Federal Commissioner of Taxation v. Gulland.
Judges:Gibbs CJ
Wilson J
Brennan J
Deane J
Dawson J
Court:
Full High Court
Gibbs C.J.
These two appeals, which were heard together, require the Court to consider the operation of sec. 260 of the Income Tax Assessment Act 1936 (Cth), as amended (``the Act'') in cases in which a medical practitioner, who had formerly been carrying on practice either in partnership or on his own, commenced to carry on the practice as an employee of a unit trust, with the result that some of the income which would otherwise have been his has actually or potentially been diverted into the hands of the beneficiaries of the unit trust, particularly members of his family.
The facts of the two cases are fully set out in the judgments of Dawson J., which I have had the advantage of reading. Their principal features were as follows.
In the first case, the taxpayer, Dr Gulland, was, at the commencement of the relevant year of income (that ending 30 June 1979) conducting a one-man medical practice. He had, in 1977, caused to be established a family trust, the purpose of which was to provide services (such as the employment of staff and the provision of management and office
ATC 4770
services) for the practice. The trustee of this trust had a discretion to distribute the income among, inter alios, the taxpayer, his wife and children. The taxpayer had power to remove the trustee of the family trust. During the relevant year of income he made the arrangements which it is sought to challenge under sec. 260. A unit trust was set up and the taxpayer and Dr Burke, who carried on another medical practice, became trustees; all the units in the trust were held by the trustee of the family trust. The taxpayer sold his practice to the unit trust and entered into a contract with that trust under which he was engaged to serve as an employee in the practice for an annual salary. A new service agreement was entered into between the trustees of the unit trust and the trustee of the family trust. The unit trust established a superannuation fund for the benefit of the taxpayer. In other respects, the practice was carried on by the taxpayer in the same way as before the arrangements were made. A curious feature of the case is that the assessment against which the taxpayer successfully appealed to the Federal Court actually reduced his taxable income - that is because the unit trust made a loss which the Commissioner treated as the loss of the taxpayer. The unit trust made further losses in the two subsequent years, so that in those years also there was no distribution of income to the family trust. These circumstances make it rather unfortunate that the present case was chosen as a test case.In the second case the taxpayer, Dr Watson, carried on practice as a medical specialist in partnership with four other doctors. During the relevant income year (which was also the year ending 30 June 1979) there were established:
- (1) a family trust under which the trustees (who were the taxpayer and his wife) had a discretion to distribute the income for the benefit of the taxpayer, his wife, children, remoter issue and charities;
- (2) similar family trusts for the other doctors;
- (3) a service trust controlled by the five doctors who had formerly been partners; and
- (4) a unit trust in which the units were held by the trustees of the family trusts respectively set up for the five doctors.
The partners sold the practice to the unit trust, employment agreements were made between the unit trust and the five doctors, a superannuation fund was created for the five doctors as employees of the unit trust, and a service agreement was made between the service trust and the unit trust. In this case, unlike that of Dr Gulland, no relevant family trust or service trust had been in existence before the arrangements were made. The unit trust made a substantial profit in the relevant year of income.
In each case, after the arrangements were made, the taxpayer carried on a medical practice in much the same way as before. However, the income which Dr Gulland had previously derived from the practice now became the income of the unit trust and Dr Gulland instead received a salary from the trust which, as it happened, was larger than the net income which he would have derived from his practice. After the arrangements Dr Watson received a salary, smaller in amount than the interest in the net income in the partnership to which he would otherwise have been entitled; in other words, the income which ultimately derived from his personal exertion as a medical practitioner was split in such a way that he received part of it and part of it went to the beneficiaries of the trust. In these circumstances the Commissioner invoked sec. 260 of the Act which provides as follows:
``(1) Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly -
- (a) altering the incidence of any income tax;
- (b) relieving any person from liability to pay any income tax or make any return;
- (c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
- (d) preventing the operation of this Act in any respect,
be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.
(2) This section does not apply to any contract, agreement or arrangement made or entered into after 27 May 1981.''
