was trustee. The taxpayer gave evidence that his brother had explained to him that as an employee he could be superannuated and that there was a possibility that the beneficiaries of the trust could be members of his family and not the taxpayer himself. Evidence was given by the taxpayer as to his motives and purpose in entering into the subsequent arrangements, although it was acknowledged before this Court that it is the character of the acts done and transactions entered into with which sec. 260 is concerned. (
Slutzkin v. F.C. of T. 77 ATC 4076 at p. 4085; (1977) 140 C.L.R. 314 at p. 329. See also
Hollyock v. F.C. of T. 71 ATC 4202 at p. 4205; (1971) 125 C.L.R. 647 at p. 655.)
On 18 June 1978 the partners held a meeting at which they agreed to proceed with the ``splitting'' of the partnership. The Minutes of this meeting were as follows:
``Meeting on 18/6/78 at Dr. G. Seet's home. 8 p.m.
Present: R. Richardson
D. Backstrom
G. Seet
D. Pincus
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Item 1. Partners agreed that partnership should be split in a way that is equitable to all.
2. Legal advice from C.W. Pincus and Paul Lee is that our best way of achieving this would be by establishing two trusts, one with trustee D.L. Backstrom employing R. Richardson, D. Pincus and G. Seet and second with trustee R.G. Richardson to employ D. Backstrom and G. Seet.
3. Present year's accounts to be managed by Bruce Kennelly & Associates, Suther Street, Redcliffe.
4. Partners discussed trust scheme as outlined in sheet proposed by D. Pincus and agreed that if Paul Lee thought the trust scheme was legally correct and Bruce Kennelly agreed it was fair, we would carry out the proposed scheme.''
Mr. Lee arranged for a number of documents implementing the arrangements to be prepared which were executed by the partners on 14 August 1978. These documents were identified by the trial Judge as follows:
``(1) A Deed of Dissolution and Sale which provided for the following matters:
- (a) the sale to Dr. Richardson as trustee of `The Stafford Heights Medical Centre Trust' of the goodwill, lease (if any), chattels and all other assets associated with the practice carried on by the partners at Stafford Heights and owned by the partners save and except only book debts and cash;
- (b) the sale to Dr. Backstrom as trustee of `The Stafford Road Medical Centre Trust' of the same items associated with the practice carried on by the partners at Stafford Road;
- (c) in the case of each sale the purchase price to be the aggregate of the value of the goodwill and lease (if any) as determined by Australian Medical Agency of Queensland Pty. Ltd. or its nominee and the book value of the other property sold;
- (d) completion of both sales to take place on 14th August 1978;
- (e) the existing partnership between the partners to be dissolved as from 14th August 1978;
- (f) a restraint on the partners practising as a general practitioner or otherwise acting in the capacity of a medical practitioner within a specific area but with a proviso that any of the partners may be employed as a medical assistant by either of the trustees at the address set out and that each trustee shall be entitled to conduct the practice purchased under the deed.
(2) Unit Trust Deeds for the Stafford Road Medical Centre Trust and for the Stafford Heights Medical Centre Trust. In the case of each trust the settlor was Cecil William Pincus and the settlement sum was $2. The original unit holders in the former trust were the respective wives of Dr. Pincus and Dr. Richardson and in the latter trust were the respective wives of Dr. Backstrom and Dr. Seet.
(3) Service Agreements which in the case of the appellant provided for his employment at the Stafford Road Medical Centre as from 14th August 1978 at an annual salary of $25,000 to be reviewed annually, for termination by either party on six months written notice to the other, for five weeks annual leave plus one week study leave, for six months continuous sick leave after which termination of employment was in the discretion of the trustee, for payments received for outside work done during normal working hours of the practice to belong to the practice and for attendance at eight half-day sessions each week in accordance with a roster to be drawn up by the trustee, with provision also for a weekend roster.''
