Administrative Appeals Tribunal
Hartigan J. (President)
The applicant taxpayer has appealed against decisions of the Commissioner for Taxation disallowing objections by the taxpayer to assessments of tax for the years ended 30 June 1984, 1985 and 1986. Similar questions are raised in each application and they were heard together. In each year the Commissioner had included in the taxpayer's assessable income the net amount of income received by a family trust in respect of consultancy services. In doing so the Commissioner applied sec. 17, 19, 25 and 177F of the Income Tax Assessment Act 1936 (Cth) (ITAA).
2. There is substantial agreement between the parties as to the facts in the case. I am indebted in that regard to Mr Brown of counsel, who appeared for the applicant taxpayer, and Mr Black Q.C. and Mr Burnside of counsel who appeared for the respondent Commissioner and for the assistance they have given to the Tribunal in that regard. I make the following findings of fact on the balance of probabilities. I set out those findings in the form of a narrative of events.
3. The taxpayer, a person with a number of years experience in the promotion and sales of computer and office-related equipment was until early 1982 an employee of a large computer and office equipment supplier. At that time the taxpayer's family, then living in Sydney, decided that living in Hobart would be better for the family for various reasons. Initially the taxpayer tried without success to obtain employment with his employer in Hobart.
4. The taxpayer watched for job vacancies in his field in a newspaper, the Hobart Mercury. Again, however, the taxpayer was unsuccessful in his endeavours. The taxpayer then approached a number of companies that he believed did business in his field in Tasmania. One such company was X Company. The taxpayer's letter to X Company was Exhibit 3 in these proceedings.
5. Following negotiations with staff at X Company it became clear to the taxpayer that the only arrangement which would be suitable to X Company was that of a consultancy contract between X Company and a company in
ATC 526which the taxpayer was a director. The motive for such an arrangement seemed to lie in the expense saved by the X Company in otherwise having the taxpayer as an employee. It seems to have been contemplated that there would be some accretion to the fee that the family company would be paid for its services as a result of these arrangements. The substance of these negotiations was confirmed in letters sent by X Company to the taxpayer; see Exhibit 4.
6. After these preliminary negotiations with X Company the taxpayer then saw his accountants and asked their advice as to what should be done to set up the necessary corporate entity. His accountants sold him a shelf company which ultimately had its name changed to that of the taxpayer's family name; Exhibit 5 is the relevant company documents and certificate for change of name. At the same time as arranging the corporate entity the taxpayer's accountants advised him that the company should also act as the corporate trustee for a discretionary family trust. Arrangements were then made for a trust deed to be drawn up by a firm of solicitors for the taxpayer's family trust (TFT); Exhibit 6. At no stage though did the taxpayer see those solicitors. His accountants organised the matter entirely.
7. Subsequently X Company entered into a consultancy agreement with the taxpayer's family company (TFC) and, indeed, varied that agreement from time to time. The various consultancy agreements became Exhibit 7. It is convenient at this stage to note that the taxpayer, ostensibly at least, had the appearance of being one of X Company's employees. That was in part confirmed by a business card of the taxpayer that was set against X Company's name; see Exhibit 10. At the time of the hearing the card described the taxpayer as the X Company's State manager. An earlier form of the card described him as a sales representative of the X Company. The taxpayer agreed in cross-examination that his practical role was that of State manager of the X Company.
8. Invoices rendered by TFC were admitted as Exhibit 9; the returns of TFC as Exhibit 11; and the taxpayer's sources of income as Exhibit 12. Moneys received by TFC from X Company were apart from moneys retained to pay any debts or expenses of TFC mainly expended by way of salary payments to the taxpayer, cash advances to the taxpayer's wife. She would receive in the order of $4,000 to $5,000 per annum in this way. The taxpayer agreed that in a sense the company operated as an extension of himself. The taxpayer also agreed that if a particularly good pay in to TFC from X Company occurred there would be a correspondingly large draw out from TFC's account.
9. At issue in this case is whether the Commissioner can, pursuant to sec. 177F of the ITAA cancel the tax benefit gained by the taxpayer by the non-inclusion in the taxpayer's assessable income of the full consultancy fee received by the TFC. The consultancy fee is the subject of distribution as a salary to the taxpayer as an employee of TFC and the distribution of the balance as trust income under the TFT to the taxpayer and his family. The question is, do the anti-avoidance provisions of Pt IVA apply to these circumstances?
10. The provisions of Pt IVA then fall to be considered. It is helpful to refer at first to various definitions contained in sec. 177A(1) of the ITAA:
```SCHEME' means -
- (a) any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and
- (b) any scheme, plan, proposal, action, course of action or course of conduct;''
There are interpretational provisions which can be usefully set out at the outset.
By sec. 177A(3) the reference in sec. 177A(1) to a scheme, plan, proposal, action, course of action or course of conduct is to be read as including a reference to a unilateral scheme, plan, proposal, action, course of action or course of conduct as the case may be.
By sec. 177A(4) a reference in Pt IVA to the carrying out of a scheme by a person is to be read as the carrying out of a scheme by a person together with another person or other persons.
Subsection 177A(5) provides:
``[Purpose of scheme] A reference in this Part to a scheme or a part of a scheme being entered into or carried out by a person for a
ATC 527particular purpose shall be read as including a reference to the scheme or the part of the scheme being entered into or carried out by the person for 2 or more purposes of which that particular purpose is the dominant purpose.''
I mention without setting out its provisions, at this stage, that sec. 177C deals extensively with a reference in Pt IVA to the phrase ``obtaining a tax benefit''.