ATC 4771
Section 260 creates many difficulties of interpretation, but some matters may now be taken as settled. The section does not refer to the motives of the taxpayer or other person who entered into the arrangement which it is sought to impugn; the purpose or effect of the arrangement must be ascertained from the terms of the arrangement itself and from the overt acts by which it was carried into effect. Not every arrangement which results in a saving of tax will be struck down by the section. For example, if one person disposes of income producing property to another so as to reduce the burden of taxation, the section will not avoid the transaction, for the incidence and burden of the tax will fall precisely as the Act intends, on the new owner:
D.F.C. of T.
v.
Purcell
(1921) 29 C.L.R. 464
at p. 473
. In
Newton
v.
F.C. of T.
(1958) 98 C.L.R. 1
at p. 8;
(1958) A.C. 450
at p. 466
, Lord
Denning
suggested a practical test for deciding whether an arrangement is one to which the section applies. He said:
``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.''
The question, according to this test, is whether the arrangement, on its face, must necessarily be labelled as a means to avoid tax. That test is a useful one, and it has often been applied, but it does not provide a guide to the decision of every case. An arrangement which is not capable of explanation by reference to ordinary dealing and which on its face is obviously designed to bring about the result that less tax will be paid may nevertheless do no more than take advantage of an opportunity to reduce tax which the Act itself provides. A line of decisions illustrates that if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that sec. 260 is attracted
Stephen
J. in
Mullens
&
Ors
v.
F.C. of T.
76 ATC 4288
at p. 4303;
(1976) 135 C.L.R. 290
at p. 318
, summed up in that way the effect of the earlier authorities which included
W.P. Keighery Pty. Ltd.
v.
F.C. of T.
(1957) 100 C.L.R. 66
;
F.C. of T.
v.
Sidney Williams (Holdings) Ltd.
(1957) 100 C.L.R. 95
; and
F.C. of T.
v.
Casuarina Pty. Ltd.
71 ATC 4068
;
(1971) 127 C.L.R. 62
. The subsequent authorities
-
F.C. of T.
v.
Patcorp Investments Ltd.
76 ATC 4225
;
(1976) 140 C.L.R. 247
, especially at ATC pp. 4236-4237; C.L.R. pp. 298-299,
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
-
are all consistent with this formulation. As
Stephen
J. further said in
Mullens
&
Ors v. F.C. of T.
at ATC pp. 4303-4304; C.L.R. p. 319:
``Section 260 of the Act, in performing its task of `protecting the general provisions of the Act', cannot be allowed to negative the Act's specific and particular provisions...''
These cases apply the principle of construction expressed in the maxim generalia specialibus non derogant. They show that Lord Denning's statement in Newton v. F.C. of T. needs to be understood subject to the qualification which I have indicated, but do not otherwise detract from the authority of that statement.
Two further aspects of sec. 260 need to be mentioned. First, sec. 260 is an annihilating provision, which enables the Commissioner to ignore the arrangement to which it applies, but does not permit him to substitute a new and fictitious set of facts in its place. In
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
, Lord
Diplock
said at ATC p. 6009; W.L.R. p. 475; All E.R. p. 511:
``... it is not a charging section; all it does is to entitle the Commissioner when assessing the liability of the taxpayer to income tax to treat any contract, agreement or arrangement which falls within the description in the section as if it had never been made. Any liability of the taxpayer to pay income tax must be found elsewhere in the Act. There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made.''
ATC 4772
Secondly, the avoidance of tax (by which I mean to include any of the purposes mentioned in sec. 260) need not be the sole purpose of the arrangement. In
Hollyock
v.
F.C. of T.