The Service Agreement between the taxpayer and Dr. Backstrom as trustee of the Stafford Road Medical Centre Trust was in the form of a letter as follows:
``Dr. D.F. Pincus
11th August, 1978
30 Tasman Street,
Stafford, Q4053
Dear Dr. Pincus,
Re: Stafford Road Medical Centre
I confirm that the following are the terms upon which you are to be employed as a Medical Assistant at the above practice.
1. Employment: Commences on 14th August, 1978;
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2. Annual Salary: $25,000.00 payable weekly to be reviewed annually;
3. Termination: Either may terminate on six (6) months written notice to the other;
4. Holidays: Five (5) weeks annually plus one (1) week's study leave to be taken at mutually agreed times;
5. Sick Leave: In the event of your becoming ill and unable to attend the practice employment will not be terminated until not less than six (6) months continuous sick leave has been taken and then shall be a matter for my discretion;
6. Additional Earnings: If you receive any payment for any work done (such as from hospital appointments, lectures, etc.) performed during hours when you are normally expected to work in the practice then those earnings shall belong to the practice and shall be paid to me;
7. Attendance: Your employment is based on eight (8) half day sessions per week in accordance with a roster to be drawn up by me. There will also be a roster for week-ends.
Would you please acknowledge your acceptance of the above terms by signing the acceptance at the foot of this letter.
When time permits a more formal Service Agreement will be drawn up for execution.
Yours faithfully,
(signed)
D.L. Backstrom as Trustee
of `The Stafford Road
Medical Centre Trust'
ACCEPTED: (signed)
D.F. PINCUS''
No formal Service Agreement was subsequently prepared. However, these arrangements were supplemented the following year by an undated letter as follows:
``211 Stafford Rd.,
Stafford.
Dear Doctor Pincus,
I confirm that the following terms are also to be included in the conditions of your employment as Medical Assistant: -
(a) Disablement Income Insurance:
- I will at my expense provide a disablement income insurance policy for your benefit for such amounts as may from time to time be agreed and until otherwise agreed for an amount of not less than eight hundred dollars ($800) per calendar month with a qualifying period of six (6) months before benefits payable. Full salary will be paid during these six (6) months.
(b) Superannuation:
- I will also at my expense establish a Superannuation Fund to provide such benefits as we shall from time to time agree but not in any event to exceed the maximum benefits from time to time allowed by the Commissioner of Taxation.
Yours faithfully,
(Signed)
David Leon Backstrom
(As Trustee of Stafford
Road Medical Practice).''
The Superannuation Fund was established by a Trust Deed dated 27 April 1979 between the ``Stafford Road Medical Practice'' as Principal Employer and the taxpayer and his wife as Trustees. The return of income lodged by Dr. Backstrom, as trustee of the Stafford Road Medical Centre Trust, disclosed that during the year ending 30 June 1979 superannuation contributions totalling $1,152.34 were made. It is doubtless a reasonable assumption that these were made in respect of the two practitioners exclusively employed by Dr. Backstrom at the Stafford Road practice.
