Cridland v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
Mahoney J.: In June 1969, the taxpayer was a student at the Queensland University, at a late stage in his course in the faculty of engineering. He was given a pamphlet which suggested that, if he applied for and received an income unit in a trust, as referred to in the pamphlet, he would become entitled to the benefit of the averaging provisions of the Income Tax Assessment Act 1936 (as amended). On 17th June 1969, he filled in an application form and sent it to an organisation controlled by Mr. D.P. O'Shea and his associates and was subsequently registered as one of some five thousand or more income beneficiaries under a trust deed. Thereafter, he remained so registered under that deed or under another form of deed and received in each of the income tax years 1970, 1971 and 1972, a small sum by way of income from the relevant trust.
The taxpayer claimed to be entitled to the benefit of the averaging provisions; the Commissioner of Taxation rejected his claim. The question to be determined in these proceedings is whether the taxpayer was so entitled.
The evidence before this Court consisted in the main of documentary material, comprising affidavits by a number of deponents and a substantial amount of documentary material tendered in evidence. In addition, oral evidence was given by the taxpayer, Mr. D.P. O'Shea and an accountant, Mr. Meredith. However, the parties in argument, have considerably narrowed the matters which are in issue between them and the arguments advanced by the Commissioner to sustain the assessments for each of the three years in question have been confined in the manner to which I shall subsequently refer. It is therefore not necessary to set forth all of the factual material upon which issues might have arisen and I shall refer only to such portions of the evidence as deal with the matters ultimately in issue between the parties.
Mr. D.P. O'Shea was, in 1968, a partner in the firm of A.W. Fadden and O'Shea, Chartered Accountants, practising in Brisbane. At the time, Mr. O'Shea was interested in entering, through the medium of companies controlled by him and his family, into the field of primary production. Having some active interest in matters relating to the incidence of income tax and the minimisation of it, Mr. O'Shea, with those associated with him, evolved a plan which, as he saw it, would be of advantage to him and his companies and would provide for the minimisation of the income tax payable by those whom he succeeded in interesting in his plan.
The plan, in general terms, involved the following: land would be acquired by one of the O'Shea companies. A trust, or trusts, would be created, the trustee of which would be empowered to carry on the business of primary production and the trustee of such trust or trusts would be granted the right to use the land (by way of lease or otherwise) and would acquire livestock or other assets such as would enable it to carry on the business of primary production as that term is used in the Act. The moneys necessary for this purpose would be provided by way of a loan from a company or companies controlled by Mr. O'Shea or his
ATC 4097family. The actual running of the business of primary production undertaken by the trustee would be carried on, not by the trustee company directly or by its own officers or employees, but by a person or company associated with Mr. O'Shea on behalf of the trustee, or would be carried on under contract to such a person or company.
The trusts to be set up were seen as having a duration of twenty-one years, and at their termination, all of the trust assets would pass to the O'Shea interests. For their duration, the trusts would be so structured and their business conducted that the income derived from the business of primary production conducted by the trustee in the way to which I have referred, would be available for distribution to persons who were interested in obtaining the benefit of the averaging provisions of the Act and who were likely to be prepared to pay for that benefit. This was to be achieved generally in the following way: the trust document was to be, in form, one which provided that the right to receive income from the trust should be divided into a specified number of ``units'', and that those units should be vested in the persons who would be registered in accordance with the trust document. The income would then be distributed amongst such persons as provided by the trust document. Provision was to be made for the transfer of income units and for the registration of persons to whom units were transferred.
Steps were then to be taken to procure persons to become holders of such units. This was to be done generally in the following way. A pamphlet was to be prepared, setting out inducements to persons who might be interested in becoming unit holders, and in fact, two forms of pamphlets (Exhibits B and C) were prepared. The number of pamphlets actually prepared was said ``conservatively'' to be some 10,000. These pamphlets were then to be distributed to anyone who might be interested in taking units and students in universities throughout Australia were seen as such persons. In fact, it appears, having regard to the persons who became unit holders, that the pamphlets were distributed in New South Wales, Queensland and Victoria. Persons were engaged by Mr. O'Shea and his associates to distribute these pamphlets and otherwise to publicise the plan and procure persons to become unit holders. Applications were in fact received from some thousands of students. The number of unit holders, who were students, who originally were registered under the terms of the first trust here in question, was, on Counsel's calculations, more than 5000.
