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Federal Commissioner of Taxation v. Gulland.

Judges: Gibbs CJ
Wilson J
Brennan J

Deane J
Dawson J

Court:
Full High Court

Judgment date: Judgment handed down 18 December 1985.

Deane J.

F.C. of T. v. Gulland

There was an element of tension between the main thrust of the judgment of the Privy Council in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 and their Lordships' reference in it to the earlier decision of this Court in
W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 . The main thrust of the judgment lay in the statement of what has sometimes been described as the ``predication'' test of the applicability of sec. 260 of the Income Tax Assessment Act 1936 (Cth) (``the Act''):

``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''

( Newton, at p. 8).

The reference to Keighery's case came in the context of the following four sentences (at pp. 8-9):

``Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W.P. Keighery Pty. Ltd. v. Commr of Taxation. 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 (1921) 29 C.L.R. 464 . But when one looks at the way the transactions were effected in
Jaques v. F.C. of T. (1924) 34 C.L.R. 328 ;

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Clarke v. F.C. of T. (1932) 48 C.L.R. 56 and
Bell v. F.C. of T. (1953) 87 C.L.R. 548 - the way cheques were exchanged for like amounts and so forth - there can be no doubt at all that the purpose and effect of that way of doing things was to avoid tax.''

In Keighery's case, looking at the overall arrangement involving the allotment of shares and the manner in which it was effected, it was possible to predicate, as Dixon C.J., Kitto and Taylor JJ. acknowledged in their joint judgment (100 C.L.R. at pp. 91-92), that it was ``beyond question that the whole plan was carefully designed'' to avoid the impending liability to income tax of either Aquila Steel Pty. Ltd. on its undistributed profits or of the recipients of those profits if they were distributed. The steps and transactions involved in turning the taxpayer company into a public one for tax purposes were plainly incapable ``of explanation by reference to ordinary business or family dealing''. Yet their Lordships, having enunciated the ``predication'' test, referred to Keighery's case as an example of a case where it was not satisfied.

The test enunciated in Newton closely corresponds with the approach which had been adopted by Isaacs J. and Starke J. in their judgments in Jaques v. F.C. of T. at pp. 360, 362 (cf. per McTiernan J. in
Hooker-Rex Pty. Ltd. v. F.C. of T. 70 ATC 4033 at pp. 4041-4042; (1970) 123 C.L.R. 71 at pp. 84-86 ). It was subsequently applied in a series of cases in this Court to invalidate steps in arrangements which bore ex facie the stamp of tax avoidance (see, in particular,
Hancock v. F.C. of T. (1961) 108 C.L.R. 258 ;
Peate v. F.C. of T. (1964) 111 C.L.R. 443 and on appeal to the Privy Council, (1966) 116 C.L.R. 38; (1967) 1 A.C. 308;
Mayfield v. Commr of Taxation (1961) 108 C.L.R. 303 at p. 319 ; Mayfield v. Commr of Taxation (No. 2) (1961) 108 C.L.R. 323 at p. 334;
Millard v. Commr of Taxation (1962) 108 C.L.R. 336 at p. 342 ;
Franklin's Selfserve Pty. Ltd. v. F.C. of T. 70 ATC 4079 at pp. 4091-4092; (1970) 125 C.L.R. 52 at pp. 73-74 ;
Hollyock v. F.C. of T. 71 ATC 4202 at pp. 4204-4206; (1971) 125 C.L.R. 647 at pp. 654-658 ). Nowhere in the judgments in any of these cases does one find any mention of Keighery or any consideration of the significance of the Judicial Committee's reference to Keighery in the judgment in Newton. In none of them was it suggested, let alone held, that the effect of that reference was to preclude the application of the Newton test to any case in which the taxpayer had created a set of affairs whose legal form would attract some liability to tax under the terms of the Act. During the period in which these cases were decided, there was no relevant mention of Keighery nor consideration of the effect of their Lordships' reference to that case in their judgment in Newton in the volumes of the Commonwealth Law Reports except in the judgment of Menzies J. in
Ellers Motor Sales Pty. Ltd. & Ors v. F.C. of T. 70 ATC 4008 ; (1969) 121 C.L.R. 665 and that of McTiernan J. in
Hooker-Rex Pty. Ltd. v. F.C. of T. 70 ATC 4033 ; (1970) 123 C.L.R. 71 . In the Ellers Motor case, Menzies J., without expressly referring to Newton, applied Keighery to preclude the application of sec. 260 to avoid the conversion of a private company into a non-private company. In the Hooker-Rex case, McTiernan J. expressed the conclusion (at ATC p. 4042; C.L.R. p. 86) that the test laid down by the Privy Council in Newton ``must limit the application of'' the central passage in the majority judgment in Keighery. Implicit in that conclusion was the view that any approval of Keighery which could be implied from the mention of the case in Newton was confined to the bare proposition for which it was cited as authority and that the content of that proposition was limited by the context provided by the fourth and first sentences of the relevant extract of their Lordships' judgment (see above) and the actual decision in Newton. McTiernan J.'s view that the Privy Council's judgment in Newton had limited the authority of Keighery was further explained and was applied by his Honour in his dissenting judgment in
F.C. of T. v. Casuarina Pty. Ltd. 71 ATC 4068 at pp. 4071-4072; (1971) 127 C.L.R. 62 at pp. 84-86 . It was, however, rejected by the other four members of the Court in that case. The decision in Keighery's case was expressly affirmed and it was stressed that the authority of Keighery had ``not been weakened by the decision or the reasons in Newton ... or by the later cases in this Court'' (per Walsh J., with whom Barwick C.J., Owen and Gibbs JJ. agreed at ATC p. 4080; C.L.R. p. 103).