The trial Judge made findings concerning the manner in which the Stafford Road practice was thereafter conducted. These findings were not challenged and it is appropriate to relate them as made:
``So far as the Stafford Road Medical Practice was concerned, a bank account entitled `Dr. Backstrom Trust Account' was opened and the first deposit to the credit of that account was made on 14 August. Staff who had been employed by the partnership at Stafford Road immediately prior to 14 August were thenceforth employed by Dr. Backstrom. A notice was placed in the surgery informing patients that from 14 August the practice would be conducted by
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the Stafford Road Medical Centre Trust and that the Doctors in attendance were Dr. Pincus, Dr. Richardson and Dr. Seet. Plates outside the surgery were changed to read `Stafford Road Medical Practice. Doctors in attendance - Dr. Pincus, Dr. Richardson and Dr. Seet'. It appears that approval could not be obtained for the registration as a business name of Stafford Road Medical Centre and accordingly the name of Stafford Road Medical Practice was registered. The name of the trust, however, remained unchanged as `The Stafford Road Medical Centre Trust'. For work done on and after 14 August patients were asked to make out cheques to Stafford Road Medical Practice. The letter-head used was headed `Stafford Road Medical Practice' and then named Dr. Pincus, Dr. Richardson and Dr. Seet as `Doctors in attendance' and the Memorandum of Fees was in a similar form. Suppliers were asked to render accounts in the name of Stafford Road Medical Practice and they were then paid by Stafford Road Medical Practice cheques. A new entry was made in the telephone book under the name of Stafford Road Medical Practice and the telephone was answered in that name. The obtaining of the necessary consent by the lessor to the transfer of the lease to Dr. Backstrom took some time and the transfer was not ultimately registered until 13 June 1980.From 14 August Dr. Backstrom visited Stafford Road approximately once a week. On these visits he signed cheques for the payment of accounts and for staff wages and he said that he had conversations with the receptionists to see if they had any problems and also very occasionally with the doctors. The doctors employed at Stafford Road received, in addition to their salary, an annual bonus based on work generated by each of them, although it appears that no bonuses were paid in respect of the year ended 30 June 1979. The four doctors held clinical meetings about once a fortnight and on some occasions they held separate business meetings although, apart from the matter of superannuation, the evidence does not indicate the nature of the business discussed at those meetings.''
The Australian Medical Agency of Queensland Pty. Ltd. assessed the value of the goodwill of the partnership practices and cheques for these amounts ($10,000 each) together with the cost of other practice property purchased were paid on 24 October 1978 to the partnership by the trustee of each of the unit trusts. The taxpayer's share of these moneys was $5,338 and on the same day he paid $5,400 to an existing trust, the Pincus Children Trust, to enable that trust to acquire units in the Stafford Road Unit Trust. An amount of $5,399 was on the same date paid to the trustee of that Unit Trust for the issue of 5,399 units. These units were issued to the taxpayer as sole trustee of the Pincus Children Trust, in which his children were the beneficiaries. As such trustee that taxpayer received during the year of income $14,404 from the trustee of the Unit Trust which the trial Judge found was distributed as income to his children as beneficiaries of the Pincus Children Trust.
The principal issue before the trial Judge was whether these arrangements attracted the application of sec. 260. In this regard the Commissioner identified the arrangements which he contended were void against him as follows:
``(a) The Agreement to dissolve the partnership between Drs. Pincus, Seet, Backstrom and Richardson;
(b) The dissolution of the partnership;
(c) The formation of the following Trusts:
- (1) The Stafford Heights Medical Centre Trust;
- (2) The Stafford Road Medical Centre Trust;
- (3) The Pincus Children Trust;
- (4) The R.G. Richardson Family Trust;
- (5) The D.L. Backstrom Family Trust.
(d) All Agreements made between the abovementioned doctors and/or the trustee or trustees of the abovenamed Trusts or any of them relating to the medical practices carried on at Stafford Road and at Stafford Heights.''
However, during the trial the Commissioner withdrew his contention that the formation of the Pincus Children Trust was void as against him. He acknowledged that that trust had been established some years prior to the arrangements between the former partners.
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The trial Judge made certain findings as to the subjective purpose of the taxpayer in entering into the arrangements, which findings, although not directly relevant, can assist to throw light upon the objective purpose of the arrangements themselves. He said that the effect of the taxpayer's evidence was that the primary consideration was to dissolve the partnership in a way satisfactory to him and the secondary consideration was to maintain his long standing relationship with Dr. Backstrom and to enable him as an employee to obtain superannuation. The taxpayer was aware that tax advantages were likely but contended they were of secondary importance to the dissolution of the partnership. The trial Judge accepted that the taxpayer was dissatisfied with the operation of the partnership and that he wished to maintain a relationship with Dr. Backstrom. However, his view, with which we agree, was that in order to do so it was not necessary to enter into such arrangements as he did. He accepted that the taxpayer wished to have the benefit of superannuation, but doubted how strongly this consideration weighed with him. The trial Judge drew attention to the fact that superannuation was not referred to in the letters from the solicitors, nor, we would add, was it mentioned at the crucial meeting of the partners on 18 June 1978, in the employment agreement or in any of the initial documentation. His opinion was that the substantial purpose of the arrangement was to minimise the taxpayer's taxation and in our opinion this conclusion is confirmed by an objective assessment of the overt acts which constituted the arrangement.