Section 177D sets out the schemes to which Pt IVA applies:
``177D This Part applies to any scheme that has been or is entered into after 27 May 1981, and to any scheme that has been or is carried out or commenced to be carried out after that date (other than a scheme that was entered into on or before that date), whether the scheme has been or is entered into or carried out in Australia or outside Australia or partly in Australia and partly outside Australia, where -
- (a) a taxpayer (in this section referred to as the `relevant taxpayer') has obtained, or would but for section 177F obtain, a tax benefit in connection with the scheme; and
- (b) having regard to -
- (i) the manner in which the scheme was entered into or carried out;
- (ii) the form and substance of the scheme;
- (iii) the time at which the scheme was entered into and the length of the periods during which the scheme was carried out;
- (iv) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;
- (v) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;
- (vi) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;
- (vii) any other consequence for the relevant taxpayer, or for any person referred to in sub-paragraph (vi), of the scheme having been entered into or carried out; and
- (viii) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in sub-paragraph (vi),
it would be concluded that the person, or one of the persons, who entered into or carried out the scheme or any part of the scheme did so for the purpose of enabling the relevant taxpayer to obtain a tax benefit in connection with the scheme or of enabling the relevant taxpayer and another taxpayer or other taxpayers each to obtain a tax benefit in connection with the scheme (whether or not that person who entered into or carried out the scheme or any part of the scheme is the relevant taxpayer or is the other taxpayer or one of the other taxpayers).''
Section 177F provides, inter alia, for the cancellation of tax benefits. I shall at this stage set out the provisions of sec. 177F(1) and (2).
``177F(1) [Commissioner's discretion to cancel tax benefit] Where a tax benefit has been obtained, or would but for this section be obtained, by a taxpayer in connection with a scheme to which this Part applies, the Commissioner may -
- (a) in the case of a tax benefit that is referable to an amount not being included in the assessable income of the taxpayer of a year of income - determine that the whole or a part of that amount shall be included in the assessable income of the taxpayer of that year of income; or
- (b) in the case of a tax benefit that is referable to a deduction or a part of a deduction being allowable to the taxpayer in relation to a year of income - determine that the whole or a part of the deduction or of the part of the deduction, as the case may be, shall not
ATC 528be allowable to the taxpayer in relation to that year of income,
and, where the Commissioner makes such a determination, he shall take such action as he considers necessary to give effect to that determination.
177F(2) [Inclusion of benefit in assessable income] Where the Commissioner determines under paragraph (1)(a) that an amount is to be included in the assessable income of a taxpayer of a year of income, that amount shall be deemed to be included in that assessable income by virtue of such provision of this Act as the Commissioner determines.''
It is now helpful to set out the submissions of counsel and an outline of their respective cases:
The applicant's case
11. Mr Brown for the taxpayer submitted that the provisions of Pt IVA of the ITAA should be construed so as not to apply to ``ordinary commercial arrangements and family arrangements''. Mr Brown referred to the Second Reading Speech of the Treasurer when the legislation was before the Parliament. He also referred to the explanatory memorandum relating to the Bill. He submitted that that material explained why the legislation should be construed in the way put in his submission. Mr Brown submitted that Pt IVA was introduced into the ITAA as a general measure against tax avoidance arrangements that are blatant, artificial or contrived. He also submitted that arrangements of a normal business or family kind, including those of a tax planning nature are beyond the scope of Pt IVA.
12. Mr Brown's submissions sought to examine some of the sec. 260 cases in the context of the Treasurer's speech and the explanatory memorandum to help arrive at a construction of the provisions under Pt IVA. Mr Brown submitted that Pt IVA is intended to attach itself only to blatant, artificial or contrived schemes. Ordinary business or family dealings in his submission do not fall within the purview of Pt IVA if in the words of Lord Denning dealing with the then current provisions of sec. 260 of the ITAA in
Newton and Ors v. F.C. of T. (1958) 98 C.L.R. 1 at pp. 8 and 9:
``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. Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax.''
13. In Mr Brown's submission the approach which appears in the passage just referred to is still relevant. That approach allows it to be said that the arrangement in the present case is not a blatant, artificial or contrived scheme. Rather, he submitted, it was of a ``normal family sort''. The words used in Newton's case (supra) Mr Brown submitted are all echoed in the Treasurer's Second Reading Speech.
14. In Mr Brown's submission if an arrangement is explicable by ordinary business or family dealing then it does not matter (for the present purpose) that the arrangement avoids tax. In his submission that is irrelevant because Pt IVA is not intended by the Parliament to catch every scheme that avoids tax but rather excludes those schemes which are of a kind capable of description as being within ordinary business or family dealing. In effect, Mr Brown submitted that various sets of circumstances which Lord Denning refers to in Newton's case (supra) are reflected in the provisions of the legislation under Pt IVA.
15. Mr Brown also submitted that the choice principle as exemplified in
W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 at p. 92 operates under Pt IVA. His submission as I understand it is that a choice principle applies in the sense that if a taxpayer has an option under the ITAA to adopt a course that is in the ordinary course of business then subject to some limitations the taxpayer is entitled to take that business option. Mr Brown in this regard referred to sec. 177D and 177C(2). He submitted that the same can be said of transactions of a family nature. Mr Brown referred to W.P. Keighery Pty. Ltd. v. F.C. of T. (supra) and to
Purcell v. D.F.C. of T. (1920) 28 C.L.R. 77 in support of his submissions.
16. Mr Brown further submitted that the Tribunal was required to look at the steps in a scheme. If any of those steps are found to have been made in order to create a set of facts which will enable the taxpayer to exercise a genuine option available to the taxpayer under the Act then under those circumstances the scheme is not caught by the Act. Mr Brown illustrated this submission by reference to sec. 170C(2)(a)(i) and to the decisions in
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.