In Casuarina, as in Keighery, the central issue concerned the status of the taxpayer as a

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public (or non-private) company. Again, it could plainly be predicated, by looking at the artificial transactions and steps involved in complying with the formal requirements necessary to qualify a company as a public one for tax purposes, that the taxpayer had been turned into a public company to avoid the impending incidence of income tax. Viewed in context, the arrangement involving the critical allotment of shares bore ex facie the stamp of tax avoidance. If it were applicable, the Newton test was plainly satisfied. The basis of the decision in Casuarina was, however, the conclusion of a majority of the Court that that test was ``incapable of being applied so as to avoid a transaction, consisting simply of an allotment of shares having the effect of depriving the allotting company of its `private' character'' (per Walsh J. at ATC p. 4080; C.L.R. p. 102). The rationale of that conclusion is to be found in what has been described as the ``choice'' principle which was derived from the passages from the joint judgments of Dixon C.J., Kitto and Taylor JJ. in Keighery (at pp. 93-94) and in
F.C. of T. v. Sidney Williams (Holdings) Ltd. (1957) 100 C.L.R. 95 at pp. 113-114 ) which were set out and relied upon by Walsh J. in his leading judgment in Casuarina. Those passages included the following extracts:

``The very purpose or policy of Div. 7 is to present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act.''

( Keighery at pp. 93-94; quoted in Casuarina at ATC p. 4078; C.L.R. p. 99.)

and

``... To hold that sec. 260 applies in this case would be to give it an operation, not to effectuate an intention appearing from the Act to impose a liability, but to defeat an intention appearing from the Act to impose alternative liabilities according as the persons interested in a company elect to have or not to have a certain state of facts existing on the last day of a year of income. The appellant's contention based on sec. 260 must therefore be overruled.''

( Sidney Williams (Holdings) Ltd. at p. 114; quoted in Casuarina at ATC p. 4070; C.L.R. p. 100.)

The wholesale amendments to applicable provisions of Div. 7 of Pt III of the Act between the decision in Keighery and that in Casuarina, which were obviously designed to preclude artificial and formalistic steps to procure the taxation advantages of public company status, may have made it difficult to continue to discern the legislative intent to ``present a choice'' which had provided the foundation of the judgment in Keighery. Nonetheless, it was upon such a perceived legislative intent, for which Keighery was seen as continuing authority, that the decision in Casuarina was based.

Two further points should be made about the effect of the majority judgments in Casuarina. The first is that they left no room for conflicting applications of the ``choice'' principle enunciated in Keighery and the ``predication'' test applied in Newton and subsequent cases. The reason for that was that the majority judgments made plain that the ``predication'' test is incapable of being applied at all to a case coming within the ``choice'' principle. In such a case, that test is simply irrelevant. That being so, as the scope of the ``choice'' principle came to be subsequently expanded, the area of operation of the ``predication'' test and of sec. 260 itself was correspondingly reduced. The second is that, while Walsh J. did not expressly advert to the question whether the authority of Keighery was restricted to cases involving the conversion of a private into a non-private or public company, both Barwick C.J. and Gibbs J. expressed the view that the principle underlying Keighery and Sidney Williams was of more general application. Barwick C.J., after expressing his concurrence with the judgment of Walsh J., commented (at ATC p. 4070; C.L.R. p. 81):

``I should merely wish to say that there is, in my opinion, no room for the application of sec. 260 where the taxpayer has become liable for the amount of tax appropriate under the terms of the Assessment Act to the state of affairs obtaining at the date made relevant by that Act for the ascertainment of the taxpayer's liability. Steps taken to bring about that state of affairs cannot, in my opinion, qualify as action under sec. 260 to achieve any one of the four purposes or effects described in the section.''