71 ATC 4202
at pp. 4205-4206;
(1971) 125 C.L.R. 647
at p. 657
, I respectfully dissented from the view, apparently accepted as correct in
Mangin v. I.R. Commr
(1971) A.C. 739 at p. 751, that the avoidance of tax must be the sole or at least the principal purpose of the arrangement, although I considered that it would not be enough to justify the application of the section that tax avoidance was an inessential or incidental feature of the arrangement. Subsequently, in
Europa Oil (N.Z.) Ltd. (No.2) v. Commr of I.R. (N.Z.)
at ATC p. 6009; W.L.R. p. 475; All E.R. p. 512, Lord
Diplock
said:
``... the section in any case does not strike down transactions which do not have as their main purpose or one of their main purposes tax avoidance. It does not strike down ordinary business or commercial transactions which incidentally result in some saving of tax. There may be different ways of carrying out such transactions. They will not be struck down if the method chosen for carrying them out involves the payment of less tax than would be payable if another method was followed. In such cases the avoidance of tax will be incidental to and not the main purpose of the transaction or transactions which will be the achievement of some business or commercial object...''
Notwithstanding the different view expressed by
Bray
C.J. in
Jones
v.
F.C. of T.
77 ATC 4058
at pp. 4065-4066;
(1977) 15 S.A.S.R. 462
at pp. 472-473
, and
Bayly
v.
F.C. of T.
77 ATC 4045
at pp. 4055-4057;
(1977) 15 S.A.S.R. 446
at pp. 459-460
. I do not understand that in that statement Lord
Diplock
was reverting to what was said in
Mangin v. I.R. Commr,
or that his statement is inconsistent with what I said in
Hollyock v. F.C. of T.
If tax avoidance is one of the main purposes of the arrangement in the sense that it is not inessential or merely incidental, that is enough.
The test suggested by Lord Denning in Newton v. F.C. of T. was applied in Peate v. F.C. of T. (1964) 111 C.L.R. 443; on appeal, (1966) 116 C.L.R. 38; (1967) 1 A.C. 308, the facts of which bear some resemblance to those of the present case. In that case eight doctors, who had for some years practised in partnership, entered into a complicated arrangement, the effect of which, stated shortly, was that the partnership was dissolved, the doctors thereafter attended to the patients of the practice on behalf of a company, the fees received by that company from the patients, after deduction of expenses, were distributed between family companies established for each of the doctors and each doctor was paid a salary by his family company; in the result, the income of each doctor was reduced and part of the moneys paid to his family company was held in trust for members of his family. It was held in this Court, and on appeal to the Privy Council, that the arrangement was void as against the Commissioner by reason of sec. 260. Kitto J. said, at p. 469 of 111 C.L.R.:
``The arrangement in the present case, considered objectively as is thus required, may well seem to be characterized by several purposes and effects, some of them unconnected with taxation, including the protection of individual members of the group against liability for negligence; the making of superannuation provision for employees, including doctors employed to assist the group; the better organization of the group's activities and particularly its methods of accounting; and the making of provision for the doctors' families... But the question remains, whether the overt acts that were done under the plan are fairly explicable without an inference being drawn that tax-avoidance is a purpose of the arrangement as a whole. Menzies J. thought they were not, and with respect I agree. The arrangement bears ex facie the stamp of tax-avoidance. An understandable purpose of providing for the doctors' families, and doing so quite honestly, is perfectly evident; but what is equally evident is a purpose of doing so by a method which will divert income away from the participating doctors to or for the benefit of their families, to the end that a substantial part of the tax might be avoided which would have been incurred if the income had first been derived by the doctors and then applied by them for the benefit of their families.''
The question that then arose was what remained when sec. 260 had annihilated that arrangement. Menzies J. (whose decision was
ATC 4773
affirmed on appeal to the Full Court) answered this question as follows, at p. 461 of 111 C.L.R. He said:``What is left then is a group of doctors practising together but without any formal agreement of partnership, using Westbank to receive all fees paid, to provide services for the group, to pay group expenses and to make distributions of what remained in agreed proportions and using their family companies to receive those distributions and to pay the individual expenses of practice. On this basis the assessable income of the doctors as a group was the total of gross fees earned.''