17. Mr Brown in applying this submission to the facts submitted that the use of the family trust by the taxpayer was the taxpayer acting consistently with normal business and family arrangements. By operating by means of the trust the taxpayer was using an option available to him under the provisions of the ITAA so it was submitted.
18. In dealing with propositions that the trilogy of cases Gulland, Watson and Pincus (
F.C. of T. v. Gulland and Ors 85 ATC 4765; (1985) 160 C.L.R. 55) is authority for the proposition that income from personal exertion cannot be diverted and that trading as a trust is not an option in a case such as this available to the taxpayer under the ITAA Mr Brown submitted that amendments to the Act regarding Div. 6AA, 6A, 6B and 6C have changed the position. In his submission these amendments provide for the taxation of trusts and trust beneficiaries in a way that allows it to be said that the use of a family trust in the way relevant here, is now an option to the taxpayer.
19. Mr Brown summarised his position on this as follows:
``Now that leads me to submit that the use of a discretionary trust is accepted. It was a course that was quite properly entered into by this taxpayer. It was not a scheme that he entered into in respect of which he had to create a set of facts. His decision to come to Hobart was based on personal reasons. He arranged his affairs in a manner that would enable him to reduce income tax. Most certainly that is conceded. It is a scheme or arrangement; certainly that is conceded. But it is not intended, and it was never intended to be, the kind of arrangement to which [Part IVA] `applied'. That applies... from the clear words of Mr Howard; from the clear words in the explanatory memorandum; from the whole of the construction of Part IVA and the historical perspective which led to the construction of Part IVA, when one considers the very important function played by Newton's case, because Newton's case set the pattern.''
20. Mr Brown submitted that the Tribunal was required to look at the general circumstances of the arrangement. This included the family considerations of moving to Hobart, the decision made to split income with the family along with the manner in which the arrangement was carried out.
21. Mr Brown conceded, in my view significantly, that the trust was not necessary to allow the taxpayer to enter into his work arrangement with the X Company. It was, Mr Brown submitted, an option genuinely open to the taxpayer under the ITAA.
22. Mr Brown made other submissions which I have considered but not all of which I shall set out separately in this part of my reasons. However, there remain some that require further mention.
Mr Brown, in his submissions, conceded that the taxpayer arranged his affairs in a manner that enabled the taxpayer to reduce his income tax. Conversely, the taxpayer's wife may have to pay more tax. Mr Brown further conceded in his submissions that on the facts of this case the taxpayer entered into an arrangement or a scheme which satisfied the definition of scheme in sec. 177A(1) of the Act. Mr Brown's submission was that the scheme into which the taxpayer had entered was not of the sort that could or should be caught by Pt IVA. Mr Brown in his submissions also conceded that the ``trust was not necessary in order [the taxpayer] to be able to enter his agreement with the [X] company''. Mr Brown's submission was that the use of the trust was an option genuinely open to the taxpayer.
23. Mr Brown also submitted that the arrangement entered into by the taxpayer was a ``normal, freely-available income splitting device which has been with us for years and was entered into partly for that purpose and partly because it was a family and business arrangement that was open to [the taxpayer]''. Mr Brown also pointed to matters such as the unavailability to the taxpayer of sick leave, long service leave, holiday pay, from the X Company and other matters such as the use of a
ATC 530company car as being circumstances which, on the evidence, show change in the taxpayer's personal circumstances for the purpose of sec. 177D.
The respondent's case
24. Mr Black Q.C. set out the scheme which the respondent alleged existed in the case before me. In Mr Black's submission the scheme involved the following elements:
- (a) The use of a corporate vehicle for supplying the taxpayer's personal services to X Company.
- (b) The use of a mechanism by which surplus income of the corporate vehicle can be distributed to persons other than the taxpayer.
- (c) The payment by the corporate vehicle of the taxpayer's salary which is less than the amount paid by the X Company for the provision of the taxpayer's services.
25. It can be seen then that in Mr Black Q.C.'s submission the substance of the scheme had three elements namely the corporate vehicle, the mechanism which is the trust and finally, and most importantly in his submission, the operation of the trust in such a way that the taxpayer gets what Mr Black said was something in the order of $12,000 by way of salary, whereas the income generated by the taxpayer's exertions would be and is much more substantial than that.
26. Mr Black Q.C. rounded off his submission in this regard by submitting that the scheme involved a combination of elements that enables the X Company to pay what it perceives to be the fair value of the taxpayer's services and it enables the corporate vehicle to pay the taxpayer a much lower amount by way of salary for the same services. As a result there is a surplus income in Mr Black's submission which in truth represents the product of the taxpayer's exertions and nothing else.
27. It is further submitted by Mr Black Q.C. that it does not matter that the first part of the scheme may reasonably be said by the taxpayer to be something that the taxpayer had to enter into if he wanted to come to Hobart. As Mr Black submitted his client does not complain that the taxpayer is employed by a company or that the X Company required the taxpayer be employed by a company. It was submitted that that part of the scheme was in a sense neutral. In Mr Black's submission it is what is added on to those facts that makes the scheme offensive to Pt IVA. Or as he put it in another way, it is those other things which enliven sec. 177D and cause the section to apply to the scheme.
Mr Black Q.C. then turned his submissions to the question of a tax benefit.
Section 177C(1)(a) of the Act provides as follows:
``177C(1) [Obtaining a tax benefit] Subject to this section, a reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as a reference to -
- (a) an amount not being included in the assessable income of the taxpayer of a year of income where that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out; or...''