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The present Chief Justice, having also expressed his agreement with the judgment of Walsh J., said (at ATC p. 4081; C.L.R. p. 104):

``... [ Keighery and Sidney Williams ] establish that where the Act itself imposes different tax liabilities on public companies on the one hand and private companies on the other, the conversion of a private into a public company is not, so far as the company is concerned, rendered void as against the Commissioner by sec. 260, notwithstanding that it will entail a reduced liability to tax. In such a case no liability to tax imposed by the Act on the company is avoided for whatever tax is appropriate to its situation remains payable. The same result follows in other cases in which the Act imposes different liabilities according as the taxpayer answers one description or another, and some examples of such cases were given by my brother Windeyer in his judgment in the present case. No doubt the formation of a public company may form part of an arrangement which has the purpose or effect of avoiding a liability imposed by the Act on some other person but the application of sec. 260 does not result from the mere fact that the company has become a public instead of a private company.''

As I read his Honour's judgment, Gibbs J. was referring to cases where express provisions of the Act operate by reference to a specific status or state of affairs of the particular taxpayer (see also
F.C. of T. v. Patcorp Investments Ltd. 76 ATC 4225 at pp. 4236-4237; (1977) 140 C.L.R. 247 at pp. 298-300 ). His Honour's reference to the examples given by Windeyer J. in the course of his judgment at first instance in Casuarina tends to confirm that reading of his judgment since those examples were of cases where a ``person (individual or corporation) may by choosing one legal status rather than another affect his liability to tax'' (per Windeyer J., 127 C.L.R. at p. 75). Be that as it may, the comments of Barwick C.J. were not so confined but would appear to have been carefully chosen to express the broad approach that steps taken to bring about any legal state of affairs upon which even general provisions of the Act could operate to impose some liability to tax could not attract the operation of sec. 260 regardless of whether one could discern in the Act a legislative intent that the taxpayer should have an effective ``choice'' between alternatives. It was that broad approach of Barwick C.J. which was subsequently to prevail in this Court. It was developed, adopted and applied in three subsequent cases in which the application of the ``predication'' test of Newton was held to be precluded. Those three cases are
Mullens & Ors v. F.C. of T. 76 ATC 4288 ; (1976) 135 C.L.R. 290 .
Slutzkin & Ors v. F.C. of T. 77 ATC 4076 ; (1977) 140 C.L.R. 314 and
Cridland v. F.C. of T. 77 ATC 4538 ; (1977) 140 C.L.R. 330 . They were all decided after the time when this Court became the final appellate court in matters involving the application or interpretation of the Act (see Privy Council (Limitation of Appeals) Act 1968 (Cth), sec. 3(1)(b)(ii)). They are of critical importance in the resolution of the present appeal.

In issue in Mullens was the taxpayer's entitlement to deductions in respect of payments on shares in a petroleum exploration company. It could plainly be predicated of the contrived arrangements and transactions that they had been artificially structured to enable the taxpayer to obtain the benefit of the deductions. It was held by a majority of the Court ( Barwick C.J. and Stephen J.; McTiernan J. dissenting) that the provisions of sec. 260 of the Act could not be applied to avoid the relevant transactions. More important for present purposes than the actual decision, however, were the reasons which the majority justices advanced for it. Barwick C.J. stated the essential content of those reasons in the following extract from his judgment (at ATC p. 4292; C.L.R. p. 298):

``The Court has made it quite plain in several decisions that a taxpayer is entitled to create a situation to which the Act attaches taxation advantages for the taxpayer. Equally, the taxpayer may cast a transaction into which he intends to enter in a form which is financially advantageous to him under the Act.
W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 and
F.C. of T. v. Casuarina Pty. Ltd. 71 ATC 4068 ; (1971) 127 C.L.R. 62 amply demonstrate this and are, in my opinion, very relevant to the resolution of this case. Also the general principle established by
I.R. Commrs v. Duke of Westminster (1936) A.C. 1 , must always be kept in mind. The Privy Council

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in
Commr of I.R. (N.Z.) v. Europa Oil (N.Z.) Ltd. (No. 1) 70 ATC 6012 at p. 6018 ; (1971) A.C. 760 at p. 771 said `... in a matter of taxation it is necessary to consider and respect the legal form in which the concession', i.e. the transaction `was embodied. Their Lordships have no need to restate the principle laid down in such cases as I.R. Commrs v. Duke of Westminster'.''