In the Judicial Committee this question of the effect which the section had once it applied caused the greatest difficulty in the case and caused Lord Donovan to dissent. The majority of the Board, although agreeing with the conclusion reached by Menzies J. and the Full Court, gave rather different reasons for doing so; Viscount Dilhorne said, at 116 C.L.R. p. 44; A.C. p. 332:
``He [the Commissioner] was therefore entitled to treat the partnership as continuing until, if in fact it had been in existence it would have been dissolved by operation of law. Until then he was entitled to treat the income in fact received by A.E. Westbank Pty. Limited as if it had been received by the partnership, and to treat as the appellant's share the same percentage of the net income of that company as he was entitled to of the income of the partnership; that is, the same percentage as that provided in the service agreement between the appellant, Raleigh and Westbank.''
Before us, it was submitted that the decision in Peate v. F.C. of T. cannot stand with Mullens & Ors v. F.C. of T., Slutzkin & Ors v. F.C. of T. and Cridland v. F.C. of T. I do not agree. It is noteworthy that in the three later cases Peate v. F.C. of T. was not mentioned and it is unthinkable that it was intended to overturn it sub silentio. Moreover, for the reasons I have already given, Mullens & Ors v. F.C. of T., Slutzkin & Ors v. F.C. of T. and Cridland v. F.C. of T. were not inconsistent with Newton v. F.C. of T., but showed that the general rule enunciated by Lord Denning in that case is displaced when the purpose of the arrangement in question is to make use of a tax advantage for which the Act provides. It was submitted that the present cases fall within the principle laid down in that trilogy of cases, because by the arrangements the taxpayers (it was said) did no more than adopt the course, available under the Act, of creating trusts, the income of which would be taxed in accordance with the provisions of Div. 6 of Pt III. That argument (which could not be accepted consistently with Peate v. F.C. of T. ) fails because it is simply not right to say that the Act allows a taxpayer the opportunity to have his own income from personal exertion taxed as though it were income derived by a trust and held for the benefit of a number of beneficiaries.
Then it was said that Peate v. F.C. of T. is distinguishable, for two reasons. First, it was said that in Peate v. F.C. of T. the company could not lawfully carry on a medical practice and further that the patients would not be entitled to a tax deduction for the fees which they paid to the company, whereas in the present cases the trustees are all members of the medical profession. In Peate v. F.C. of T., Menzies J. did refer to this aspect of the matter (at p. 460 of 111 C.L.R.) and in Hollyock v. F.C. of T. (a case of a pharmaceutical chemist), at ATC pp. 4205-4206; C.L.R. pp. 657-658, I regarded a similar consideration as important. However, none of the members of the Full Court or the Judicial Committee in Peate v. F.C. of T. appears to have relied on this circumstance and it was plainly not the determining consideration in the case. Further, it was submitted that standards of ordinary and acceptable conduct have changed since Peate v. F.C. of T. was decided two decades ago and practices then unacceptable in a profession are now tolerated for the very reason that persons engaged in a profession would otherwise be in a position of disadvantage, from a taxation point of view, when compared with tradesmen and proprietors of small businesses. There is truth in that statement. However, when Lord Denning in Newton v. F.C. of T. spoke of ``ordinary business or family dealing'' he intended to refer to what was normal or regular, rather than to what had become common or prevalent; in any case, that reference was made by way of contrast to the words ``without necessarily being labelled as a means to avoid tax'' and it is the latter words which give the clue to Lord Denning's meaning: see Mangin v. I.R. Commr at p. 751.
