Federal Commissioner of Taxation v. Phillips.

Judges:
Bowen CJ
Deane J
Fisher J

Court:
Federal Court

Judgment date: Judgment handed down 8 August 1978.

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Bowen C.J. and Deane J.: The relevant facts are set out in the judgment of Fisher J., which we have had the benefit of reading. We agree with Fisher J.'s statement of those facts and with his conclusion that the taxpayer was, in each of the relevant years of income, entitled to the benefit of a deduction pursuant to the provisions of sec. 51 of the Income Tax Assessment Act 1936 (``the Act'') in respect of his share of the relevant payments made and liabilities incurred by the firm of Fell & Starkey, of which he was a member, to the First Meritable Trust (``the Trust'').

It is important to distinguish between the purposes underlying the overall rearrangement of the manner in which the partnership of Fell & Starkey carried on its business, including the establishment and equipping of the Trust, and the purpose of the subsequent incurring of liabilities and making of payments to the Trust. The purposes underlying the overall rearrangement were, to no small extent, of a domestic or private nature. No attack is, however, made by the Commissioner on the effectiveness of that re-arrangement. It is not suggested that the relevant assets were not in fact effectively transferred. It is not suggested that the relevant staff did not, in truth, cease to be employees of the partnership and become employees of the Trust. The Commissioner abandoned any suggestion that the provisions of sec. 260 of the Act were applicable to avoid, as against him, all or any of the transactions or steps which the re-arrangement involved.

After the re-arrangement had been completed, the partnership itself possessed neither the staff nor the furniture or other plant necessary to enable it to carry on its accountancy business. The moneys paid or accrued due to the Trust were in respect of services, furniture and other plant which the partnership clearly needed to enable it to carry on that business for the purpose of gaining or producing assessable income. The Commissioner has not suggested that any agreement or arrangement relating to the provision by the Trust of the relevant services and the rental of the relevant equipment was a sham. The findings of the learned judge at first instance that the agreed rates for the relevant services were realistic and not excessive and that the rate fixed for hire of plant and furniture likewise could not be said to be excessive have not been challenged before us. The rates of interest charged on

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ATC 4363

moneys accrued due were plainly reasonable. In these circumstances, the payments and liabilities were, in the relevant sense, necessarily incurred in carrying on the accountancy business for the purpose of gaining or producing assessable income (see
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47 at p. 56 and
F.C. of T. v. Snowden & Willson Pty. Limited (1958) 99 C.L.R. 431 at pp. 436-7 ). It is not to the point that the reasonable commercial profits which the Trust derived as a result of its contractual arrangements with the partnership could reasonably have been expected to have accrued to the partnership if the re-arrangement had not been effected or that those profits would, in due course, be credited or distributed either to a partner or to individuals, trusts or companies with which one or more of the partners were associated. Nor, in the absence of any questions involving the effect of sec. 260 of the Act, is it to the point that the overall re-arrangement had, with taxation and estate planning considerations in view, been effected to achieve, inter alia, those very results.

There was not, in the present matter, any associated collateral advantage (in terms of either legal entitlement or commercial anticipation) outside the ordinary internal administration of the Trust which could properly be seen as a purpose for the making of the payments or the incurring of the liabilities. It is therefore, in the view we take, unnecessary for the taxpayer to rely on the approach which found favour with the majority of their Lordships in
Europa Oil (N.Z.) Limited (No. 2) v. Commr. of I.R. (N.Z.) 76 ATC 6001 , but which was rejected by Lord Wilberforce in his dissenting opinion. The decision in the present case is governed by the decision of the High Court of Australia in
Cecil Bros. Pty. Limited v. F.C. of T. ((1964) 111 C.L.R. 430 ).

The appeal should be dismissed with costs.