His Honour proceeded (at ATC pp. 4292-4293; C.L.R. pp. 298-299) to add a qualification to the general proposition that sec. 260 did not apply to avoid the creation by a taxpayer of a ``legal form'' to which the Act attaches taxation advantages. That qualification was that the provisions of sec. 260 could apply to a case where `` the actual transaction into which the parties have entered involves the taxpayer in liability to tax or does not afford the taxpayer some benefit in taxation, such as a deduction, and that transaction is cast into another form which, if effective, would relieve the taxpayer of tax'' (at ATC p. 4292; C.L.R. p. 298, emphasis added). Otherwise, the effect of Mullens was to establish that, for the purposes of sec. 260, it is to legal form, rather than substance, that consideration must be given and respect paid. In its emphasis on legal form and disregard of substance, the approach of Barwick C.J. appears to me to be contrary to the general approach adopted by Isaacs J. in Jaques (see, particularly, Isaacs J.'s reference to ``factitious liability'' and ``factitious payment'' at p. 360) and to the general approach to be discerned in the Privy Council's judgment in Newton (particularly, at pp. 8-9).

In Slutzkin, a unanimous Court ( Barwick C.J., Stephen and Aickin JJ.) applied the reasoning of the majority in Mullens to overrule a decision of Rath J. that the provisions of sec. 260 were applicable to expose the proceeds of a sale of shares as dividends in the hands of the vendors. In the course of his judgment, Barwick C.J. said (at ATC p. 4079; C.L.R. p. 319):

``... the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to tax, or subject him only to less tax than some other form of transaction might do. I.R. Commrs v. Duke of Westminster (1936) A.C. 1, too easily forgotten, is still basic in this area of the law. There is no room in that area for any doctrine of economic equivalence. To the legal form and consequence of the taxpayer's transaction, which in fact has taken place, effect must be given: see Commr of I.R. (N.Z.) v. Europa Oil (N.Z.) Ltd. 70 ATC 6012; (1971) A.C. 760.''

As the above passage makes clear, this statement of a ``choice'' theory has nothing to do with a legislative intent to give a choice between specific alternatives. It is a general ``choice'' of legal ``form'' to which ``effect must be given''. Aickin J. (at ATC p. 4083; C.L.R. p. 326) quoted extensively from the judgment of Barwick C.J. in Mullens including the statement that sec. 260 will not apply ``if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act'' (per Barwick C.J. in Mullens, at ATC p. 4294; C.L.R. p. 302). Aickin J. added (at ATC pp. 4083-4084; C.L.R. pp. 326-327) that, in his opinion, that was equally the position ``where the actual transaction is one which stands wholly outside the operation of'' the Act. His Honour also quoted (at ATC p. 4084; C.L.R. p. 327), with approval, that part of the judgment of Stephen J. in Mullens in which Stephen J., having referred to the situation where, as in Keighery, ``the Act offers to the taxpayer a choice of alternative tax consequences'', said (at ATC p. 4303; C.L.R. p. 318):

``So, too, if no question arises of a choice between two courses of conduct but, instead, the Act offers certain tax benefits to taxpayers who adopt a particular course of conduct; the adoption of that course does not establish any purpose or effect such as is described in sec. 260. Instead, an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will then represent a due and proper incidence of tax, there will be no relief from, or defeating of, liability to tax and the Act will have the very operation which the legislature intended.''

Aickin J. commented (at ATC p. 4084; C.L.R. p. 327):

``That principle equally applies in a case of receipts with which the Act simply does not

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deal, i.e. capital receipts, save such as are for the purpose of the Act deemed to be income. To adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act, notwithstanding that such course is adopted with full knowledge of the provisions of the Act and with a conscious intention that the proceeds should not fall within the operation of the Act.''

The third member of the Court in Slutzkin, Stephen J., while adding some comments of his own, indicated (at ATC p. 4081; C.L.R. p. 322) general agreement with the reasons for judgment of Barwick C.J. and Aickin J.

In Cridland, the full significance of what had been said and decided in Mullens and Slutzkin was explained and accepted by a Court of five Justices. Mason J., with whom the other members of the Court ( Barwick C.J., Stephen, Jacobs and Aickin JJ.) agreed, quoted critical passages from the judgments of Barwick C.J. and Stephen J. in Mullens and summarized the effect of Mullens and Slutzkin as follows (at ATC p. 4542; C.L.R. p. 339):

``The decision in the Mullens case and the passages from the judgments to which I have referred show that the principle which underlies the Keighery case is... not confined to cases in which the Act offers two alternative bases of taxation; it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by sec. 260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage.

The distinction drawn by Lord Denning in Newton v. F.C. of T. (1958) 98 C.L.R. 1 at p. 8, between arrangements implemented in a particular way so as to avoid tax and transactions capable of explanation by reference to ordinary business or family dealing has not been regarded as the expression of a universal or exclusive criterion of operation of sec. 260. Lord Denning's observations were applied neither in the Mullens case nor in the subsequent case of Slutzkin v. F.C. of T 77 ATC 4076.''