In my opinion the arrangements made by Dr Watson, like those in Peate v. F.C. of T., bear
ATC 4774
on their face an indication of a purpose to avoid tax. It is true that the arrangement revealed other purposes as well, namely the desire to make adequate provision for the superannuation of Dr Watson and to benefit the members of his family. I do not think that the attempt to obtain deductions for contributions to the superannuation fund should be treated as merely another attempt at tax avoidance. It would have been possible, theoretically at least, for Dr Watson to provide for himself a superannuation scheme while he remained self-employed, but unless he were an employee, contributions to the superannuation scheme would not have been tax deductible. As at present advised I do not consider that sec. 260 would have frustrated an arrangement made by Dr Watson to become an employee for the purpose of enabling his employer to have the benefit of the deductions allowed by sec. 82AAC of the Act, even if the employer were a company or trust which he himself controlled. However the arrangements in fact made went far beyond what was necessary to take advantage of the tax benefit provided by sec. 82AAC. The creation of the unit trust, and the allocation of units in the trust to the trustees of the family trust, together with the employment agreement, viewed objectively, can only be regarded as an attempt to split the income from Dr Watson's practice, and thus to avoid tax which Dr Watson would otherwise have paid, or to alter the incidence of the tax payable on that income. I am unable to agree that tax avoidance was an inessential or incidental feature of the arrangement. At the very least it was one of the main purposes of the arrangement and sec. 260 accordingly applies.In my opinion sec. 260 also applies to the arrangements made by Dr Gulland. I have already mentioned the points of distinction between the two cases. The introduction of another medical practitioner, quite unconnected with the practice, as co-trustee of the unit trust emphasized the artificiality of the arrangement. On the other hand, the arrangement, if effective against the Commissioner, would have increased rather than reduced Dr Gulland's income in the relevant income year, because the unit trust made a loss during that year. It does not follow that the arrangement did not have one of the purposes or effects described in sec. 260. Viewed as an arrangement intended to operate in future years, the objective purpose of the arrangement can be seen to be an attempt to avoid tax. Further, the arrangement had the purpose and effect of altering the incidence of tax in the relevant income year.
The fact that Dr Gulland's family trust was already in place leads to no different conclusion. The creation of the unit trust, and the issue of all the units in that trust to the trustee of the family trust, stamped the arrangement as one whose purpose or effect was to avoid tax or alter the incidence of tax.
In the Federal Court, Toohey J. considered that a critical point of distinction between the two cases was that in the case of Dr Watson there was an antecedent transaction between the parties (namely, the partnership) which the impugned arrangement affected, whereas the fact that Dr Gulland was carrying on practice alone could not be described as an antecedent transaction which was altered by the arrangement. For that reason he joined in upholding Dr Gulland's appeal. He relied on a passage from the judgment of Barwick C.J. in Mullens & Ors v. F.C. of T. at ATC p. 4294; C.L.R. p. 302, which was cited with apparent approval by Aickin J. in Slutzkin & Ors v. F.C. of T. at ATC p. 4083; C.L.R. p. 326 and by Mason J. in Cridland v. F.C. of T. at ATC p. 4541; C.L.R. p. 338. Barwick C.J. said:
``... there will be no relevant alteration of the incidence of tax 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. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act. Section 260 is not directed to tax on income to which the taxpayer is entitled only by reason of the actual transaction into which the parties have entered.''
Later, however, Barwick C.J. went on to say, at ATC pp. 4294-4295; C.L.R. pp. 302-303:
``Again, it is otherwise if, by reason of an antecedent transaction or situation, the taxpayer was already subject to tax in respect of an income which that antecedent transaction or situation produced or would produce, or was not or would not be entitled to any deduction in the situation created by
ATC 4775
that antecedent transaction. In such a situation the avoidance of the impugned transaction, because it represented an endeavour to cast what had already been agreed into a form which avoided or lessened the amount of tax otherwise payable, would expose the antecedent situation which did not carry any right to a deduction. Just as there must be income, not derived from the impugned transaction but derived from the antecedent transaction between the parties which, when that transaction is struck down, is exposed as producing assessable income, so, in my opinion, in relation to a deduction, the avoidance of the impugned transaction must disclose a transaction or situation which did not entitle the taxpayer to a deduction.''