In pursuance of this general plan, a number of trusts were constituted. Those with which the present proceedings are directly concerned were trusts numbered 2 and 4.
Trust No.2 was constituted by a deed dated 13th January 1969, made between Mr. J.J. O'Shea as settlor and Glenrich Ranch Pty. Limited as Trustee whereby the settlor paid to the trustee $1,000 to be held and applied by the trustee upon the trusts set forth in the document. The document provided that the trusts should continue for twenty-one years and that on their expiration the capital and any applied income in the hands of the trustee should be held on trust for Mr. D.P. O'Shea or his legal personal representatives: cl. 2(a). Clause 2(b) and (c) provided:
``2(b). To facilitate the administration of the Trust the rights of beneficiaries who may be or become entitled to distribution of income of the Trust (hereinafter referred to as `income beneficiaries') shall be divided into 5000 units and any income beneficiary may hold a beneficial interest in one or more than one unit but no person shall be entitled to a fraction of a unit. Initially the income beneficiary shall be
(i) Helen Audrey Meredith as to 4999 units;
(ii) Neville Keith Meredith as to I unit:
(c) It is contemplated that the rights of individual income beneficiaries may be assigned and transferred from time to time but as between the Trustee and an income beneficiary the Trustee shall only be required to account to an income beneficiary who is registered as such beneficiary at any particular date and the Trustee shall not be required to be concerned with equities or other interests other than those of registered income beneficiaries.''
Clause 4 provided:
``4(a). The income beneficiaries of the Trust shall be the said Helen Audrey Meredith and Neville Keith Meredith in the first instance and thereafter they shall be the parties who are for the time being registered in the books of the Trust as such beneficiaries.
(b) The Trustee shall cause proper books of account and other records to be kept of all property and transactions of the Trust.
(c) A company may be an income beneficiary under the Trust.
(d) An income beneficiary may assign and
ATC 4098transfer his rights as such beneficiary to any other party by an instrument in such form as is approved from time to time by the Trustee provided that the assignment will not be effective until the instrument has been properly stamped and registered by the Trustee in the books and records of the Trust.
(e) In the event of the death or bankruptcy of an income beneficiary...
(f) Notwithstanding anything to the contrary herein contained a person shall not be registered in the books of the Trust as an income beneficiary unless and until he shall have satisfied the Trustee that he has donated a sum of not less than One Dollar ($1) to an institution or organisation fund or body as defined by sec. 78 of the Income Tax Assessment Act or which has been approved by a Students Representative Council (by whatever name called) of any University in the Commonwealth of Australia.''
Clause 5 provided:
``5(a) Until the termination of the Trust the Trustee shall have the right to distribute to the income beneficiaries the whole or any part of the Trust from time to time or to retain and accumulate the whole or any part of the income of the Trust.
(b) If the Trustee shall decide to distribute any income pursuant to cl.5(a) hereof the Trustee shall be entitled to distribute the same to or between any one or more of the income beneficiaries and in such shares and proportions as the Trustee in its absolute and uncontrolled discretion shall think fit and no income beneficiary shall have any right or claim against the Trustee by reason of the exercise by the Trustee of its discretion pursuant to this clause. A minute entered in the books and records of the Trust and signed by or on behalf of the Trustee setting forth the names of the income beneficiaries in whose favour the Trustee has exercised its discretion pursuant to this clause and the amount of income the Trustee has distributed to such income beneficiaries shall be conclusive evidence of the matters therein stated.
(c) If the Trustee decides in any financial year to retain the whole or any part of the income of the Trust for that year the Trustee may accumulate...
(d) It is expressly stipulated that the discretion of the Trustee either to pay income to the income beneficiaries or to accumulate income shall be absolute and shall not be questioned by any such beneficiary.''
The Trust No. 4 was constituted by a deed dated 16th January 1970, made between Eileen Emily O'Shea as settlor and Glenrich Ranch Pty. Limited as Trustee, whereby the settlor paid to the trustee $100 to be held and applied by the trustee upon the trusts therein set forth.