28. Mr Black's submissions stressed the commencing words of sec. 177C(1) and in particular the words ``obtaining by a taxpayer of a tax benefit in connection with a scheme''. He submitted that obviously has to be related to the scheme in that the statute uses the words ``in connection with''.
29. It was then submitted on behalf of the Commissioner that a tax benefit in this case has been obtained because were the scheme not entered into with the three elements the taxpayer would have received, by way of income, the amounts that ultimately, for no reason apparent other than fiscal reasons, were distributed by the trust. It was further submitted that the taxpayer would have received the amount either by way of income directly or, in the circumstances of this case where the X Company would not allow that, if the scheme had not been entered into he would have received a salary from his company that was commensurate or, at least, bore a close and reasonable relationship with the value of the services that he was giving to the company.
30. The Commissioner's case was then that a substantial amount of income was generated solely from the exertion and skill of the taxpayer. Instead of being reflected in salary this income was reflected in other ways, ultimately finding its way into the hands of the
ATC 531taxpayer's family through distributions under the taxpayer's family trust. Exhibit 12 in this case illustrates the Commissioner's contentions in this regard.
31. During submissions Mr Black Q.C. handed to the Tribunal a chart which illustrates the matters set out in Exhibit 12.
32. The effect of this evidence if accepted is that the income that the taxpayer derived by way of salary from the company that got the benefit of the services provided by him and that provided the services through the taxpayer to the X Company, bears no relationship to the income received by the taxpayer. Mr Black Q.C. submits that this material illustrates the way in which income in his submission was split. As will appear later, I accept that the distribution occurred in the way set out in Exhibit 12 and I accept that the income received by the taxpayer bears no relationship to the services provided by him to the X Company through the TFC.
33. In Mr Black's submissions the consequence is that Pt IVA attaches to this scheme according to its terms and the scheme is ineffective to carry out the purpose for which it was intended. Mr Black then directs his submissions to sec. 177D of the Act. That section sets out the eight matters to which the Tribunal is to have regard as to whether a conclusion is reached that the scheme or any part of the scheme was carried out for the purpose of obtaining the tax benefit. I have already set out sec. 177D of the Act.
34. Mr Black Q.C. in his submissions pointed to what he described as relevant objective facts which should be borne in mind when one turns to consider the application of sec. 177D. It was his submission that the relevant facts were not in dispute or were certainly not seriously in dispute.
35. In his submission the first fact relevant here is that there was no need for the family trust to be established to enable the taxpayer and his family to pursue their legitimate domestic and business desires of going to Hobart. It was his submission that the X Company was unaware of the trust. It was his submission that the X Company did not require the creation or maintenance of the trust. Mr Black's next submission then raises the question of why was the trust entered into? His submission in answer is that by saying that the trust came into being only after accountancy advice had been given on the tax aspects of the taxpayer's proposed new employment. Related to this in his submission was, that the Tribunal should find, that as a general rule, family discretionary trusts are redolent of fiscal consequences. It was his submission that that is not invariably the case but that in many situations it is a very strong indication that some fiscal matter is in mind. In other words, it is at the bottom of the creation of the trust.
36. The next objective matter that Mr Black's submissions identified is this: that it is beyond dispute that the taxpayer and his wife controlled the trust and the trustee. The final matter which Mr Black's submission raised at this point was that the mechanism of the company and the trust was overtly used to split income derived solely from the taxpayer's exertions. By way of emphasis the submission added that in this particular case there was not the use of a word processor or a deductible typewriter that was contributing some minute amount to the derivations of income. It was Mr Black's submission that all the taxpayer's skill and energy and qualifications and so forth were put into the derivation of income.
37. Mr Black's submission was that income was split in a way that was calculated to minimise the tax to be assessed on the total income generated by the taxpayer's exertions. He submitted that the distributions appear to have been, at the end of each year, worked out by the accountants and adopted by the taxpayer and his wife at a meeting. Nevertheless, he submits, it was worked out by the accountants in such a way that the distributions maximised the tax advantage by taking each person's income to a theoretical maximum that is reached before it then jumps on to another scale. Mr Black submitted that the taxpayer's income from the trust was to be the balance then left. Mr Black submitted that the taxpayer's salary from the company was not, on the evidence, fixed by reference to any value of the services provided by the taxpayer to the company but rather was fixed again according to accountancy advice as representing what was sensible in the overall context of the scheme.
The final objective fact which Mr Black raised in his submission was that if one stands back and looks at the taxpayer's family in early 1982 before the taxpayer changed his employment and then again in late 1982 and
ATC 532thereafter when the change in employment had occurred, one finds that, viewed as a family, essentially nothing has changed.
38. It is his submission that if one looks at the family before and after the change in employment the patterns of cash flow are essentially the same, with the important and necessary consequence that money had to go through the company and then through the trust before it was distributed into the hands of the beneficiaries and, to a smaller extent, before it came into the hands of the generator of the income who was the employee of the company, namely the taxpayer.
39. Mr Black then turned to the application of sec. 177D(b) of the Act.
Paragraph 177D(b)(i) raises the question of the manner in which the scheme was entered into or carried out. Mr Black's submission here was that the scheme was negotiated in a personal capacity by the person who in fact generated all the income in the scheme. It was, he submitted, negotiated by the taxpayer in his personal capacity (with his own company in a personal capacity). The taxpayer controlled the trust. Thus it came about that the scheme was carried out according to the dictates of the taxpayer and his wife who obviously in all respects agreed with what was going on and in the carrying out of the scheme one finds that all the figure work is dictated by fiscal considerations.
