Peate v FCT

(1964) 111 CLR 443
[1964] HCA 84
111 CLR 443
38 ALJR 164
[1965] ALR 352
13 ATD 346
9 AITR 355

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(Judgment by: Taylor J.)

Peate
v Federal Commissioner of Taxation

Court:

Judges: Menzies J.
McTiernan
Kitto

TaylorWindeyer
Owen

Subject References:
Income Tax (Cth)

Hearing date: September 4, 5, 6, 7, 10;
Judgment date: 12 December 1962

Sydney

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Judgment by:
Taylor J.

TAYLOR J. The relevant facts are fully set out in the reasons which led Menzies J. to make the orders from which these appeals are brought and I find it necessary only to refer to the principal features of the plan disclosed by the evidence. What is disclosed is that eight medical practitioners, then practising their profession in partnership, devised, with the aid of their legal advisers, a somewhat complicated plan pursuant to which they would, after its inception, cease to practise in partnership and, thereafter, each would become an employee of a family company incorporated for that express purpose (in the appellant's case W. Raleigh Pty. Limited) and bound to work as a medical practitioner either for that company or, at its direction, for any other company carrying on a business similar to that carried on by the family company. The salary payable to the appellant by Raleigh was to be 1,000 pounds per annum "or such other salary as shall be mutually agreed upon from time to time". As evidenced by the minutes of a meeting of directors of Raleigh held on 3rd September 1956 the appellant also agreed to make available to Raleigh the surgery theretofore used by him in consideration of his employment by that company. On the same day as the appellant entered into a formal agreement with Raleigh to this effect he entered into a further agreement to which that company and a recently incorporated company, known as Westbank Pty. Limited, were parties. One of the two subscribers' shares in Westbank was transferred to Raleigh on 31st August 1956 and the other was transferred to another of the family companies on the same date. The only other issue of Westbank's shares which took place occurred on 10th September 1956 when 198 shares were issued in parcels of twenty-five plus or minus a few shares in some cases to each of the eight family companies and at all material times the eight medical practitioners were its directors. By this second agreement Raleigh undertook to arrange for the appellant to serve Westbank as a medical practitioner and the appellant undertook that he would as the agent of Westbank ensure that any person to whom he should render medical or surgical treatment would contract orally or otherwise with Westbank that payment for such medical or surgical treatment should be due to Westbank directly even though the accounts for such services might be rendered by Westbank in the name of the appellant. In return Westbank undertook to pay to Raleigh a service fee of fourteen per cent of its gross income after deducting therefrom all the expenses incurred in conducting Westbank's business including any contributions to a provident fund to be established by that company. At all material times only two ordinary shares in the capital of Raleigh were issued and these were held by the appellant's legal advisers whilst 15 C class and 15 D class shares were issued on 28th February 1958 to trustees for each of the appellant's two children. This latter shareholding did not carry any right to vote at any general meeting except as the directors might determine and it conferred a right to such dividends only as the directors might think fit to determine. On 24th April 1958 the directors determined that the holders of the C and D class shares should be entitled to receive separate dividends of 385 pounds in respect of each class of shares but as to 350 pounds in each case the dividend was to be satisfied by a further issue of these special category shares. Further dividends were declared on these shares in April 1960 and further C and D class shares were issued to the trustees. Prior to 30th June 1960 850 C class shares and 850 D class shares had been issued. It remains to be said at this stage that the appellant and his wife were the directors of Raleigh and that a resolution in writing of the appellant as governing director was by the articles of association as valid and binding as a resolution passed by the board of directors. Further, article 79 provided that the remuneration of the directors should be fixed by the directors and that such remuneration should be divided among them in such proportion and manner as they might determine.