Mason J. went on (at ATC pp. 4542-4543; C.L.R. pp. 339-340) to underline the limited scope of any residual authority of Newton's case. The decision in Newton must now be explained on the basis of a ``finding of fact'' that the moneys received by the taxpayers were or were deemed to be dividends. Unless Newton's case is so explained, it would rest ``on the use of sec. 260 as a charging provision, for the receipts would not have been liable to tax under the ordinary provisions of the Act unless they could be characterized as dividends'' (at p. 340). His Honour indicated that such a use (i.e. as a charging provision) of sec. 260 would be impermissible since it is now established that sec. 260 is not such a provision (see
Europa Oil (N.Z.) Ltd. (No. 2) v. Commr of I.R. (N.Z.) 76 ATC 6001 ; (1976) 1 W.L.R. 464 ; (1976) 1 All E.R. 503 ).

The effect of the decisions and judgments in Mullens and Slutzkin was to deprive sec. 260 of much of what one would have thought was its intended operation. With due respect to those who have seen the matter differently, it appears to me that the approach of Barwick C.J. in Casuarina, which was adopted and developed in Mullens and Slutzkin, unjustifiably divorced the provisions of sec. 260 itself from the other provisions of the Act. Thus, the statement of Stephen J. in Mullens (at ATC p. 4303; C.L.R. p. 318) that ``an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted... will have the very operation which the legislature intended'' disregards the significance of sec. 260 to the legislative intent to be discerned in the Act. Again, the emphasis which Barwick C.J. and Aickin J. placed, in their judgments in Slutzkin (at ATC pp. 4079 and 4083; C.L.R. pp. 319 and 326), upon legal form to the exclusion of substance disregards the important function which sec. 260, with its emphasis on ``purpose'' and ``effect'', was plainly intended to serve in the Act as a whole. The propositions for which Slutzkin is authority - viz. that, in the application of sec. 260, effect must be given to ``the legal form and consequence of the taxpayer's transaction'' (per Barwick C.J. at ATC p. 4079; C.L.R. p. 319) and that ``[t]o adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act'' (per Aickin J. at ATC p. 4084; C.L.R. p. 327) - seem to me to deprive sec. 260 of most of its intended

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operation by effectively confining it to cases where the impugned transaction was properly to be seen not as an effective new transaction but as merely ``cloaking'' (per Mason J. in Cridland, at ATC p. 4542; C.L.R. p. 340) some ``antecedent'' and `` actual '' transaction or state of affairs `` between the parties '', ``for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act'' (per Barwick C.J. in Mullens, at ATC p. 4295; C.L.R. p. 302, quoted by Aickin J. in Slutzkin, at ATC p. 4083; C.L.R. p. 326). Mason J. was doing no more than stating the obvious when he referred to ``the very restricted operation conceded to sec. 260'' by the ``settled'' construction of the section: Cridland at ATC pp. 4540-4541; C.L.R. p. 337. The ineffectiveness of the section, in the light of what had been established by the judgments in Mullens and Slutzkin, led his Honour to take the step of pointing out (at ATC pp. 4540-4541; C.L.R. p. 337) that more than twenty years had passed since Kitto J. had drawn attention to the need for legislative reform of its provisions. Mason J.'s pointed reference to that call for legislative reform was made in a judgment with which, as has been mentioned, the four other members of the Court concurred.

It should be apparent from the foregoing that I have difficulty with the emphasis upon legal form and the disregard of substance which Mullens and Slutzkin require in the application of sec. 260. Uninstructed by authority, I should have thought that the legislative intent to be discerned in sec. 260 was that identified by Isaacs J. in Jaques and by the Privy Council in Newton, namely, that, if it can be objectively predicated that either form or substance must be explained as - to use the vernacular - a ``tax dodge'', it should be disregarded. As presently advised, I would not be disposed to extend the authority of the reasoning which prevailed in Mullens or Slutzkin by applying it to the resolution of other legislative provisions aimed at preventing tax avoidance. That reasoning must, however, be accepted (at least since Cridland ) as having ``settled'' the construction of sec. 260. Indeed, it was not submitted on behalf of the Commissioner that the decisions in Mullens and Slutzkin should be reopened or that the reasoning underlying those decisions should be disregarded. The reason for that was, no doubt, that the calls by this Court for legislative reform have, after a quarter of a century of inaction by Governments of differing political persuasions, finally evoked some response. Section 260 has now, at long last, been amended so as not to apply to contracts, agreements or arrangements made or entered into after 27 May 1981 (see sec. 260(2)) and replaced by the new Pt IVA of the Act as regards any ``scheme'' (defined in sec. 177A(1)) entered into after that date. In these circumstances, the present case must be determined by reference to the ``settled'' construction of sec. 260 for which the three most recent decisions of a Full Court of this Court stand as clear and unchallenged authority.