However, the trial Judge accepted the taxpayer's contention that the Commissioner was not empowered by subsec. 170(2) of the Act to issue the amended assessment on 11 March 1983. He came to this conclusion notwithstanding his finding that the taxpayer had not in his amended return made ``full and true disclosure of all the material facts necessary for his assessment''. He held that this non-disclosure had not resulted in any avoidance of tax by that taxpayer. This avoidance, he said, was the consequence of a failure by an officer of the Commissioner to carry out his instructions. The officer misunderstood these instructions and the failure to apply them to the return of the taxpayer was, in the trial Judge's opinion, an error of law. The Commissioner was therefore not entitled to amend the assessment, notwithstanding the avoidance of tax, and the assessment was set aside and the taxpayer's appeal upheld.
The Commissioner appealed to this Court against this finding of the trial Judge. His counsel contended, for the purpose of keeping the point open, that subsec. 170(2) did not as a matter of construction require that the avoidance of tax be the result of the failure to make full and true disclosure. However, he conceded that the authority of
F.C. of T. v. Levy (1960-1961) 106 C.L.R. 448, especially at p. 468 per Owen J., precluded this Court from deciding in his favour this question of construction. For our part we would acknowledge that subsec. 170(2) requires both of its conditions, which are cumulative and related, to be satisfied. However, whether, as a matter of causation, it is necessary for the avoidance of tax to be the ``result'' of the failure to make full and true disclosure may well be the subject of debate. Counsel's submissions were, in consequence of his concession, confined to the trial Judge's finding that there was no connection between the non-disclosure and the avoidance of tax.
The taxpayer by his cross-appeal challenged the finding that he had not made full and true disclosure. We agree with the trial Judge's finding in this regard and in particular with his identification of the relevant facts and documents which were not disclosed to the Commissioner either by the taxpayer or Dr. Backstrom. In our opinion the Commissioner's original assessment was correctly made in the light of the facts disclosed on the return as lodged by the taxpayer.
Prior to the making of this assessment the First Assistant Commissioner had, by letter of 27 March 1980, instructed the Deputy Commissioner in Brisbane to rely upon Peate's case (
Peate v. F.C. of T. (1964) 111 C.L.R. 443 and (1966) 116 C.L.R. 38) and to issue assessments based on sec. 260 against doctors who sold their practices to companies or unit trusts. In accordance with these instructions an adjustment sheet was issued to Dr. Backstrom as trustee of the Stafford Road Unit Trust, the net income of which was then assessed against him personally. A very full notice of objection was lodged by Dr. Backstrom and ultimately the assessment was amended excising that income on the basis that the instruction of 27 March 1980 had been misunderstood and as against him misapplied. This instruction, amplified by a further letter of instructions of 21 March 1983,
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was then correctly applied, assuming the arrangements attracted sec. 260, to the amended return of the taxpayer. The amended assessment, the subject of these proceedings, was in consequence issued to the taxpayer.The contention of the taxpayer's counsel, which was accepted by the trial Judge, was that the avoidance of tax was not the result of his client's failure to make full and true disclosure but of the misunderstanding by the assessor of his instructions.