The term of the trust was provided for in terms similar to those of Trust No. 2.
Clause 2(b) provided that ``to facilitate the administration of the trust the rights of beneficiaries who may be or become entitled to distribution of the income of the trust... shall be divided into Ten thousand units (10,000)...''; and it was provided that initially the income beneficiaries should be Mr. R. N. O'Shea as to 4972 units and as to one income unit each, a large number of individuals whose names were selected in a manner to which I shall subsequently refer.
Provision for assignment and transfer was made in a manner similar to that contained in cl. 2(c) of Trust No. 2.
By cl. 4(a) it was provided that the income beneficiaries should be those persons listed in cl. 2(b) who should be registered in the books of the trust and thereafter should be the persons for the time being registered in such books as such beneficiaries.
Clause 4(b)-(e) were generally similar to the provisions of cl. 4(b)-(e) in the Trust No. 2.
Clause 4(f) provided that a person should not be registered in the books of the trust as an income beneficiary unless and until the trustee was satisfied that a transfer of the unit in question had been made to the transferee.
Clause 5 provided:
``5(a) Each income beneficiary shall be entitled to be paid in each income year a one ten thousandth part of the net annual income of the trust in respect of that income year for each income unit of which such income beneficiary is registered in the books of the trust as a holder as at the date of the determination of the amount of such part in respect of any particular income year or as at the end of the income year whichever is the earlier Provided that no change in interests shall be registered between the date of determination as aforesaid and the end of the income year. `Income Year' in this clause means income
ATC 4099year for the purposes of the Income Tax Assessment Act.
(b) Payment of the income in accordance with cl. 5(a) hereof shall be made by the trustee to each income beneficiary notwithstanding that such income beneficiary is an infant or under any disability or that for any reason not suijuris and shall not for any such reason or because such income beneficiary could not but for this clause give a receipt therefor be retained or accumulated by the trustee and the receipt of any income beneficiary notwithstanding such income beneficiary's infancy or of the guardian or person in whose charge such income beneficiary may be shall in addition, and without prejudice to sub-cl. (c) hereof be a good and sufficient receipt and discharge therefor.
The advantages which Mr. D. P. O'Shea and his associates sought to obtain from this plan are not completely clear. It was not, apparently, thought that the sum of $1 stipulated to be paid by persons acquiring a unit under Trust No. 2 would result in any benefit to the O'Shea interests. In fact, the sum appears seldom to have been collected from persons seeking to become such unit holders and it appears that, with a view to ensuring, as they believed, that the stipulation in the Trust No. 2 would be complied with, Mr. O'Shea and his associates made a payment of $500 to a body within sec. 78 to ``cover'' the persons who would not have made such a payment.
Mr. O'Shea rejected the suggestion that any advantage might accrue to his accounting firm from any association which would be formed with students or others as a result of the plan.
The advantage put forward was that there was the possibility that if a tax saving was effected for the unit holders, they would make payments to one of Mr. O'Shea's companies. Mr. D. P. O'Shea, in his evidence, relied in this regard upon what appeared in the published pamphlet.
In each of the pamphlets (Exhibits B and C), the following note appeared:
The annual fee is $50 p. a., but is not payable unless, and until, tax savings of at least $50 are made in each year.
For the initial years, in which less than $50 is saved, an administrative charge of $5 is made, payable when the tax saved exceeds $75.
The following example illustrates this:Tax Fee Saving Payable $ $ Year One 0 0 Year Two 0 0 Year Three 40 0 First year income 200 65 Second year income 300 50 Third year income 400 50
We have no means of legally recovering the $50; we rely on the honesty of the beneficiaries. Those who do not save $50 in any one year simply sign a declaration to that effect.
Because no payment is made to us if the tax saving falls short of $50, it is impossible to lose.''
Mr. D. P. O'Shea took the view that this provision imposed no legal obligation on the unit holders and that reliance could be placed only upon the possibility that a unit holder, if a tax saving was secured, would make a payment as there contemplated. No payment has, of course, been made under the provision; no tax saving has been achieved, or at least, has to date been achieved.
I come now to consider how, in relation to the taxpayer here in question, the plan was carried into effect.