For the Commissioner, particular reliance was placed upon the decisions of this Court and of the Privy Council in Peate's case. That case, so it was said, had never been disapproved and was applicable to govern the decision in the present one. In his judgment in the [84 ATC 4587] Fisher J. convincingly demonstrated the significant differences between the circumstances in Peate and the circumstances in this case. I find it unnecessary, however, to examine those differences. The reason is that the reasoning of the judgments in Peate's case is quite inconsistent with the notions for which Mullens, Slutzkin and Cridland stand as clear authority. The point can be readily illustrated, at the cost of some repetition, by applying to the facts of Peate's case some of the propositions established by the judgments in Mullens and Slutzkin.

Both in this Court and in the Privy Council, Peate's case was decided on the basis that the various transactions were legally effective. The legal form and consequences of those transactions were that Dr Peate no longer carried on his profession as a partner with the other doctors: he carried it on as an employee of a company. Dr Peate had done that which ``[t]he Court has made it quite plain'' that he was ``entitled'' to do, namely, he had created ``a situation to which the Act attached[d] taxation advantages for the taxpayer'' (per Barwick C.J. in Mullens at ATC p. 4292; C.L.R. p. 298, quoted by Mason J. in Cridland at ATC p. 4541; C.L.R. p. 338). That being so, the consequence of the reasoning in Mullens and Slutzkin, which was accepted and applied in Cridland, was that ``effect must be given'' to ``the legal form and consequence of the taxpayer's transaction'' (per Barwick C.J. in

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Slutzkin at ATC pp. 4078-4079; C.L.R. p. 319). An ``assessment which reflect[ed] the tax consequences of the course of conduct which [Dr Peate had] in fact adopted [would] then represent a due and proper incidence of tax, there [would] be no relief from, or defeating of, liability to tax and the Act [would] have the very operation which the legislature intended'' (per Stephen J. in Mullens, at ATC p. 4303; C.L.R. p. 318, quoted by Aickin J. in Slutzkin at ATC p. 4084; C.L.R. p. 327). The reason for that is that there ``is no room for the application of sec. 260 where the taxpayer has become liable for the amount of tax `appropriate under the terms of the Assessment Act to the state of affairs obtaining' at the relevant date; `steps taken to bring about that state of affairs' do not operate to attract sec. 260'' (per Stephen J. in Mullens, at ATC p. 4084; C.L.R. p. 318, quoting Barwick C.J. in Casuarina, at ATC p. 4070; C.L.R. p. 81).

The main judgment in the Full Court of this Court in Peate was that of Kitto J. with whom McTiernan J. and Owen J. agreed. There is simply no hint in his Honour's judgment of any of the above propositions derived from the judgments in Mullens and Slutzkin. To the contrary, the main thesis of Kitto J.'s judgment is inconsistent with them. That thesis was clearly stated by his Honour (at p. 470): ``sec. [260] must be given full operation according to its terms, and its terms apply to every arrangement which has the stated purpose or effect, whatever be the method by which it seeks to produce an avoidance of tax.''

The other two members of the Full Court in Peate were Taylor J. and Windeyer J. There are passages in the judgment of each of them which tend to suggest that the arrangements in Peate should be regarded as intended only to cloak an actual arrangement between the partner doctors to the effect that things should simply continue as before. If that be so, Peate's case could be seen as still authoritative in the same narrow sense as the authority of Newton was preserved in Cridland. It would, however, have no application to the present case since it has not been argued by the Commissioner that the relevant arrangements and transactions were intended to, or did, operate otherwise than fully in accordance with their legal form and effect. The better view would, however, appear to be that both Taylor J. and Windeyer J. in Peate accepted the formal efficacy of the various arrangements and transactions. On that approach, the reasoning underlying their judgments conflicts with the propositions to be derived from Mullens and Slutzkin in the same way as does the reasoning underlying the judgment of Kitto J. Moreover, one finds in both the judgment of Taylor J. (at p. 475) and of Windeyer J. (at pp. 480-481) reliance upon the perception that, as a matter of economic substance, the ``picture is little different from that which would have appeared if [Dr Peate] had assigned his future gross income upon condition that the assignee, after paying [Dr Peate's] share of working expenses, should then pay to the appellant such part of the net amount as he should direct and, thereafter, expend the balance in a specified manner for the benefit of the appellant's wife and children'' (at p. 475). In this, their judgments are in direct conflict with the essential tenet of the underlying reasoning of Mullens and Slutzkin that ``[t]here is no room... for any doctrine of economic equivalence'' (per Barwick C.J. in Slutzkin at ATC p. 4079; C.L.R. p. 319).