We cannot agree that there was no, or no sufficient, connection between the non-disclosure and the avoidance. No such mistake of law, upon which so much reliance was placed by the taxpayer, was established as having been made when issuing the original assessment to the taxpayer. The Commissioner's mistake was made in assessing the returns, both as trustee and personal, of Dr. Backstrom. When the full facts were disclosed in connection with his objection, Dr. Backstrom's assessment was amended as was the taxpayer's. The taxpayer had not himself earlier made full disclosure and no error of law was established as having been made when his return was originally assessed. Mistakes of fact were undoubtedly made in assessing him and were made because he had not made full disclosure of the arrangements into which he entered. The Commissioner was thus unable to make an informed decision on the application of sec. 260. In our opinion the taxpayer's appeal to the Supreme Court should not have been upheld on this ground.
By his notice of cross-appeal the taxpayer challenged the trial Judge's finding that Peate's case applied and that the arrangements attracted the operation of sec. 260. In assessing the scope, at the relevant time, of sec. 260 counsel for the Commissioner identified correctly the three principal grounds upon which the Courts have found that taxpayers have successfully avoided or negatived the operation of that section. It is apparent that although Peate's case remains as undisturbed authority upon its particular facts, its scope has been restricted by subsequent limitations on the operation of the section itself (see per Mason J. in
Cridland v. F.C. of T. 77 ATC 4538 at p. 4541; (1977) 140 C.L.R. 330 at p. 337). Peate's case adopted and applied the ground propounded in
Newton v. F.C. of T. (1958) 98 C.L.R. 1, namely whether the arrangements were capable of explanation as an ordinary business or family dealing or were necessarily labelled as a means of avoiding tax. We recognise that what was unacceptable as an ordinary business or family dealing at the time of the arrangements in Peate's case may have gained acceptance by 1979. In this present matter it was said that the purpose of the arrangements was to obtain superannuation benefits for the taxpayer upon his retirement, which purpose was explicable as an ordinary business or family dealing. However, the only evidence in this regard was that of the subjective purpose of the taxpayer. It certainly was not objectively discernable as the purpose of the overt acts which constituted the arrangements, and it is these arrangements and not the purpose or motives of the taxpayer which must be explicable as an ordinary business or family dealing. Moreover, the further fact that the trustee of the particular Unit Trust might, because of subsec. 48(1) of the Medical Practitioners Act 1939-1976, have had difficulty in suing to recover fees counts against the arrangements as being so explicable. In our opinion the trial Judge correctly concluded that the only objective discernable was that of income splitting.
Counsel for the Commissioner correctly conceded that this was not the end of the matter and that notwithstanding that the objective purpose was to avoid tax in this manner, it was open to the taxpayer to negative, if he could, on two further grounds the operation of the section and to rely on the ``choice principle''. This principle, discussed at length by Mason J. in Cridland's case (supra) establishes that sec. 260 is inapplicable if -
- (1) the taxpayer has a choice under the Act of two or more bases of taxation or
- (2) the taxpayer can create a situation by entering into a transaction which will attract particular tax consequences under specific provisions of the Act.
Keighery Pty. Limited v. F.C. of T. (1957) 100 C.L.R. 66 illustrates the operation of the first ground and Cridland v. F.C. of T. (supra) the scope of the second ground.
In this matter counsel for the taxpayer sought to avoid the application of sec. 260 in two ways. He contended that Peate's case could be distinguished on the ground that there was there a pre-existing partnership and thus an antecedent transaction which was cast in a new
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form for the purpose of varying the incidence of tax. He contended that as the dissolution of partnership in this matter was not part of the tax avoidance arrangements there was no antecedent transaction, i.e. no pre-existing partnership. His further submission was that in consequence of the dissolution the taxpayer, as a sole practitioner, had a choice as to how he would practise. The Act he contended offered him the alternative of practising alone, or in partnership or under a trust structure. In adopting the lastmentioned alternative he had exercised a choice and was enjoying thereafter income from a new source. In this regard he relied upon the following authorities in addition to those above mentioned:Mullens & Ors. v. F.C. of T. 76 ATC 4288 per Barwick C.J. at pp. 4292 and 4294; (1976) 135 C.L.R. 290 C.L.R. at pp. 298 and 302;
Europa Oil (N.Z.) Ltd. (No. 2) v. Commr. of I.R. (N.Z.) 76 ATC 6001; (1976) 1 All E.R. 503.