40. In Mr Black's submissions the sole consideration which exercised the taxpayer and his wife was how could the income be effectively distributed so as to minimise the tax that is payable on the wealth generated by the taxpayer's exertions. He submitted that there was no rational reason and none advanced as to why the amounts of the distribution should be in the sums in which they were paid or varied in the ways in which they were other than for fiscal reasons. He next turned to para. 177D(b)(ii) which deals with the form and substance of the scheme. The submission there was that the form of the scheme involved the employment of the taxpayer as the employee of the family company. As a result he and his wife controlled a trust which involved income splitting between entities which were not at arm's length except in respect of the first contract that is the contract between the X Company and the trustee company.
41. In relation to the substance of the scheme the taxpayer got paid less than he earned or less than he generated and less than he was worth. He also contrasted this with the effect of the scheme that the family situation basically remains the same.
42. Mr Black Q.C. did not rely upon sec. 177D(b)(iii). This section is concerned with the time at which the scheme was entered into and the length of the period during which the scheme was carried out. In relation to sec. 177D(b)(iv) which is concerned with the result in relation to the operation of the Act that, but for Pt IVA, would be achieved by the scheme Mr Black submitted that splitting of the income earned by the taxpayer was the result. It was Mr Black's submission that the general concept of such income splitting is not one recognised or authorised by the Act.
43. In relation to sec. 177D(b)(v), (vi), (vii) and (viii) Mr Black made the general submission that these sections relate to changes and consequences and the connections between the persons who are essentially involved in the changes. In his submission the taxpayer's income in this case went down, the income of his wife and his children goes up to a particular fiscally determined limit and the taxpayer does all the work that generates the income. In Mr Black's submission that essentially was what was happening and those were the changes.
44. In regard to the submission of the applicant that the taxpayer entered into the scheme in order to accept employment as otherwise the X Company would not have employed him is a relevant consequence, Mr Black conceded, but it was only part of the scheme. In Mr Black Q.C.'s submission the taxpayer would have still got the job had none of the trusts existed or even if the trusts had existed but did not have the fiscally determined distributions involved in this case.
45. It was then submitted that the only conclusion which would stand up in this case upon an examination of the requirements of sec. 177D is that the taxpayer both entered into and carried out the scheme as a whole so as to split his income and obtain tax benefits accordingly or the taxpayer entered into and carried out that part of the scheme that involves the trust distributions and the fixing of his income from the company for the purpose of enabling the tax benefit to be obtained.
46. It was next submitted that if I was satisfied that part of the scheme was carried out for the purpose of enabling the taxpayer to obtain a tax benefit then as a matter of statutory construction Pt IVA applies to the scheme as a whole.
47. It was next submitted that the application of the choice principle did not apply here. I was referred to the effect of sec. 177C(2)(a)(i); that section provides as follows:
``177C(2) A reference in this Part to the obtaining by a taxpayer of a tax benefit in connection with a scheme shall be read as not including a reference to -
- (a) the assessable income of the taxpayer of a year of income not including an amount that would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer of that year of income if the scheme had not been entered into or carried out where -
- (i) the non-inclusion of the amount in the assessable income of the taxpayer is attributable to the making of a declaration, election or selection, the giving of a notice or the exercise of an option by any person, being a declaration, election, selection, notice or option expressly provided for by this Act; and...''
48. Mr Black Q.C. directed his submission to the words of sec. 177C(2)(a)(i). Reference is made ``to the making of a declaration, election or selection, the giving of a notice or the exercise of an option by any person, being a declaration, election, selection, notice or option expressly provided for by this Act; '' (my underlining). It was Mr Black's submission that these words closely followed previous learning under sec. 260 of the Act and he drew attention to the use of the words ``expressly provided for by this Act''.
49. Mr Black then submits that on the facts of this case the Tribunal should conclude that Pt IVA was enlivened and that the Commissioner correctly applied it to adjust the returns in the manner as appear in the adjustment sheets. In other words, he submits, the tax benefit sought to be obtained from the scheme is negated with compensating adjustments as appear in the sheets.
50. Part IVA represents a new chapter in the history of anti-avoidance provisions in the ITAA. Its legislative predecessor sec. 260, while in more recent times rechampioned, was seen to have numerous shortcomings. (See
John v. F.C. of T. 89 ATC 4101 at p. 4108; (1989) 83 A.L.R. 606 at p. 615;
Davis and Anor v. F.C. of T. 89 ATC 4377 at p. 4399 per Hill J.) The question here is how the Tribunal should approach the application of Pt IVA. It must be seen whether any of the views expressed by the courts as to the interpretation, construction and application of sec. 260 will assist the Tribunal in the interpretation, construction and application of Pt IVA to the circumstances of this case.
51. My basic task in approaching Pt IVA is to ascertain the meaning of the words used in the relevant sections of the Act. If the meaning is plain then I must proceed to apply those words using their plain ordinary meaning. At the hearing the applicant's counsel tendered as Exhibit 2 the Treasurer's second reading speech and the explanatory memorandum relating to the Bill which was subsequently enacted as an amendment of the ITAA which introduced Pt IVA into the legislation. Mr Brown has submitted that I should refer to the extrinsic material forming Exhibit 2 in order to interpret the words of sec. 177C(2)(a)(i), 177A(5) and the various matters to which regard must be had under sec. 177D. Mr Brown, on this question, relied upon sec. 15AB of the Acts Interpretation Act 1901 (Cth).
