Tupicoff v. Federal Commissioner of Taxation.Judges:
Full Federal Court
Fisher J.: In this matter I have had the advantage of perusing in draft form the reasons of Beaumont J. I agree with his conclusion that the appeal should be dismissed and generally with his reasons. There is no need for me to restate the facts and I propose only to make observations on the application of sec. 260 of the Income Tax Assessment Act 1936 (``the Act'') to the taxpayer's arrangements.
Counsel for the taxpayer sought to avoid the application of the section primarily on the ground that the overt acts constituting the arrangements were explicable as ordinary business dealings. Alternatively, he contended that by using a trustee company as the vehicle for what had been his personal agency activities the taxpayer was exercising a choice open to him under the Act (
Cridland v. F.C. of T. 77 ATC 4538: (1977) 140 C.L.R. 330). These submissions encompass the principal grounds upon which the Courts have refrained from applying sec. 260. On these grounds it is as open now as it was in 1977 for taxpayers to avoid, in respect of pre 27 May 1981 arrangements, the application of the section. Likewise, it is equally open to the Commissioner (in their absence) to seek to apply the section in like matters with reasonable prospects of success.
The trial Judge correctly found, in my opinion, that the arrangements could not be explained as ordinary business, or for that matter family, dealings. The Commissioner's contention was that the application of Peate's case (
Peate v. F.C. of T. (1964) 111 C.L.R. 443; (1966) 116 C.L.R. 38) to the facts of this matter conclusively determined it in his favour on this ground. To the extent that Peate's case adopted and applied the ordinary business or family dealing test of
Newton's case (1958) A.C. 450 to its particular facts, it is correct to say that the principles of Peate's case are applicable here. However the application of those principles to facts which are similar, although not identical, to Peate's case will not always produce the same result (cf.
Gulland v. F.C. of T. 84 ATC 4587).
In my opinion the principles applied in Peate's case do produce in this matter a result favourable to the Commissioner, even though the facts are not identical. They particularly differ in that Peate's case dealt with the activities of professional men in earlier times and different circumstances. Such a favourable result is produced here because it is not possible objectively to discern any significant business or commercial purpose in the taxpayer's arrangements. Indeed careful attention seems to have been given to the retention of as much as possible of the pre-existing arrangements. The taxpayer retained his status as an accredited representative approved by National Mutual Life Association of Australasia Limited (``National Mutual'') and as such he preserved for himself his existing benefits in superannuation, medical, accident and sickness funds conducted by National Mutual. Likewise he appears to have retained for the company the benefit of his existing bonus entitlements. On the other side of the coin he was required personally to indemnify National Mutual in relation to his company's activities. Thus he was not only subject to the same liabilities as before but he and the company doubtless became subject to new liabilities under the Trade Practices Act 1974.
The trial Judge found that the subjective purposes which the taxpayer contended had motivated him to enter into the arrangements were insignificant. It is a matter of established law that they were also irrelevant. In any case neither those purposes nor the alleged objective purposes required the insertion into the arrangements of a discretionary trust. It is also pertinent to note, though not entirely relevant, that the discretionary distribution of income by the trustee appears to have been made with a view to minimising tax. The taxpayer's two
ATC 4853children each received, in accordance with the trustee's distribution, the maximum amount permitted without incurring liability to tax thereon.
Even though as a matter of law the taxpayer was employed by the trustee company, which held the agency from National Mutual, the source of the company's revenue and of the income distributed by it as trustee was the personal exertion and expertise of the taxpayer. It cannot be said that the arrangements amounted to an assignment of future income, as contended by the Commissioner, even if the result sought to be achieved by the arrangements was the same as if such an assignment had been attempted. In my opinion the only significant discernible purpose was that of income splitting. The contention of the taxpayer that he avoided the application of sec. 260 on the ground of ordinary business dealing was thus correctly rejected by the trial Judge.
Even though the arrangements must be labelled as a means to avoid tax, the taxpayer was still entitled to contend, as he did, that he brought himself within the choice principle as explained by Mason J. in Cridland's case at ATC pp. 4541-4542; C.L.R. p. 339. His counsel submitted that sec. 260 has ``no more application so as to set aside a choice by a taxpayer to cease earning income by personal exertion than it does to divest oneself of income earning property''. In my opinion this submission is misconceived on a number of grounds. Here it is crucial to note that, although the taxpayer attempted to cease deriving income, he did not cease ``the personal exertion'' activities which heretofore had been the undoubted source of his income. Moreover sec. 260, on its application to dealings with income produced by personal exertion, operates in a manner markedly different from that when a disposition of income producing property is under consideration (contrast
D.F.C. of T. v. Purcell (1921) 29 C.L.R. 464 with Peate's case,
Hollyock v. F.C. of T. 71 ATC 4202; (1971) 125 C.L.R. 647 and
Millard v. F.C. of T. (1962) 108 C.L.R. 336).
The taxpayer also contended that the Act gave him a choice as to the manner in which he conducted his business operations and that his decision to work as an employee of the trustee company was an exercise of that choice. In so doing he said he was choosing between the alternative arrangements open to him under Div. 5 (Partnerships), Div. 6 (Trust Income) and Div. 7 (Private Companies) of the Act. In my opinion the principles enunciated by Mason J. in Cridland's case have no application to such choices. As Bowen C.J. said when discussing a like contention in Gulland's case, ``the taxpayer did not merely `create a situation by entering into a transaction' to attract particular tax consequences''. The Chief Judge went on to make comments which can well be applied in this matter and which I adopt. He said at p. 4590:
``The arrangement here goes beyond mere entry into a transaction such as a university student buying units in a trust. Here, with a purpose of altering the incidence of taxation in which his income from his practice was taxable in his hands, the taxpayer set about creating an entirely different situation whereby by means of a number of agreements entered into by a trust which he set up for this purpose the income could eventually end up in the hands of a family trust rather than his own.''
In my opinion the trial Judge correctly found that the choice principle did not assist the taxpayer to avoid the application of sec. 260.
On a number of aspects of his argument counsel for the taxpayer placed reliance upon the decision of the Full Court of this Court in
F.C. of T. v. Kareena Private Hospital 79 ATC 4667; (1979) 41 F.L.R. 307. However, in my opinion he can gain no assistance from that case. There is a crucial fact difference in that the taxpayer company in Kareena ceased entirely, during the year of income under consideration, to carry on its income producing activities. It did not merely attempt, as in this matter, to divert the income of its activities into the hands of another. The taxpayer here continued to exercise his ``skill and acumen'' although, it was contended, on behalf of the company as trustee and not on his own account. Even if it is correct to categorise the income as commission earned on the introduction of a prospective purchaser of a policy rather than ``the fruits of a professional practice'' (as the doctors' income was described in Peate's case, supra), in my opinion there is nothing in the distinction. The income of a taxpayer as a sole trader is the product of his personal exertion (
F.C. of T. v. Everett 80 ATC 4076 at p. 4083; (1980) 143 C.L.R. 440 at p. 454).
I agree with Beaumont J.'s reasons for judgment on the other aspects of this matter and in particular that the appeal should be dismissed with costs.