In the early part of 1969, the Glenrich company, as trustee, commenced preparing for the carrying on the business of a primary producer within the Act. It is not in question in these proceedings that at all relevant times, that company was as trustee under the relevant trusts carrying on the business of primary production.
In June 1969, the taxpayer applied for an income unit in Trust No. 2. He made this application because he had heard of the Glenrich Ranch Trust as it was described, from a fellow student, who one day approached him with a pamphlet (it is not clear which of the two pamphlets in evidence he actually saw) and explained it generally to him. He read the pamphlet through but not carefully. He conceded that his motive in ``joining the trust'' was ``to be able to average your income for tax purposes''. He agreed that he did not anticipate receiving any substantial sums by way of income from the trust and, whilst he did not know that ``those who were organising the affairs of the trust would do everything possible to ensure that primary production status was conferred upon it'' he assumed that he knew ``they were carrying on primary
ATC 4100production and the whole point of my joining the trust was for me to average my income''.
As he understood it, he was under no legal obligation to pay any fee to Mr. O'Shea or his associates, or to the trustee but he understood there was a moral obligation to pay the stipulated fee if a tax saving was made.
He did not in fact pay $1 or any sum in connection with the application.
It is not clear what was the form of the application signed by the taxpayer; the two pamphlets contained each a different form of application. No substantial point has been made concerning the form of the application: cf. Ex. D.
Consequent upon the application, a transfer was purported to be made of an income unit in Trust No. 2 by Mr. R. M. O'Shea to the taxpayer (Ex. J). It has not been in issue in the present case but that Mr. R.M. O'Shea was entitled to the relevant income unit in Trust No. 2 and that consequent upon the purported transfer, the taxpayer was entered in the books of the Trust No. 2 or otherwise in fact registered as a holder of that income unit.
Later in June 1969, the taxpayer received $1 from the trustee of Trust No. 2 and this has been accepted for the purposes of these proceedings as a distribution of income by the trustee from the business of primary production carried on by it.
In January 1970, the Trust No. 4 was constituted. At about this time, Trust No. 2 ``ceased operations''.
In June 1970, the taxpayer received from the trustee of Trust No. 4 the sum of $1 and this is accepted to be, again, a distribution by such trustee of the kind to which I have referred.
In July 1971, it appears, and has been accepted, that a further distribution of this kind to the taxpayer took place in relation to Trust No. 4.
It is not in issue but that the taxpayer was at all relevant times an income beneficiary for the purposes of Trust No. 4. Reference was made during the course of the hearing to the circumstances in which Trust No. 2 ceased operations and Trust No. 4 was brought into being. For reasons which it has not been necessary to consider in detail, Mr. O'Shea and those associated with him apparently took the view that most or all of the persons who were income beneficiaries under Trust No. 2 should become income beneficiaries under Trust No. 4. The No. 4 trust deed was so drawn that the relevant persons, including the taxpayer, were specified in cl. 2(b) of that deed as being entitled to each an income unit.
I come now to the issues for determination in these proceedings.
By Division 16 of Part III of the Act, provision is made for the averaging of the income of a taxpayer who carries on the business of primary production as therein set forth. By sec. 157(3) it is provided:
``For the purposes only of determining whether a person is carrying on a business of primary production, a beneficiary in a trust estate shall, to the extent to which he is presently entitled to the income or part of the income of that estate, be deemed to be carrying on the business carried on by the trustees of the estate which produces that income.''
The parties are agreed that no issue arises in these proceedings as to the interpretation of that subsection. The Commissioner has taken the view, perhaps in the light of sec. 101, that if (subject to the particular arguments to which I shall subsequently refer) the taxpayer was the holder of an income unit in Trust No. 2, he was carrying on the business of primary production insofar as that business was carried on by the trustee of that trust. It is agreed that, insofar as concerns Trust No. 4, he was carrying on the business of primary production at all relevant times.
The issues which have been raised for decision and which have been argued on behalf of the Commissioner, are as follows:
1. That, by virtue of sec. 260 of the Act, sec. 157(3) did not avail the taxpayer; and
2. That, by reason of the manner in which the relevant procedures were carried out, the taxpayer did not become the registered holder of an income unit under the Trust No. 2.