52. Mr Black Q.C. submitted that sec. 15AB had no operation so far as the legislation before the Tribunal was concerned. The first basis of the submission was that the material upon which Mr Brown sought to rely did not bear upon the question of whether the meaning of the provisions is the ordinary meaning conveyed by the text of the provisions. He submitted that the ordinary meaning was plain enough. The second basis for his submission was that there was nothing ambiguous or obscure about the meaning of the provisions. Further, he submitted, it cannot be said that the ordinary meaning of the words of the provisions led to a result that is manifestly absurd or unreasonable.
53. I am of the view that the primary source is the statute itself. The words of the statute are
ATC 534plain. I cannot use the Minister's words to displace the plain language of Parliament. I refer to the words of Mason C.J., Wilson and Dawson JJ. in
Re Bolton, Ex parte Beane (1987) 162 C.L.R. 514 at p. 518:
``The words of a Minister must not be substituted for the text of the law.''
Mr Black went on in his submissions to demonstrate convincingly in my view, that in any event the words used in the sections that go to make up Pt IVA are not at odds with the text of the second reading speech and the explanatory memorandum. In the result Exhibit 2 confirms that the meaning of the provisions in question is the ordinary meaning conveyed by the text of the provision taking into account its context in the Act and the purpose or object underlying the Act. Thus sec. 15AB(1)(a) is the operative provision in this case and not sec. 15AB(1)(b).
54. I consider that when I approach the construction of provisions of Pt IVA I should do so free of pre-existing conceptions as to any class or classes of scheme that may or may not be caught by the provisions of Pt IVA. My first task is to construe the provisions, if possible, according to the plain meaning of the words contained in the provisions. If it appears that the words are used which have acquired particular meanings in revenue law or if concepts developed in the revenue cases emerge then I am able to gain assistance from the cases which explain particular meanings or particular concepts.
55. For present purposes Pt IVA requires the existence of a scheme entered into (after 27 May 1981) for the purpose of enabling the taxpayer to obtain a tax benefit and which has in fact produced a tax benefit.
56. Subsection 177A(1) defines ``scheme'' very broadly. That definition is supplemented by subsec. 177A(3). Scheme is also a word that has attracted attention in other contexts of the ITAA (cf. sec. 26(a)) although such discourse is of doubtful assistance in the present context. In this case two steps were taken which ultimately had the effect of reducing what would otherwise have been the taxpayer's entitlement to income. They were the establishment and maintenance of the employer corporate entity (the TFC) with the taxpayer as its sole employee and the creation of a family trust (the TFT) with the taxpayer and the taxpayer's family as beneficiaries. Subsection 177A(1) defines the word ``scheme''. However that is extended by the effect of sec. 177A(3). I have already set out sec. 177A(1) and (3).
57. I have considered the width of the meaning of ``scheme'' in sec. 177A(1) and in my opinion the steps that I have referred to above come within its ambit. In particular I find that scheme at least involved:
- (a) the use of TFC as a vehicle for supplying the taxpayer's personal services to X Company;
- (b) the use of TFC to provide a mechanism by which surplus income can be distributed to persons other than the taxpayer; and
- (c) the payment by TFC of the taxpayer's salary which is less than the amount paid by X for the provision of those services.
Those steps amount to either an ``arrangement'', a ``scheme'', an ``action'', a ``course of action'' or a ``course of conduct'' as those words are understood according to their ordinary meaning. To the extent that only the taxpayer formed a part of the execution of the ``scheme'' then subsec. 177A(3) of the ITAA applies. That scheme was entered into after 27 May 1981 (sec. 177D), namely in 1982, and carried out in subsequent years after that. That those steps comprised a ``scheme'' does not of itself resolve the matter though. I go back to a submission made by counsel for the taxpayer:
``His decision to come to Hobart was based on personal reasons. He arranged his affairs in a manner that would enable him to reduce income tax. Most certainly that is conceded. It is a scheme or arrangement; certainly that is conceded. But it is not intended, and it was never intended to be, the kind of arrangement to which section 4(a)(sic) applied.''
58. I turn now to consider the purpose for which the scheme was entered into and carried out. I find that the purpose for which the taxpayer obtained the family company (as part of the first step in the scheme) was to enable the taxpayer to enter into a consultancy agreement with X Company. To the extent that gaining a tax benefit existed by incorporating, if it existed at all, then I find that the purpose of entering into the consultancy was the dominant purpose; see sec. 177A(5). However, that deals only
ATC 535with the purpose behind the carrying out of the first part of the scheme, namely, the creation and maintenance of the corporate entity.
59. Subsection 177A(5) is of further importance for this reason. That subsection basically provides that the necessary purpose of gaining a tax benefit will exist if it is the dominant purpose for entering into or carrying out the scheme or part of the scheme. That, of course, leads to an examination of the purpose behind the maintenance of the corporate entity and the purpose behind the creation and the maintenance of the family trust with the taxpayer and his family as beneficiaries (the second step). Section 177D is here relevant. That section sets out the matters that are to be taken into account in determining whether the taxpayer entered into and carried out the scheme for the purpose of obtaining a tax benefit.
60. Paragraph 177D(a) refers to a situation where the taxpayer obtains, or would but for section 177F, obtain a tax benefit. That is an issue I shall address below. Section 177D(b) then sets out eight matters to which regard must be had by the Tribunal in ascertaining the purpose of the taxpayer. Those matters will not always all be of the same weight in particular cases. In every case it is necessary to consider the particular facts at issue. In the present case the relevance of those matters can now be addressed when considering the maintenance of the corporate entity and the creation and maintenance of the family trust. I now turn to the matters to which regard must be had in sec. 177D(b)(i) to (viii). In doing so I accept generally the submissions made on behalf of the Commissioner.