2. The initial step in the implementation of the plan was the dissolution of the pre-existing partnership and the purported sale to Raleigh by the appellant of the goodwill of his medical practice together with instruments, furniture and plant at valuation. The price payable for goodwill - 7,500 pounds - was apparently arrived at by taking the appellant's average income over the previous three years and the amount of the purchase money became a debt owing by Raleigh to the appellant. This debt, it is said, has been reduced from time to time. It is, it seems to me, doubtful whether the appellant had any goodwill to sell to Raleigh for prior to the dissolution of the partnership the practice was the property of the partnership and the capital and assets of the partnership and the profits and losses thereof were expressed to be divided into a hundred parts, the share of the appellant being fourteen of such parts.

3. Another feature of the plan was the formation by Westbank of a superannuation fund to provide benefits for the employees of that company and for employees of such of the eight family companies, including Raleigh, as became members of the fund and from time to time Raleigh made contributions on account of its employees, that is to say the appellant and his wife.

4. It is clear to the point of demonstration that the pivotal point of the whole plan was an exchange by the appellant of his income from the pre-existing partnership, that is to say, fourteen per cent of the net profits, for the right to receive a salary from Raleigh and the right of that company to receive from Westbank fourteen per cent of its net profits. However, as governing director of Raleigh, the appellant was at liberty to fix his own salary and the disposition of the profits, if any, of that company was to a very large extent in the hands of the appellant. In the first of the years under review Raleigh paid to the appellant a salary of 1,560 pounds, in the second 2,080 pounds and in the third 2,080 pounds and 200 pounds as director's fees in the same years Raleigh paid as salary to the appellant's wife 1,200 pounds, 1,300 pounds and 1,300 pounds respectively. Additionally, as already mentioned, Raleigh, pursuant to resolutions of the appellant and his wife, paid several sums to the trustees of the superannuation fund established by Westbank on their respective accounts and, as already appears, they also determined that dividends should become payable on its C and D class shares and that the bulk of the dividends so declared should be appropriated as payment for shares issued to trustees for their children. All of these disbursements and appropriations were made out of the "service fee" paid by Westbank to Raleigh, supplemented in each of the years under review by a comparatively small amount of dividends declared by the former company. The "service fees" were, during the years in question, 5,820, 5,155 and 5,271 pounds respectively and the dividends were 525 pounds, 724 pounds and 632 pounds.

5. The interrelated and concerted transactions by which these results were brought about were attacked as constituting an arrangement having the purpose or effect of defeating, evading or avoiding a duty or liability imposed on the appellant by the provisions of the Income Tax and Social Services Contribution Assessment Act. The difficulties attendant upon the application of the provisions of s. 260 of the Act to any given set of facts have been adverted to in a number of recent cases and the effect of the decision in Newton's Case [1958] AC 450 ; (1958) 98 CLR 1 has been comprehensively stated by Kitto J. in Hancock v. Federal Commissioner of Taxation (1961) 108 CLR 258 , at p 283 I do not repeat what his Honour there said but it is clear enough that here there was an arrangement constituted by a predetermined and concerted series of transactions which had the effect, and were calculated to have the effect, of avoiding the liability of the appellant to tax on a specified share of profits earned by him in co-operation with a number of other medical practitioners and yet leaving him free, to all intents and purposes, to make such dispositions of that share for his own benefit and for the benefit of his wife and children. Indeed, in its final analysis, the picture is little different from that which would have appeared if the appellant had assigned his future gross income upon condition that the assignee, after paying the appellant's share of working expenses, should then pay to the appellant such part of the net amount as he should direct and, thereafter, expend the balance in a specified manner for the benefit of the appellant's wife and children.