1. Section 260.
Mr. Cullinan, leading Counsel for the Commissioner, in his helpful argument, submitted that there existed an arrangement within the section, that arrangement being comprised of an invitation to the taxpayer that (if he became a member of the relevant trust) Mr. O'Shea and those associated with him would procure that each year the trustee would carry on the business of primary production in such a way as to attract the operation of sec. 157(3); and, he submitted, the arrangement encompassed a representation by the taxpayer that he would, without being under any legal obligation so to do, pay appropriate fees to the relevant O'Shea company if he obtained the
ATC 4101benefit of the averaging provisions consequent upon the arrangement. The submission was that that which was absolutely void as against the Commissioner as the result of the section was, as it was put, the registration of the taxpayer as an income beneficiary under the trust.
Section 260 provides:
``260. 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.''
On the face of the section, there was, as Mr. Cullinan submits, an arrangement which had both the purpose and the effect of altering the incidence of income tax, or which would have that effect if it operated according to its terms.
However, as he conceded, the interpretation of sec. 260 cannot stop there. The terms of the section are so wide that, as Windeyer J. pointed out in the Casuarina case (70 ATC 4069; 44 A.L.J.R. 299), if applied according to their ordinary meaning, they would render invalid for income tax purposes, transactions clearly not within the legislation intention. But, as Mr. Cullinan correctly pointed out, the terms of the section do not provide any principle by reference to which a ``reading down process'' can be carried out. But, he argues, the ``reading down principle'' has been authoritatively established by Newton's case (99 C.L.R. 1). This, he argues, establishes that the section is to be given an interpretation which will leave untouched transactions ``of a normal character'' but which will invalidate transactions ``designed to avoid or reduce taxation liabilities''. It is this which, as he submits, is embodied in the ``business or family dealing'' qualification referred to by Lord Denning in that case and applied by McTiernan J. in
Hooker-Rex Limited v. F. C. of T. (70 ATC 4033; 123 C.L.R.71). On this basis, he would explain the decision in
Hancock v. F. C. of T. (108 C.L.R. 258) and in the
Mayfield cases (108 C.L.R. 303, 323), as being transactions not ``of a normal character''. In
Peate v. F.C. of T. (111 C.L.R. 443; 116 C.L.R. 38); it was, he argues, made clear by Kitto and Taylor JJ. that the principles for the operation of sec. 260 formulated in the Hancock case, were not limited to cases in which the attempt was to convert income into capital but had a general application.
But the application of sec. 260 cannot be so limited. The Keighery (100 C.L.R. 66) and the
Casuarina cases (71 ATC 4068; 127 C.L.R. 62) make this clear. Mr. Cullinan sought to distinguish these cases as relating only to the problems incident to the taxation of private and public companies. But in my opinion, they are not to be so understood. The principle upon which they are based is set forth in the well-known passage in the judgment of Dixon C. J., Kitto and Taylor JJ.. (at p. 92-3):
``Whatever difficulties there may be in interpreting sec. 260, one thing at least is clear: the section intends only to protect the general provisions of the Act from frustration, and not to deny to taxpayers any right of choice between alternatives which the Act itself lays open to them. It is therefore important to consider whether the result of treating the section as applying in a case such as the present would be to render ineffectual the attempt to defeat, etc. a liability imposed by the Act or to render ineffectual an attempt to give a company an advantage which the Act intended that it might be given.''
As their Honours then pointed out, the Act made a company's liability for undistributed profits tax, ``depend upon the company possessing certain characteristics on a particular day, the characteristics being such that whether the company possess them on that day is a matter within the antecedent control of shareholders or other persons interested''. This principle was affirmed in the Casuarina case (71 ATC 4068; 127 C.L.R. 62). Walsh J., who gave the principal judgment in that case, referred (at ATC p. 4079; C.L.R. p. 100) to what was said in the
Sidney Williams case (100 C.L.R. 95 at p. 113-4) that, to apply sec. 260 in such a case would be ``to give it an operation, not to effectuate an intention appearing from the Act to impose a liability, but to defeat an intention appearing from the Act to impose alternative liabilities according as the persons interested in a
ATC 4102company elect to have or not to have a certain state of affairs existing on the last day of a year of income''. His Honour said that sec. 260 was not to apply to steps ``which have taken the company out of one category and place it in another'' merely because the steps were taken ``to produce a tax advantage''.