- (i) Regard must be had to the manner in which the scheme was entered into or carried out. The evidence which related to the relationship between X Company and the taxpayer is here relevant as to the purpose behind the creation of a corporate entity and its use thereafter for the purpose of obtaining a tax benefit.
- As regards the creation of the trust, as noted above the trust was created at the suggestion of the taxpayer's accountants. On the evidence there was present no specific reason arising out of the taxpayer's or other circumstances for the creation of the trust. The accountants arranged everything through a firm of solicitors and the taxpayer had no involvement with the creation of the trust. Furthermore, the trust through the corporate trustee was controlled by the taxpayer and his wife. The distribution by the trustee of trust income was done at what was described as ``at threshold rates''. I accept that, in reality, the payment of income to the taxpayer by the TFC and the distributions to beneficiaries of the TFC were carried out according to the wishes of the taxpayer and his wife. I accept that their rationale was to minimise the tax that is payable on the income generated by the taxpayer's exertions.
- (ii) The form and substance of the scheme must be regarded. Many of the matters referred to in (i) above will here be relevant so far as ``substance'' is concerned. The form of a corporate vehicle which employed the taxpayer and controlled the trust belies the real substance of that arrangement which essentially allowed the taxpayer to act in such a way as to attract to himself a lower incidence to personal income tax. The taxpayer, and his wife, were always in control of the income ``coming in'' and merely acted in such a way as to generate as small a liability to income tax as possible. The taxpayer and his wife controlled both TFC and TFT. This control allowed them to split income generated by the taxpayer's exertions through the TFC and the trust mechanism between the taxpayer and members of the family. I accept that under the scheme the taxpayer was paid less than he was worth and far less than he generated for the TFC.
- (iii) The time at which the scheme was entered into and the length of the period during which the scheme was carried out. Counsel for the Commissioner made no submissions on this ground. Time may well be relevant here in so far as it illustrates that the taxpayer became an employee of the TFC at a time of relocation. He did however continue to generate income by reason of his own personal exertions after his employment by TFC as he had done before as an employee of other employers. The antecedent situation in the sense referred to by Lockhart J. in
F.C. of T. v. Bunting 89 ATC 4358 at p. 4363.
- (iv) The result in relation to the operation of this Act that, but for the operation of Pt IVA, would be achieved by the scheme. To an extent this begs the question relating to ``tax benefit''. However, it can be said that the result of the scheme was to enable the taxpayer to reduce his incidence to income tax compared with that to which he would have otherwise been exposed as a consequence of the services that he had rendered to the X Company. The income generated by the taxpayer was split as a result of the scheme in the way referred to above.
- (v-viii) Regard must be had to matters which relate to changes and consequences to the taxpayer and any other person as a result of the scheme. Regard must be had to the connection between the taxpayer and any other person. The relevance of these several matters can be summarised thus: as between the taxpayer and his family the result of the scheme was to reduce the overall taxation burden that would otherwise have settled upon the taxpayer. I accept that as the income of the taxpayer went down the income of his wife and children by way of distributions to them from TFT went up to particular limits set with regard to tax thresholds set under the ITAA.
61. I am satisfied, on the balance of probabilities, that having regard to the matters listed in sec. 177D para. (b) that the purpose of the taxpayer when he entered into and carried out the scheme was to obtain a tax benefit. It is not sufficient that this situation be described as a normal family arrangement. The ramifications of Pt IVA on a particular set of facts will always be judged on a case by case basis and no assistance will be gained from the establishment of broad categories such as ``normal family arrangement''. It remains to be considered whether the taxpayer obtained a tax benefit as a result of the scheme; see sec. 177A para. (b).
62. Section 177C defines tax benefit. For present purposes subsec. 177C(1)(a) and 177C(2) are relevant. Turning first to subsec. 177C(1)(a). It provides that a taxpayer will be taken to have obtained a tax benefit in connection with a scheme if an amount is not included in the assessable income of that taxpayer in a year of income and that amount would have been included, or might reasonably be expected to have been included, in the assessable income of the taxpayer for that year of income if the scheme had not been entered into or carried out. I have found that the taxpayer when incorporating for the purpose of gaining the consultancy with X Company did so without any tax effect so far as Pt IVA is concerned. To an extent that appears to pose a dilemma. After the incorporation of TFC it is impossible to say that the services rendered by the taxpayer should have been remunerated by anybody other than TFC. I am satisfied on the facts of this case that, in the absence of the trust arrangements, it could reasonably have been expected that the taxpayer would have been paid by the TFC all the income that was distributed by TFC as trust income to beneficiaries other than the taxpayer. That income represented the worth of the exertions of the taxpayer to both the TFC and to X Company. That is, in the years of income in question here, that was income which might reasonably have been expected to have been included in the assessable income of the taxpayer. I am satisfied that the contentions of the Commissioner in regard to the distribution of income which are set out in Exhibit 12 are made out on the evidence before me. While the matter did not arise on these facts the same result might follow if the taxpayer's family were included as nominal employees of a family company.
63. I now turn to subsec. 177C(2). That subsection gives rise, inter alia, to something like the ``choice principle'' under the old sec. 260. Subsection 177C(2) provides that where a tax benefit is obtained as the result of a choice (declaration, election or selection, the giving of a notice or the exercise of an option) expressly provided by the ITAA then any tax benefit obtained by the taxpayer is not a tax benefit for the purposes of Pt IVA of the ITAA. It is the escape hatch to Pt IVA. The lynch-pin of subsec. 177C(2) is undoubtedly the words ``expressly provided''. The clear intention of those words and the structure of the ITAA itself is that it is not sufficient that the ITAA merely recognise that there are certain legal relationships which might produce an effect on the income of a taxpayer but rather, the ITAA must itself expressly give a choice which has the result, when taken advantage of, of producing a tax benefit. Examples of such
ATC 537choices can be found in sections such as sec. 26B, 26BA, 36(3), 36AAA, 36AA and so on.