Both the majority and the minority judgments in the Privy Council in Peate dealt with the applicability of sec. 260 (as distinct from the effect of its application) in a very summary fashion. Like the judgments in this Court, their Lordships' comments simply do not advert to the propositions which were subsequently to be accepted in this Court in Mullens and Slutzkin. Their approach is however plainly inconsistent with those propositions in that it subordinates legal form to economic equivalence. It is in direct conflict with the notion, for which Mullens (at ATC pp. 4292, 4294 and 4084; C.L.R. pp. 298, 302 and 318), Slutzkin (at ATC p. 4083; C.L.R. p. 326) and Cridland (at ATC p. 4541; C.L.R. p. 338) stand as plain authority, that sec. 260 does not apply to the case where a taxpayer creates a situation or casts a transaction in a form which is financially advantageous to him under the Act.

Nor is it really to the point to say that Peate's case has never been mentioned with disapproval in any subsequent case in this Court. Putting to one side the question whether it involved giving to sec. 260 the operation of a charging provision, the decision in Peate's case depended upon an application of Newton's case. It has already been seen that the reference

ATC 4789

to Keighery in Newton's case has proved to be a Trojan horse whose content has, on the plain authority of a unanimous Full Court of this Court in Cridland, reduced Newton's case itself to the status of a doubtful ``finding of fact''. Inevitably, the status of Peate as an authority was similarly reduced. Indeed, there is much to be said for the view that Peate could not, in any event, survive the unequivocal statement in Cridland that it is now established that sec. 260 is not a charging provision. But it is unnecessary to pursue that point. It suffices to say that the present case must be resolved by reference not to the reasoning to be found in Peate's case but by reference to what was said and decided in the subsequent cases in this Court.

When one comes to apply the ``settled'' construction of sec. 260 to the facts of the present case the outcome is inevitable. As a matter of legal form, Dr Gulland was not, at the relevant times, carrying on practice as a sole practitioner. His former practice was carried on by him and Dr Burke as trustees of the ``practice trust''. The sole beneficiary of that trust was the trustee of another trust (``the family trust''). Dr Gulland's medical activities were performed by him in his capacity as an employee of the practice trust. Assessments to tax of the trustees and Dr Gulland on the basis of the legal structure which Dr Gulland had chosen to erect would, without the intervention of sec. 260, reflect ``the tax consequences of the course of conduct which the taxpayer has in fact adopted'' (per Stephen J. in Mullens, at ATC p. 4303; C.L.R. p. 318). Both Dr Gulland and the practice trust would ``become liable for the amount of tax appropriate under the terms of the Assessment Act to the state of affairs obtaining at the date made relevant by that Act for the ascertainment of [their] liability'' ( Casuarina at ATC p. 4070; C.L.R. p. 81). That being so, the steps taken to bring about that state of affairs cannot ``qualify as action under sec. 260 to achieve any one of the four purposes or effects described in the section'' ( ibid. ). In that regard, it is to be noted that the case is plainly not one in which ``the actual transaction into which the parties have entered involves the taxpayer in liability to tax or does not afford the taxpayer some benefit in taxation, such as a deduction, and that transaction is cast into another form'' ( Mullens at ATC p. 4292; C.L.R. p. 298). The only relevant transactions into which ``the parties'' entered were those which produced the ``state of affairs obtaining at the date made relevant by [the] Act'' ( Casuarina at ATC p. 4070; C.L.R. p. 81). Those transactions were real, actual and effective. The plain effect of this Court's more recent decisions, the authority of which the Commissioner has not sought to challenge, is that ``effect must be given'' to ``the legal form and consequence'' of those transactions ( Slutzkin at ATC p. 4079; C.L.R. p. 319).

It follows that those decisions require that the appeal by the Commissioner be dismissed.

Deane J.:

Watson v. F.C. of T.

The implementation of the arrangements made by Dr Watson and his colleagues in relation to the medical practice which they had formerly carried on in partnership involved matters of substance and significance. The former partners no longer carried on practice in partnership. Their subsequent professional activities were as employees. They no longer owned their former practice. While they had an indirect beneficial interest in it through their respective family trusts, they did not own the unit trust which thenceforth owned the practice and employed them. The transactions which achieved that result were new and legally effective. The situation which resulted from them was a new and real one. Neither those new transactions nor that new situation could properly be seen as a mere casting into another form of some ``actual'' transaction or situation between them in the sense referred to by Barwick C.J. in his judgment in
Mullens & Ors v. F.C. of T. 76 ATC 4288 at pp. 4292-4295; (1976) 135 C.L.R. 290 at pp. 298 and 302-303 .