It was upon this principle that Mr. Handley, Q.C., for the taxpayer, relied. This was, Mr. Handley argued, a case where the taxpayer had an alternative: he had a choice whether or not to be a beneficiary in a relevant trust and, if he chose to be such a beneficiary then, as he argued, he could invoke the observations of Barwick C. J. in the Casuarina case (at ATC p. 4070; C.L.R. p. 81) that where a taxpayer has become liable for the amount of tax appropriate under the terms of the Act to the state of affairs obtaining at the relevant date, ``steps taken to bring about the state of affairs cannot... quality as action under sec. 260'' even though they be, as Mr. Handley argued, ever so artificial.
That there is what has been described as a ``choice principle'' is now clear. The matter of difficulty is to determine what is the ambit of that principle.
I do not think that sec. 157, in providing that a beneficiary in a trust estate is, to the extent there provided, to be deemed to be carrying on business carried on by the trustees of the estate is presenting to the taxpayer an alternative, in the sense in which that term was used in the Keighery case.
Some reliance appears to have been placed in the Keighery case upon the fact that the alternative presented was between the possessing or not possessing of ``certain characteristics on a particular day'' and upon the fact that the characteristics were ``such that whether the company possesses them on that day is a matter within the antecedent control of shareholders or other persons interested''.
If some assistance is to be gained from this as to the nature of the alternatives or the choice involved in this approach to sec. 260. then it is relevant to determine whether the tax liability in question depends on whether the taxpayer has some relevant characteristics and whether the acquisition of them is within the power of the taxpayer ``or other persons interested''. The concept of ``characteristics'' in this sense is not to be narrowly viewed but, as was put in argument, it might be thought that, even if a taxpayer may have the characteristic of being a beneficiary under a relevant form of trust, the acquisition of such a characteristic is hardly a matter within the control of the taxpayer or of relevant persons. It was put for the taxpayer that the interpretation of sec. 260 must permit of a taxpayer acquiring the characteristic of being such beneficiary because otherwise the section would operate to invalidate against the Commissioner a trust of, e. g., a grazing business, where it appeared that the settlor had been influenced to set up the trust by the purpose of conferring on the beneficiary the advantages of Division 16. I do not see this as a difficulty in the present case. A settlement of the kind referred to would fall outside sec. 260 not because of the Keighery principle, but because it represented a transaction as to which, on the face of it, it could be predicated that it was explicable as part of ordinary business or family dealing, in the Newton sense.
But, whether it be correct or not to spell out the boundaries of the choice principle in this way, the present case falls within sec. 260 because in my opinion, the operation of sec. 157(3) is not to present to a taxpayer an alternative or choice in the relevant sense. Section 157(3) is essentially a machinery provision. Division 16 operates to allow averaging in the case of a taxpayer carrying on the business of primary production. This has some difficulty of application to the case where the taxpayer is a trustee. A trustee is not personally liable to tax on income derived by him, except, in general, where there is no beneficiary presently entitled to the income in question: sec. 95; in such a case, the beneficiary who is presently entitled to the income bears the liability to tax: sec. 97. But the beneficiary does not himself carry on the business of primary production and therefore, Division 16 would, in substance, not apply where the business was being carried on by a trustee for such beneficiary. It is to remedy this position, arising as it does from the drafting of the section in Division 6 relating to trustees, that renders necessary sec. 157(3).
This is a position far different from that arising where the Act establishes different bases of taxation and contemplates the taxpayer choosing between them. It is not in my opinion, a case of the Act presenting alternatives or choices at all, but a case where, within a field, that of persons carrying on the business of primary production, a particular provision is necessary to reconcile fairly the operations of different parts of the legislation.
However, Mr. Handley, for the taxpayer, submitted that this was a wrong approach to
ATC 4103sec. 260. He submitted that where in the Act it can be seen that being a particular person, e.g., a beneficiary under such a trust, or doing a particular thing, has a particular income tax consequence, then however artificial be the steps taken to cause the taxpayer to be such a person or do such a thing, sec. 260 does not operate. He pointed to the extreme artificiality of the procedures adopted in the Keigher and the Casuarina cases and he sought to call in aid the observation of Barwick C.J. in the Casuarina case (71 ATC 4068 at p. 4070; 127 C.L.R. at p. 81) as supporting such an argument.