This latter passage shows in my opinion that in the earlier passage the learned Chief Justice was using ``antecedent transaction'' to refer to an antecedent situation as well as to an antecedent transaction. In any case, however, there is nothing in sec. 260 that supports the view that that section can apply only when there has been an antecedent transaction between parties. An arrangement will, for example, be within the section if it alters the incidence of income tax in a case in which the only relevant antecedent circumstance is that the taxpayer is in receipt of income. The cases of Dr Watson and Dr Gulland cannot be distinguished on the ground suggested by Toohey J.
Clearly, in the case of Dr Gulland, when the impugned arrangement is annihilated, what is left is the situation in which the taxpayer is in receipt of the income from his practice. In the case of Dr Watson, F.C. of v. F.C. of T. provides the necessary guidance as to the effect of the annihilation. Whether one takes the approach of the Judicial Committee or that of the High Court in Peate v. F.C. of T. the result is that the income received by the unit trust should be treated as the income of the five doctors.
The Commissioner correctly did not contend that sec. 260 annihilated the service trust in either case. In Dr Gulland's case the service trust was in existence before the impugned arrangements were made and was unaffected by sec. 260. In Dr Watson's case, the creation of the service trust was part of the arrangement affected by the section. However the section renders void as against the Commissioner an arrangement only ``so far as it has or purports to have the purpose or effect'' of the kind described in the section. Authorities such as
Cecil Bros Pty. Ltd.
v.
F.C. of T.
(1964) 111 C.L.R. 430
and
F.C. of T.
v.
Phillips
78 ATC 4361
;
(1978) 20 A.L.R. 607
indicate that each taxpayer was entitled to obtain the necessary services from a trust of his own creation, and that sec. 260 did not render void the arrangements made for that purpose.
For these reasons I consider that in both cases the learned trial Judge was correct in upholding the assessment made by the Commissioner. I would accordingly allow the Commissioner's appeal in the case of Dr Gulland and would dismiss Dr Watson's appeal.
Gibbs C.J.:
Pincus v. F.C. of T.
This appeal, like Watson v. F.C. of T. (85 ATC 4765) raises questions concerning the application of sec. 260 of the Income Tax Assessment Act 1936 (Cth), as amended (``the Act''), to a case in which medical practitioners, carrying on business in partnership, sell their business to trustees and thereafter work in the practice as employees, with the result that a portion of the fees earned by their work, less expenses, is available for distribution among the beneficiaries of the trust, who include their respective wives and children. There are, however, some points of distinction between Dr Watson's case and the present, and it will be necessary to consider whether the distinction is material. The facts are fully set out in the judgment of Dawson J. The taxpayer, Dr Pincus, had carried on a partnership, in equal shares, with Drs Backstrom, Richardson and Seet at two surgeries, Stafford Road and Stafford Heights. Drs Pincus and Richardson worked at Stafford Road and Dr Backstrom worked at Stafford Heights, while Dr Seet worked at both surgeries. The partnership was dissolved. The assets appertaining to Stafford Road were sold to Dr Backstrom as trustee of a unit trust, the beneficiaries of which were the families of Drs Pincus and Richardson by way of family trusts and the assets appertaining to Stafford Heights were sold to Dr Richardson as trustee of a unit trust, the beneficiaries of which were the families of Drs Backstrom and Seet. Thereafter, Dr Backstrom (as trustee) employed
ATC 4776
Drs Pincus and Richardson (full-time) and Dr Seet (part-time) at Stafford Road, and Dr Richardson (as trustee) employed Drs Backstrom (full-time) and Seet (part-time) at Stafford Heights. The decision to dissolve the partnership was first made by Dr Pincus because he was dissatisfied with the manner in which the partnership was conducted. When he discussed, with his advisers, the arrangements which should be made it was suggested to him that he create a trust scheme which would provide himself and his family with superannuation benefits. In fact the unit trust did institute a superannuation scheme, although not until some months later. The Commissioner invoked sec. 260 of the Act and it was held in the Full Federal Court that he was entitled to do so.Before us it was submitted on behalf of the taxpayer that sec. 260 does not apply to a case such as the present and that
Peate
v.
