Commissioner of Taxation v Service

[2000] HCATrans 520

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S81 of 2000

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

JAMES GLEN SERVICE

Respondent

Application for special leave to appeal

GLEESON CJ
McHUGH J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 24 NOVEMBER 2000, AT 9.33 AM

Copyright in the High Court of Australia

MR D.H. BLOOM, QC:   May it please the Court, I appear with my learned friend, MR M. RICHMOND, for the applicant.  (instructed by Australian Government Solicitor)

MR D.F. JACKSON, QC:   If the Court pleases, I appear with my learned friend, MR S.J. McMILLAN, for the respondent.  (instructed by Speed & Stracey)

GLEESON CJ:   Yes, Mr Bloom.

MR BLOOM:   Your Honours, this case involves an arrangement which depended, for its efficacy, upon the taxpayer being entitled, under section 51(1), to a deduction for the amount equal to the total of fees earned by him from third party employers.  The arrangement was a simple one.  In consideration of the payment over by him to his family company, of 120,000 to 180,000 per year, he got $80,000 a year assessable, plus some other non-taxable benefits.

GLEESON CJ:   Does the case raise any new question of principle?

MR BLOOM:   Your Honour, only this, whether and to what extent the object of tax avoidance is relevant in characterisation under section 51(1).

GLEESON CJ:   What does tax avoidance have to do with this case?

MR BLOOM:   It is not only the inference which is open on the evidence, but there is evidence that certain other receipts from the third party companies were dealt with by the taxpayer in a way ‑ ‑ ‑

McHUGH J:   That is not a point that was ever raised in the applicant’s summary of argument.

MR BLOOM:   Yes, it was, your Honour.  The Fletcher point.  It is the Fletcher point.

GLEESON CJ:   Perhaps you could tell me, then, precisely what you mean by the expression “tax avoidance”.

MR BLOOM:   Yes.  If the object is to – if given the disproportion in this case, between what was paid over, 180,000, and what was received, 80,000, if one finds that an object of incurring the expenditure of 180,000 is to get a better tax treatment for that money than would be the case if the taxpayer returned it as his own income, effectively, in the net sense, then one can take that object into account in deciding to disallow the expenditure under section 51(1), in that process of characterisation.

GLEESON CJ:   Where does that leave Part IVA?

MR BLOOM:   Part IVA is still there, your Honour, and that is the question, because in Fletcher’s Case, the question really is, “To what extent does this tax avoidance, motivation or object, have a part to play in 51(1), considered simpliciter, without looking at Part IVA?”.

GLEESON CJ:   Is that the question that was argued in front of the Full Court of the Federal Court?

MR BLOOM:   It most certainly was raised, yes, your Honour.

GLEESON CJ:   Now, last time the Commissioner of Taxation was involved in an application for special leave to appeal in a tax matter, in this case as a respondent, counsel for the Commissioner submitted to this Court that the Federal Court ought to be regarded, ordinarily, as the final Court of Appeal in relation to tax matters.

MR BLOOM:   I have read the transcript of that, if your Honour please, and I think your Honour put – there are two sides to that equation depending upon for whom one appears, and that is the only answer I can give your Honour.

McHUGH J:   Well, it is not a one-way rule.

MR BLOOM:   No, your Honour, it is a two-way rule.

McHUGH J:   It applies to the Commissioner ‑ ‑ ‑

MR BLOOM:   Yes, your Honour, certainly, it does.

McHUGH J:   …..

MR BLOOM:   I accept that, your Honour.  In fact, I think the Westfield Case was an unsuccessful application by the Commissioner, if I remember, your Honour.  I think I appeared for the Commissioner in that case.

McHUGH J:   You did.

MR BLOOM:   But, your Honour, this is important, because the Tribunal said, “The tax avoidance motive” - it referred to it, it said “But that is not relevant to the 51(1) issue”.  Justice Sackville said it was, and the Full Court said, again, it was not.

GLEESON CJ:   By “tax avoidance”, you mean getting a better tax treatment.

MR BLOOM:   Yes, your Honour.

GLEESON CJ:   Why would not anyone want to get a better tax treatment?

MR BLOOM:   Well, your Honour, it is a question of what one can permissively do.

GLEESON CJ:   Who wants to get a worse tax treatment?

MR BLOOM:   Your Honour, the theory is that when one earns income, one should pay tax upon it, and if one enters into some sort of arrangement, familial or otherwise, that has the effect that one does not pay full tax on it, one has to examine that carefully.

GLEESON CJ:   We are back to Everett’s Case.  Is this the argument that the person who derives income, is the person whose brow perspires?

MR BLOOM:   When it is personal service income, yes, your Honour, that is an aspect of it, yes.

GLEESON CJ:   That is an old argument that the Commissioner has been running for a long time, Mr Bloom.

MR BLOOM:   But never fully resolved, your Honour, with respect.

McHUGH J:   Yes, but this is not just merely an application of settled principle that the Court set out, at great length, passages in Fletcher’s Case.

MR BLOOM:   They did, but then the Full Court said that tax avoidance - the facts, for instance, that saw this taxpayer exclude from the arrangement because, and only because - and it is the only inference that is open - because there was better tax treatment for them.  Certain options he got from the Advance Bank went to his family trust, not to the family company, an eligible termination payment, which could only be dealt with concessionally if he derived it - that came in cash and that stayed with him, that did not go across to the family company.  Both the Full Court and the Tribunal, contrary to what Justice Sackville had said, said that they were not relevant in looking at the 51(1) issue.