6. For the appellant it was contended that, although the interrelated transactions in question, prearranged and concerted as they were, may be said to constitute an arrangement, the arrangement, as such, was not of such a character as to bring it within s. 260. First of all it was somewhat boldly contended that it was "capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax" (see per Lord Denning in Newton's Case [1958] AC 450 , at p 466; (1958) 98 CLR, at p 8 ) and then it was suggested that the application of s. 260 is limited to cases where it appears that the arrangement which is attacked, is concerned with the disposal of a fund already in existence when the arrangement is made. I confess to some difficulty in appreciating the basis upon which the latter submission is made for the interrelated transactions, pursuant to the general framework of the arrangement which had been made and which envisaged those transactions, dealt with the ultimate destination of the income that had resulted from the professional activities of the eight medical practitioners. Indeed, in Newton's Case (1) the shareholders had no present rights, either by way of capital or income, to the fund in the hands of their company when they became parties to the arrangement which subsequently regulated the various dealings which took place. I see nothing in s. 260 to preclude the view that an agreement to deal in a particular manner with a fund when it comes into existence and which, when that event occurs, is carried into effect, is within the terms of the section.

7. As to the appellant's first submission it is, I think, not open to doubt that the purpose and effect of the arrangement which is now attacked was to avoid tax. It is true, no doubt, that it had other ends in view such as the making of provision for the appellant's wife and children. But avoidance of tax was the means to those ends and a diminution in the appellant's tax was not merely an incident of what might be regarded as an ordinary family settlement; as I have already indicated avoidance of tax on income produced by the professional activities of the eight medical practitioners in question was at the very heart of the arrangement which was about as far removed as possible from any concept of ordinary business or family dealing. Further, it possessed no other feature to deny its true character, that is an arrangement having the purpose or effect of defeating, evading or avoiding income tax.

8. A further point was made that even if the various dealings did constitute an arrangement of that character its avoidance did not enable it to be said that the appellant had derived the income in respect of which he has been assessed. That is to say, that no part of the profits earned by the professional activities of the appellant could be said to have found its way into his hands. It may be of some significance on this aspect of the case to advert to the manner in which fees were paid by the patients attended to by the doctors concerned for the evidence disclosed "that all governmental and institutional fees were paid by cheques payable to the doctors concerned and that most of the private fees that were paid by cheque were paid by cheques in which the doctor and not the company (Westbank) was named as the payee" and that where necessary the doctors endorsed cheques to enable them to be paid into Westbank's bank account. In these circumstances the bulk of the income earned found its way in the first instance into the hands of one or other of the doctors concerned. It may also be of some importance to observe, as I have already pointed out, that the disposition of the whole of the service fee received by Raleigh from Westbank was, for all practical purposes, in the hands of the appellant as governing director of Raleigh. But it is unnecessary to rely upon these matters in rejecting the appellant's submission on this point. I have no doubt that the avoidance of the agreements made by the appellant with Raleigh and Westbank produces a situation in which the Commissioner is entitled to say that what Westbank received it received in part on behalf of the appellant. The part which it can be said to have received on his behalf is the proportion of the total amount received ascertained by applying to that amount the percentage used in each of the income years under review for the calculation of the services fee paid to Raleigh. I have used this formula because Raleigh's "service fee" did not remain constant during the three years under review. In the year ended 30th June 1958 it was 14 per cent of Westbank's net income and in the two years following it was 14.993 per cent and 15.815 per cent respectively. These variations were said to have occurred because of the withdrawal of one medical practitioner and his family company during the second year and other changes in the composition of those practising ostensibly on Westbank's account during the third year. These departures from the express terms of Raleigh's agreement with Westbank show clearly enough that from time to time there was agreement among the medical practitioners concerned as to how the profits resulting from their professional activities should be shared among their family companies. I agree with Menzies J. that when the agreements between the appellant and Raleigh and between those parties and Westbank are treated as void as against the Commissioner what is left exposed is a receipt of moneys by Westbank on account of the medical practitioners in question and that to the extent of the percentages indicated the appellant can be said, within the meaning of s. 19 of the Act, to have derived income.

9. Other questions relating to the necessity of minor adjustments in the assessments which were debated before Menzies J. were not raised upon the appeals and I do not refer to them. In my view the appeals should be dismissed.