In my opinion, sec. 260 has a wider operation than this argument would allow. Such a view of the operation of the section is inconsistent with the established case law. Thus, in
Jaques v. F. C. of T. (38 C.L.R. 324) the legislation provided that a deduction might be claimed for calls paid upon shares in certain kinds of companies. By a series of artificial steps, amounts which it had been contemplated would be paid towards the capital of an enterprise were made, not upon nondeductible shares, but upon shares calls on which would be deductible. The calls, when made, were calls of the kind and to companies of the kind falling squarely within the legislation, but this was not seen as a sufficient answer to the argument that sec. 260 was not applicable. The Court had no difficulty in applying the section.
Clarke v. F.C. of T. (48 C.L.R. 56) the legislation brought to tax a premium given upon the grant of a lease but not a premium given upon the assignment of a lease. A taxpayer who owned the freehold of a hotel had agreed or arranged to grant a lease for a premium. In order to avoid tax upon the premium, he caused a company to be formed, granted a lease to the company without premium, and caused the company to assign the lease for a premium, the value of which he subsequently received on the liquidation of the company. The taxpayer was, with the application of sec. 260, held liable to tax upon the premium. In Clarke's case, it is clear that the taxpayer had, as far as the ordinary principles of law were concerned, succeeded in characterising that which he received as a premium upon the assignment of a lease but this did not prevent the application of sec. 260.
In the Newton litigation, both of these cases were treated as correct applications of sec. 260 by the Privy Council (98 C.L.R. 1); see also the reference to them by Fullagar J.
F. C. of T. v. Newton (96 C.L.R. 577).
In my opinion, the observations of Barwick C. J. referred to, do not mean that, whatever the artificiality, the section does not apply once there is achieved any of the particular sets of circumstances upon which tax consequences are imposed by the Act. This takes his Honour's observations too far. There are many sets of circumstances which are, by the Act, given particular tax consequences: see, e. g., sec. 23 and 26. It cannot be in my opinion, that if any of those sets of circumstances be achieved, by however artificial a procedure and for whatever tax avoidance purpose, sec. 260 cannot have application. As was pointed out by Walsh J. in
F. C. of T. v. Ellers Motor Sales Pty. Limited (72 ATC 4033 at p. 4043; 128 C.L.R. 602 at p. 621-2) even in the procedure adopted in the Casuarina case, it may be that, whilst the artificially achieved public company could not be treated as a private company, it may be that, whilst the artificially achieved public company could not be treated as a private company, it does not follow that the income tax liability of others involved in the procedures may not be affected by the application of sec. 260. Reference was made in passing, in the argument, to the critical analysis of sec. 260 and its New Zealand analogue in the
Mangin case 70 ATC 6001; (1971) A.C. 739 and the
Europa Oil case 70 ATC 6012; (1971) A.C.760., but to exclude it from operation in the manner suggested in argument would involve not only a departure from the words of the section, but such a qualification of it as would destroy the greater part of its operation.
In my opinion, the alternative or choice principle relied upon does not prevent the application of sec. 260.
It has not been necessary in the present case to formulate with precision the arrangement giving rise to the operation of the section and to specify the particular steps taken to carry out that arrangement. It is not in contest but that, if the section applies, the Commissioner may treat the taxpayer as not entitled to the averaging provisions of Division 16.
2. Was the taxpayer a registered holder of an income unit under Trust No. 2?
In view of the conclusions which I have formed upon the first issue, it is not necessary for me to deal in detail with this issue. However, the matter was argued at length by Mr. Bennett, Junior Counsel for the Commissioner.
Mr. Bennett submitted that Mr. Cridland had never become an income beneficiary for the purposes of the Trust No. 2 and that therefore, the $1 received by him did not bring sec. 157(3) into operation. For this argument
ATC 4104he relied upon two points: first, he submitted that the terms of the Trust No. 2 had not been complied with in respect of the vesting in the taxpayer of the relevant income unit; and, second, he submitted that, insofar as such a vesting took place consequent upon a transfer to him of that unit from Mr. R.M. O'Shea (as in Ex. J) that transfer was without consideration and therefore ineffective.