64. I accept the submissions on behalf of the respondent that to escape the operation of Pt IVA in this respect one would have to say not only was income splitting something that the Act contemplated but that there was an express provision in the Act that enabled a person to have a trust such as the TFT and to split the income of the trust according to the way in which that person wanted to arrange his affairs. The mere fact that the Act recognises that there are such things as trusts, partnerships and so forth and then provides how those trusts and partnerships should be taxed does not mean that the mechanism is one expressly provided for by the Act for the purposes of sec. 177C(2)(a)(i).
65. Mr Black in his submission identified a number of sections of the Act where options and elections and so on are expressly provided for. For example, he referred to the trading stock provisions of the Act namely sec. 31, 36AA, and 36AAA. He pointed to the general deduction sections, sec. 56, 56A and 57. He then pointed to sec. 80G. In relation to the substantiation provisions, he referred to the fact that there was express provision for an election under sec. 82KY. He referred to the Division relating to the income of private companies in sec. 105C which talks of an election to have taxes paid at the point of distribution. He referred to sec. 116D in relation to life assurance companies where provision is made for a particular form of election. Mr Black referred to certain mineral transporting transactions and referred to sec. 123BA and 123BB. He referred to the Mining and Prospecting Subdivision, Subdiv. 10A and referred to sec. 124ADH, 124AG, and 124AH.
66. I was referred to
Tupicoff v. F.C. of T. 84 ATC 4851. In that case, the taxpayer had worked as an agent for an insurance company. He decided to form a company which would be the agent instead of himself. He formed the company and its shareholders were the taxpayer, his wife and the insurance company. On the day of incorporation a discretionary trust was created. The company became the trustee of that trust. The taxpayer, his wife and children were the beneficiaries of the trust. The taxpayer then resigned his agency and the company became the agent instead. The company carried on business and the taxpayer was its principal employee and in the relevant tax year all the gross earnings of the company were derived from the taxpayer's personal exertions. An income splitting device then came about through the vehicle of the discretionary trust. The Commissioner relied upon sec. 260 of the Act to attack the arrangement and that attack was successful. Fisher J., with whom in this respect Beaumont and Pincus JJ. agreed, dealt with the question of choice in the context of people who split their income through the mechanism of a family trust. What his Honour said appears at p. 4853.
``The taxpayer also contended that the Act gave him a choice as to the manner in which he conducted his business operations and that his decision to work as an employee of the trustee company was an exercise of that choice. In so doing he said he was choosing between the alternative arrangements open to him under Div. 5 (Partnerships), Div. 6 (Trust Income) and Div. 7 (Private Companies) of the Act. In my opinion the principles enunciated by Mason J. in Cridland's case have no application to such choices. As Bowen C.J. said when discussing a like contention in Gulland's case, `the taxpayer did not merely `create a situation by entering into a transaction' to attract particular tax consequences'. The Chief Judge went on to make comments which can well be applied in this matter and which I adopt. He said at p. 4590:
- `The arrangement here goes beyond mere entry into a transaction such as a university student buying units in a trust. Here, for the purpose of altering the incidence of taxation in which his income from his practice was taxable in his hands, the taxpayer set about creating an entirely different situation whereby by means of a number of agreements entered into by a trust which he set up for this purpose the income could eventually end up in the hands of the family trust rather than his own.'
In my opinion the trial Judge correctly found that the choice principle did not assist the taxpayer to avoid the application of sec. 260.''
67. In this context I also refer to what Beaumont J. said in Tupicoff's case at p. 4863 and to what the Chief Justice said in F.C. of T. v. Gulland at ATC p. 4773; C.L.R. p. 70:
``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.''
68. This was what Mr Black Q.C. referred to as the ``old learning''. He submitted that Pt IVA is in any event quite specific because the reference in sec. 177C(2)(a)(i) is to declarations, elections, and so on expressly provided for by the Act. This, he says, reflects the same concept as is evidenced in the ``old learning''. I accept those submissions.
69. It follows that in the present case the taxpayer choosing to incorporate and to take advantage of trust arrangements, while recognised by the ITAA as legal relationships that affect the income of the taxpayer, are not choices ``expressly provided'' by the ITAA in the sense that I understand those words.
70. I am satisfied that on the facts of this case the provisions of Pt IVA have been enlivened and that its provisions ought to be applied in this case so as to adjust the returns in the manner set out in the adjustment sheets which form part of the evidence before the Tribunal. The tax benefits sought to be gained from the scheme ought to be negated by the amount of the adjustments as they appear in the adjustment sheets. I am satisfied on the balance of probabilities that in the light of the findings I have made the whole of the tax benefits to which I have referred in these reasons ought to be cancelled under sec. 177F(1) of the ITAA.
71. I am satisfied on the balance of probabilities that the taxpayer entered into and carried out a scheme for the purpose of obtaining a tax benefit and which did in fact produce a tax benefit as I understand those concepts in Pt IVA and the whole of that tax benefit ought to be cancelled. Accordingly the decisions under review are affirmed in respect of the income years 1984, 1985 and 1986.
72. When this matter was first called on the applications for review of decisions relating to the TFT's assessments for the income years in question were also called on. I have heard neither evidence nor submissions relating to these three applications. It appears that the parties intend that these applications shall be disposed of in the light of the decisions in the taxpayer's applications. I shall make such orders or directions as the parties may require in respect of the TFT applications.
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