Case V36

Members:
CJ Bannon QC
BJ McMahon SM
GR Taylor M

Tribunal:
Administrative Appeals Tribunal

Decision date: 5 February 1988.

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C.J. Bannon Q.C. (Deputy President) and review relates to an income tax assessment in G. Taylor (Member)

This application for respect to the financial year ending 30 June

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1979. The Commissioner of Taxation (the respondent) disallowed a claimed deduction of $99,900 for loss on the sale of plant and thereby increased the amount of the assessable income of the taxpayer company on which he assessed tax. The taxpayer objected to the assessment stating that the amount of $99,900 represented the loss incurred on the sale of one Kelvinator Foodarama Refrigerator. The notice of objection states:

``The company acquired the refrigerator for the sum of $100,000. The refrigerator had not been previously depreciated and the restrictions contained in Section 60 of the Income Tax Assessment Act would have no application to the cost price for depreciation purposes.

The company leased the refrigerator for a period of three years and rental of $10 was derived for the year ended 30 June, 1979. The equipment was purchased on the 23rd of April, 1979 for $100,000 and sold on the 25th of June, 1979 for $100. It is claimed that as all the provisions of Section 59 have been complied with the company is entitled to a deduction in the year of income for the sum of $99,900 representing the difference between the cost of the unit and the consideration receivable on the sale.''

The refrigerator in question had a market value of $30 and was purchased second-hand from one of the two directors of the taxpayer company.

The hearing of this application was greatly facilitated by the way in which the taxpayer's case was presented. Mr Bloom Q.C., on behalf of the applicant, tendered three affidavits in evidence, one by the male director of the taxpayer, which affidavit became Exhibit B, one by the other director, his wife, which affidavit became Exhibit C and one by his accountant and tax adviser, which affidavit became Exhibit D. These affidavits covered succinctly most of the relevant facts although some extra matters were extracted by Mr Rolfe Q.C. during careful cross-examination of the deponents.

The taxpayer is a family company of which the deponents of the affidavits, Exhibits B and C, who are husband and wife, are the directors and principal shareholders. Some Class B shares are also issued to the deponents as trustees for their children. Nobody in their right senses would agree to pay $100,000 for a refrigerator worth $30 in an arm's length transaction. However, people in close family relationships occasionally transfer property to one another for a consideration which is grossly inadequate or alternatively excessive,
McGain v. F.C. of T. (1965) 13 A.T.D. 556 . Pepper-corn rentals of land payable to kings by vassals are known. In
Alexander v. Rayson (1936) 1 K.B. 169 , a lease was entered into of premises in Piccadilly at a rent of £ 450 per year, together with a collateral lease, in effect of a refrigerator, at £ 750 per year. In the joint judgment of Greer, Romer and Scott L.JJ., at p. 182 the Lords Justices said:

``The provision and maintenance of the frigidaire does, however, constitute some consideration for the agreement. It certainly would seem to be a somewhat inadequate one, but the Court is not concerned with the adequacy of consideration if consideration there be.''

In that case, the court held that the plaintiff could not rely on either the lease or the bailment of the refrigerator because each document was executed for an illegal purpose and in order to conceal the real agreement between the parties, which in fact involved only one transaction, not two (pp. 188-189).

Section 78A of the Income Tax Assessment Act 1936 (Cth) (``the Act'') was introduced to overcome tax schemes where the value of gifts was illusory or diminished, but at the relevant period there was no similar provision in force concerning claims for depreciation. At that time sec. 54(1) of the Act read as follows:

``54(1) [Depreciation deductible] Depreciation during the year of income of any property, being plant or articles owned by a taxpayer and used by him during that year for the purpose of producing assessable income, and of any property being plant or articles owned by the taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by him shall, subject to this Act, be an allowable deduction.''

Section 59(1) then read:

``59(1) [Depreciated value exceeds consideration] Where any property of a taxpayer, in respect of which depreciation has been allowed or is allowable under this

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or the previous Act, is disposed of, lost or destroyed at any time in the year of income, the depreciated value of the property at that time, less the amount of any consideration receivable in respect of the disposal, loss or destruction, shall be an allowable deduction.''

Section 62(1) as then in force was in the following terms:

``62(1) [`Depreciated value' defined] In this Division, `depreciated value' of any unit of property at any time means the cost of the unit to the person who owns or owned the property at that time less the total amount of depreciation (if any) allowed or allowable in respect of that unit in assessments of the income of that person, for any period prior to that time, under this Act or any previous law of the Commonwealth.''