It is our opinion that this latter submission is on a number of grounds misconceived. The very basis of the argument, namely, the contention that the dissolution of partnership, which was said to leave the taxpayer as a sole trader with a choice, was not part of the tax avoidance arrangements, is fallacious. It was a condition precedent to the implementation of these arrangements and was agreed upon by the partners at the same meeting as the arrangements themselves. The dissolution was effected by the agreement establishing these arrangements and also took effect on the date of that agreement. The dissolution of partnership was an element in the tax avoidance arrangements. Even if the taxpayer had been for a brief moment of time a sole trader with a choice, such choice was not of the kind referred to by Mason J. in Cridland's case. Moreover, we agree with what Bowen C.J. said of a like contention in his reasons in
Gulland v. F.C. of T. 84 ATC 4587, namely, that it would be a misapplication of what Barwick C.J. said at ATC p. 4294; C.L.R. p. 302 of Mullen's case to apply sec. 260 if the change was from a partnership but not if the change was from a sole trader.
Furthermore, it cannot be said that the taxpayer was enjoying a new source of income. The source, namely the conduct of a medical practice, remained the same throughout although the business structure on behalf of which he practised had changed.
In our opinion the taxpayer's arguments for avoiding the application of sec. 260 are unacceptable and we agree with the trial Judge that the arrangements attracted the operation of that section.
It remains for us to determine the consequences of the annihilating effect of sec. 260. Counsel for the taxpayer drew to our attention the dissenting opinion of Lord Donovan in Peate's case, contending that it here raised an insuperable problem. However, in our view, this is not the case as the difficulties in applying the section which prompted his Lordship's dissent do not arise in this matter. The application of sec. 260 exposes the taxpayer as carrying on practice at Stafford Road in association with Dr. Richardson. In return for medical services, the patients pay fees which he directs be paid to the account of Stafford Road Medical Practice. Dr. Backstrom operates on this account and deals with these moneys on behalf of the taxpayer and Dr. Richardson, paying expenses and salaries therefrom and the amount remaining to the taxpayer and Dr. Richardson equally. The arrangements which provided that the taxpayer acts as an employee of Dr. Backstrom who for his part owns the practice in his capacity as a trustee, accounting to the unit holders for the net profits are all struck down by the application of the section. The taxpayer receives his share of the net profits otherwise than as a holder of units in the unit trust, for the acquisition of these units is void as against the Commissioner. None of the avoided arrangements are necessary for the application of sec. 19 of the Act (as Lord Donovan found them to be in Peate's case) and nothing ``new or fictitious'' (again to use his Lordship's words) has been inserted in place of these arrangements. That portion of the net proceeds of the Stafford Road Medical Practice which was received by the taxpayer as trustee of the Pincus Family Trust has, in consequence of the application of sec. 260, the character of income in his hands. The Commissioner therefore correctly added this sum to the taxpayer's taxable income and assessed him to tax thereon.
In our opinion the appeal of the Commissioner should be upheld and the cross-appeal of the taxpayer dismissed with costs both here and in the Supreme Court.
THE COURT ORDERS THAT:
1. The appeal of the Commissioner of Taxation be allowed.
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2. The cross-appeal of the taxpayer David Fabian Pincus be dismissed.
3. The amended assessment of the Commissioner of Taxation adding to the taxable income of the taxpayer the sum of $14,404 be confirmed.
4. The taxpayer pay to the Commissioner of Taxation his costs of the appeal and cross-appeal in this Court and of the hearing in the Supreme Court.
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