In the course of argument, several other problems arising from the form and carrying into effect of the trust document were mentioned, but the parties confined themselves, in this regard, to these two matters.
Mr. Bennett submitted that the taxpayer must show that at the relevant time, Mr. R.M. O'Shea was the owner of the income unit, that he transferred it to the taxpayer, and that that transfer did not conflict with the terms of the Trust No. 2. It is not necessary for me to detail the effect in this regard of all of the documents in evidence, but in my opinion, it is proper to infer that Mr. R. M. O'Shea, at the relevant time in 1969, was the owner of the necessary income unit; see Ex. V and the minutes of the meeting of directors of the trustee company held on 19th May 1969. The meeting of directors there minuted, whether the transactions be intended as acts of the trustee as such or of the company in some other capacity provide, in my opinion, a sufficient basis for inferring that Mr. R. M. O'Shea had income units registered appropriately in the trustee's books.
The instrument of transfer (Ex. J) evidenced a transfer ``in consideration of the sum of ten cents (10¢¢) made at my request to an institution organisation fund or bodies defined by sec. 78 of the Income Tax Assessment Act or approved by a Students Representative Council (named below) by Brian Anthony Cridland... the receipt of which is held by me...''. There was no evidence that Mr. O'Shea had such a receipt although a lump sum of $500 had been paid by Mr. D. P. O'Shea earlier in the year to a body falling within sec. 78. If it were an issue of fact to be determined, I would not be satisified that a particular sum of ten cents had been paid as stated in Ex. J.
However, it is not in question but that, following the transfer document, the taxpayer was registered in the trustee's books as the holder of the income unit purportedly transferred. Mr. Bennett submitted that this was a voluntary transfer of ``a mere expectancy'' and that as such, it was invalid to vest in the taxpayer any rights under the Trust No. 2.
I do not think that it is necessary for present purposes to consider whether
Gartside v. I.R. Commrs. (1968) A.C. 553, establishes, as Mr. Bennett contended, that the income unit was such a mere expectancy. If, in fact, the taxpayer was registered as an income beneficiary, then he was, in my opinion, a person to whom the trustee might distribute income under the trust document. It is not necessary to examine the attempt made in the minutes of 19th May 1969, to make registration as an income beneficiary conclusive in the manner there referred to. In my opinion, the provisions of cl. 2 and 4 of the trust document would entitle the trustee validly to make a distribution to a person who was so registered and to accept him as an income beneficiary. Whether that person (assuming there had been no valid transfer of any interest) would have been liable in respect of ``equities or other interests'': cf. cl. 2(c); to account to his transferor would not, in my opinion, prevent the payment being a payment to an income beneficiary falling within sec. 101 and 157(3) of the Act.
Mr. Bennett then took the point that under cl. 4(f) of Trust No. 2, a person ``shall not be registered in the books of the trust as an income beneficiary unless and until he shall have satisfied the trustee that he has donated a sum of not less than one dollar ($1) to'' an institution as therein referred to.
Notwithstanding the documentation indulged in, it may be that the complicated procedures were not in every case followed exactly: whether the form of application for an income unit (Ex. D) was the form placed before the trustee is not completely clear and whether the trustee ever considered whether he should be ``satisfied'' as provided by cl. 4(f) and of the matter there specified, is also not clear. It may be that, in respect of the registration of the taxpayer, some procedure such as was envisaged in the minutes to which I have referred (Ex. V) was followed.
It may be that, if it were necessary for determination of the present matter to decide this question, there would be sufficient in the evidence to warrant the conclusion that the taxpayer was a ``specified beneficiary'' within sec. 101 of the Act so as to cause the receipt by him of an income distribution to bring sec. 157(3) into operation. It may be that sec. 101 looks to beneficiaries who are specified, in terms, and not to the validity of their specification or whether they are subject to
ATC 4105equities or other obligations. However, on this question I do not express any concluded opinion.
For the reasons which I have set forth, I am of opinion that the taxpayer's appeals fail.
I direct Counsel for the Commissioner to bring in Short Minutes of Order to give effect to the findings which I have made.