In 1979 sec. 62(3) was inserted in the Act by Act No. 149 but this did not apply to property acquired pursuant to a contract made earlier than 12 June 1979. Section 62(3) is as follows:

``62(3) [Where parties not at arm's length] For the purposes of the application of sub-section (1) in relation to a person in relation to a unit of property in a case where -

• (a) sub-section (2) does not apply in relation to that person in relation to that unit;
• (b) the amount that, but for this sub-section and section 57AF, would be the cost of the unit for the purposes of sub-section (1) is attributable, in whole or in part, to a transaction to which that person was a party;
• (c) the Commissioner is satisfied that, having regard to any connection between any 2 or more of the parties to the transaction and to any other relevant circumstances, those parties were not dealing with each other at arm's length in relation to the transaction; and
• (d) the Commissioner is satisfied that the amount that, but for this sub-section and section 57AF, would be the cost of the unit for the purposes of sub-section (1) is greater than the amount (in this sub-section referred to as the `arm's length amount') that would have been the cost of the unit if the parties to the transaction had dealt with each other at arm's length in relation to the transaction,

the arm's length amount shall, subject to section 57AF, be deemed to be the cost of that unit to that person for the purposes of sub-section (1).''

In regard to the present taxpayer, it is fairly admitted by the male director, in para. 5 of Exhibit B, that in the early part of 1979 he discussed with the taxpayer's accountant an arrangement to minimise tax on the profit made by the taxpayer. The accountant suggested the scheme in the following words:

``The arrangement works like this. The company buys the fridge from your wife for say $100,000, then leases it to one of my companies and then later sells the fridge, say to you, for $100 or so and claims a tax deduction for the loss on the sale of the fridge.''

The taxpayer's female director and the accountant in their affidavits corroborate that this was a tax minimisation scheme and that it was adopted.

The details were largely as arranged. The refrigerator, worth about $30, was transferred to the taxpayer for $100,000 in or about April 1979. A so-called lease, or more properly an agreement for bailment, of the refrigerator dated 24 April 1979, between the taxpayer and one of the accountant's companies was executed under seal, the bailment being for the period of three years at a fee of $10 per annum (Exhibit H). The taxpayer gave a bill of exchange dated 23 April 1979, in favour of the female director, in the sum of $100,000 (Exhibit J). For extra caution, an agreement for sale of the refrigerator to the taxpayer dated 25 June 1979 was later executed (Exhibit G). By an agreement dated 23 April 1979, the female company director agreed to lend the sum of $100,000 to the taxpayer free of interest for a term of 32 years (Exhibit K). The loan of $100,000 was shown, after deductions, in the taxpayer's balance sheet for the year ending 30 June 1979 (part of Exhibit 1). Before the financial year expired, the taxpayer, by agreement of 25 June 1979, sold the refrigerator to the male taxpayer for $100. A copy of the agreement is annexure F to the male taxpayer's affidavit. On 3 June 1979, a

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certificate of insurance cover in the sum of $300 was issued to the taxpayer (naming the alleged bailee as an interested party) on behalf of a well-known insurance company (Exhibit N).

The story of the bailment is unconvincing. The bailee never took possession of the refrigerator. It may well be a sham arrangement. Details are set out in the three affidavits and the matter was canvassed in oral evidence. However, it probably does not matter. The refrigerator, after the sale to the taxpayer, was moved into its premises, and was used by its employees to store lunches and drinks. Mr Bloom made it clear that he was relying on this as use by the taxpayer and the case was fought on that basis. The respondent did not argue that this was outside the scope of the particulars of objection. We accept that this was a use by the taxpayer company during the relevant financial year. Therefore the facts warrant a finding that the taxpayer company bought the refrigerator for $100,000 in April 1979, used it in its business, and sold it on 25 June 1979 for $100. It is on the basis of the above facts that the taxpayer claims a deduction from tax in the relevant year in the sum of $99,900.

Learned counsel for the taxpayer submitted that this review involves an example of the choice principle discussed in
Cridland v. F.C. of T. 77 ATC 4538 at p. 4542; (1977) 140 C.L.R. 330 at p. 339 and that there is no room for the application of sec. 260 of the Act to annihilate the arrangement as against the respondent. He pointed specifically to the state of the legislation before the amendment of 12 June 1979 to introduce sec. 62(3) into the Act. He submitted that the Act allowed arrangements such as that which we have found to have existed and that it was no answer for the respondent to claim the price paid for the refrigerator was paid to avoid taxation if the transaction was not a sham. As already indicated, we find that in essential details, omitting the alleged bailment to the accountant, the transactions were not a sham. However, we are unable to accept that there is no room for the operation of sec. 260 of the Act to avoid the arrangement as against the respondent. If this review had occurred within a reasonable time of the assessment being raised, it is likely that the taxpayer's argument would have succeeded. However, in the meantime, the High Court has decided
F.C. of T. v. Gulland 85 ATC 4765 and the Federal Court has decided in
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718 at pp. 4729-4730 to strike down circuitous and artificial arrangements the sole purpose of which is to avoid liability to tax. notwithstanding the choice principle.

We consider we should apply the view expressed in the latter case and decide that the arrangement outlined is void as against the respondent under sec. 260 of the Act, as it then stood.

We have had the advantage of reading draft reasons for decision prepared by Senior Member McMahon, and in view of our conclusion, there is no need to deal with his view that the use made of the refrigerator by the taxpayer was so minimal as not to entitle the taxpayer to a deduction. The use was certainly small and it was fortuitous that the employees were able to store their lunches in the refrigerator when the taxpayer needed a tax deduction.

The objections to the assessment under review are disallowed.