F.C. of T.
(1964) 111 C.L.R. 443
; on appeal,
(1966) 116 C.L.R. 38
;
(1967) 1 A.C. 308
is no longer good law. I have dealt with, and rejected, similar contentions in my reasons for judgment in
F.C. of T.
v.
Gulland
(
85 ATC 4765
)
;
Watson v. F.C. of T.
and need not repeat those reasons here.
It was then submitted that
Peate v. F.C. of T.
is distinguishable for the following reasons. It was said that in the present case the decision to dissolve the partnership was made on 18 June 1978 and that at that time no final decision was made as to anything else. The sale of the assets of the partnership at Stafford Road and Stafford Heights respectively to Drs Backstrom and Richardson did not occur until 14 August 1978. It was submitted that the dissolution of the partnership, in itself, did not have the purpose or effect of avoiding tax but it did have the effect of terminating the existing source of the taxpayer's income. The result, it was submitted, was that the taxpayer, having dissolved the partnership, was free to decide to commence practice as an employee and that sec. 260 would have no application to any arrangements he made for that purpose. Particular reliance was placed on a passage from the judgment delivered by Lord
Diplock
in
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
. Lord
Diplock
said, at ATC p. 6009; W.L.R. p. 475; All E.R. pp. 511-512:
``... the description of the contracts, agreements and arrangements which are liable to avoidance presupposes the continued receipt by the taxpayer of income from an existing source in respect of which his liability to pay tax would be altered or relieved if legal effect were given to the contract, agreement or arrangement sought to be avoided as against the Commissioner. The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his affairs in relation to income from a new source in such a way as to attract the least possible liability to tax.''
However, when the decision to dissolve the partnership was made, it was clearly intended to replace it by some other arrangement. In fact the partnership was formally dissolved by a ``Deed of Dissolution and Sale'', made on 14 August 1978, by which the assets of the partnership were sold to the two doctors as trustees. There was no lapse of time between the dissolution of the partnership and the other arrangements. In any case it would be wrong to regard the income after the dissolution as coming from a new source; the source remained the practice by the taxpayer of his profession at Stafford Road.
Alternatively, it was submitted on behalf of the taxpayer that even if sec. 260 applies, the annihilation of the tax avoidance arrangement will not leave exposed a partnership between Drs Pincus and Richardson at Stafford Road. It is well settled that sec. 260 does not impose any liability to tax; where the section annihilates an arrangement, the taxpayer will be liable to tax only if the actual facts then left exposed will be such as to render him liable. It was submitted that if the arrangement was rendered void by the section, the dissolution, which, as the Commissioner contended, was part of the arrangement, would itself be avoided, so that what would remain would be the partnership between the four doctors. It was then said that the Commissioner was inconsistent in assessing the taxpayer as he did.
Section 260 renders an arrangement void as against the Commissioner only in so far as it has or purports to have one of the purposes or effects specified in the section. The dissolution of the partnership, in itself, had no such
ATC 4777
purpose or effect, but it formed an integral part of the arrangement to which sec. 260 applied. The other elements of the arrangement, so far as it had the purpose or effect of tax avoidance by the taxpayer, comprised the sale of the assets to Dr Backstrom as trustee, the employment of Dr Pincus by the unit trust and the issue of the units in the unit trust to the family trust. However, when the section took effect, what was left after the annihilation of the arrangement was not the original partnership. The four doctors were in fact no longer practising in partnership, and the section does not require or permit fiction to be substituted for fact. The application of sec. 260 revealed that Drs Pincus and Richardson were practising in association and that Dr Seet was working part-time in conjunction with them, although his remuneration for doing so came from the practice at Stafford Heights. It revealed that Dr Pincus in fact received, from the practice of his profession, not only the amount paid to him as ``salary'' but also the amount of profits distributed by Dr Backstrom as the trustee of the unit trust to Dr Pincus as trustee of the family trust.The conclusion reached by the Federal Court was correct and the appeal should be dismissed.
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