On the other hand, it can plainly be predicated of the arrangements made between Dr. Watson and his colleagues and of the transactions which implemented them that they were so made and implemented to avoid income tax. If the test enunciated in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 and applied in
Peate v. F.C. of T. (1964) 111 C.L.R. 443 ; (1967) 1 A.C. 308 and (1966) 116 C.L.R. 38 were appropriate to determine whether the provisions of sec. 260 of the Income Tax

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Assessment Act 1936 (Cth) were applicable to the present case, I would be of the view that it was satisfied. For the reasons given in my judgment in
F.C. of T. v. Gulland 85 ATC 4765 , however, I consider that that test is not applicable to the circumstances of the present case. This is a plain consequence of the recent decisions of this Court in Mullens and in
Slutzkin & Ors v. F.C. of T. 77 ATC 4076; (1977) 140 C.L.R. 314 and
Cridland v. F.C. of T. 77 ATC 4538 ; (1977) 140 C.L.R. 330 . Those decisions must prevail. Indeed, the Commissioner has not sought to challenge their authority.

The judgments in those three cases in this Court have

``made it quite plain... that a taxpayer is entitled to create a situation to which the Act attaches taxation advantages for the taxpayer. Equally, the taxpayer may cast a transaction into which he intends to enter in a form which is financially advantageous to him under the Act''

(per Barwick C.J. in Mullens at ATC p. 4292; C.L.R. p. 298, quoted by Mason J. (with whose judgment Barwick C.J., Stephen, Jacobs and Aickin JJ. agreed) in Cridland at ATC p. 4541; C.L.R. p. 338).

``To the legal form and consequence of the taxpayer's transaction, which in fact has taken place, effect must be given: see
Commr of I.R. (N.Z.) v. Europa Oil (N.Z.) Ltd. 70 ATC 6012 ; (1971) A.C. 760''

(per Barwick C.J. in Slutzkin at ATC p. 4079; A.C. p. 319).

``Instead, an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will then represent a due and proper incidence of tax, there will be no relief from, or defeating of, liability to tax and the Act will have the very operation which the legislature intended''

(per Stephen J. in Mullens at ATC p. 4303; C.L.R. p. 318, quoted by Aickin J. in Slutzkin at ATC p. 4084; C.L.R. p. 327).

``As [ Barwick C.J.] has said in
F.C. of T. v. Casuaring Pty. Ltd. 71 ATC 4068 at p. 4070; (1971) 127 C.L.R. 62 at p. 81 , there is no room for the application of sec. 260 where the taxpayer has become liable for the amount of tax `appropriate under the terms of the Assessment Act to the state of affairs obtaining' at the relevant date; `steps taken to bring about that state of affairs' do not operate to attract sec. 260''

(per Stephen J. in Mullens, at ATC p. 4303; C.L.R. p. 318).

I would allow the appeal and make orders having the effect that the amended assessment be set aside.

Deane J.:

Pincus v. F.C. of T.

The termination of the partnership between Dr Pincus and his three partners was plainly capable of being explained by reference to ordinary professional and commercial considerations. It could, however, be predicated that a main purpose of the structure and content of the new arrangements - and of transactions which implemented them - was to avoid income tax. If the test enunciated in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 is the appropriate criterion of the applicability of sec. 260 in a case such as the present, I would be of the view that it is satisfied (see, as to the sufficiency of a main purpose,
Peate v. F.C. of T. (1964) 111 C.L.R. 443 at p. 469 ;
Hollyock v. F.C. of T. 71 ATC 4202 at p. 4205; (1971) 125 C.L.R. 647 at pp. 656-657 ). For the reasons given in my judgments in
F.C. of T. v. Gulland and Watson v. F.C. of T. 85 ATC 4765 however, I am of the view that that test is not applicable. The decisions of this Court in
Mullens & Ors v. F.C. of T. 76 ATC 4288 ; (1976) 135 C.L.R. 290 ;
Slutzkin & Ors v. F.C. of T. 77 ATC 4076 ; (1977) 140 C.L.R. 314 and
Cridland v. F.C. of T. 77 ATC 4538 ; (1977) 140 C.L.R. 330 lead inevitably to the conclusion that sec. 260 of the Act has no application at all to the circumstances of the present case.

The rearrangement of the relationships between the four members of the previous partnership could not be seen as a mere casting into another form of the ``actual transaction'' or ``situation'' between them (see the comments of Barwick C.J. in Mullens at ATC pp. 4292-4295; C.L.R. pp. 298, 302-303). The transactions involved were new transactions. The new relationships which the transactions created were quite different in substance from those which had existed before. That being so, it did not come within ``the very restricted operation conceded to sec. 260'' by the

ATC 4791

``settled'' construction of the section (see Cridland at ATC p. 4540; C.L.R. p. 337).

It follows that I would allow the appeal and make orders having the effect that the order of the learned primary Judge ( Kelly J.) setting aside the amended assessment be restored.


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