Now, the Full Court seems to have interpreted what this Court said in Fletcher on the basis that you first must find colourability, as opposed to genuineness, before you undertake the exercise that we think the High Court was saying you must undertake in Fletcher’s Case.

GLEESON CJ:   Where do you find what you say is the error in the reasoning of the Full Court?

MR BLOOM:   Your Honour, at page 68, paragraph 66, they refer to the fact the taxpayer’s evidence was accepted, and he denied that he had assigned his income over to the family company for any tax benefit, and seemed to accept that as, in effect, the perfect answer.  We have given your Honours a reference to Jacob’s Case in which Justice Gibbs, as he then was, quoting something that Justice Fullagar had said, in relation to a person’s purpose for object, said that “Such evidence, though it provides, in a sense, the best evidence, for obvious reasons, must be tested most closely and received with greatest caution”.  They then go on to say:

The fact that the options and the –

eligible termination payment –

were dealt with differently…..hardly seems relevant.

If one goes back to the Tribunal at page 12 of the application book, paragraphs 16 and 17, in paragraph 16 there is a reference to the decision that the options from the Advance Bank, unlike the fees, should go into the family trust.  Then in paragraph 17:

The manner in which the Advance Bank options were dealt with may have been influenced by considerations of tax but there was no evidence before me as to what was realised –

in fact, there was, there was evidence that there was a substantial profit from them –

and what the exact tax implications were.  It was suggested by Mr Gormly –

who was the tax officer who conducted the case before him –

that tax was a consideration as to the manner in which the directors’ fees were dealt with; it is possible that tax was considered; however, Part IVA of the Tax Act was not in issue –

but what we say, with respect, is it was relevant in the weighing of the factors, as the Court said in Fletcher’s Case, to characterisation of the outgoing under section 51(1) itself.

McHUGH J:   Yes, but it is a question of fact.  I know tax lawyers, tax specialists who have great difficulty in understanding that most tax questions are simply questions of fact.  They dress them up as great principles of law, but for the most part, they are simply questions of fact.

MR BLOOM:   Your Honour, accepting deficiencies in tax practitioners on that basis, all I can say to your Honour is there is a finding of fact, but he says it is not relevant.

McHUGH J:   Yes, but look at your heads of argument, they show only too plainly this case has nothing to do with great principles.

(i)  Full Court impermissibly treated as decisive the fact that the outgoing was a prerequisite to the earning of the directors’ fees.

MR BLOOM:   Yes, that is the Lunney point.

McHUGH J:  

(ii)  Failure to apply the essential character test.…

(iii)  Full Court failed to apply the principle stated in Fletcher.

MR BLOOM:   That is where we are debating at the moment, your Honour.

McHUGH J:   Well, I know, but it is an application of principle.  If we granted special leave every time some tribunal or court failed to apply some relevant principle, we would have thousands of cases a year.

MR BLOOM:   But, your Honour, the difficulty is that in the application of the same passage from Fletcher, the trial judge says that, “This evidence of tax avoidance is relevant”.  The Full Court says, “This evidence of tax avoidance” - the facts are not in dispute – “This evidence of tax avoidance is not relevant”, and the question is, to what extent is evidence of tax avoidance relevant?

McHUGH J:   You keep using the pejorative expression “tax avoidance”.  It never appeared in the judgment, did it, of the Full Court, nor in your written submissions.

MR BLOOM:   Your Honour, we talked about income splitting and we talked about ‑ ‑ ‑

McHUGH J:   You talked about motive and purpose, taxpayer’s motive and purpose.

MR BLOOM:   Yes, and at page 81 we refer to tax advantages obtained.  I do not know that tax avoidance is a pejorative term ‑ ‑ ‑

GLEESON CJ:   But is there something wrong with obtaining tax advantages?

MR BLOOM:   There is something wrong, with respect, your Honour, in not taking those into account in determining where there is clear disproportion what the object of the expenditure is.  That is the point of it.

McHUGH J:   That means the Full Court and the Tribunal got it wrong.

MR BLOOM:   Yes, your Honour.

McHUGH J:   So what is special about that?

MR BLOOM:   Well, it means that, now, the law is that one does not take into account those aspects, tax minimisation, or however one wants to describe it non-pejoratively, in asking the question under 51(1).

McHUGH J:   No, it is just a question of fact.

MR BLOOM:   But, your Honour, they say it is not relevant.

McHUGH J:   That decides nothing.

MR BLOOM:   But the facts are found, and they say it is not relevant, with respect, your Honour.

McHUGH J:   Courts and tribunals should not decide cases by comparing the facts of one case with the facts of another.  They apply principles.

MR BLOOM:   Well, your Honour, I cannot put it higher than saying, with respect, that where they say the facts, not being in dispute, that those facts are not relevant to section 51(1).

GLEESON CJ:   I am looking at paragraph 70, Mr Bloom, on page 69.

MR BLOOM:   Yes, well, that is just not right.

GLEESON CJ:   Not right, as a matter of fact, you say.

MR BLOOM:   Yes, your Honour.

GLEESON CJ:   But they applied the right principle, did they not?  You say the applied the right principle and they got it wrong as a matter of fact.

MR BLOOM:   It is a cart before the horse argument there, your Honour.  They seem to find a necessity to find colourability first, before one goes to the weighing, before one goes to determine all of the matters that the court referred to in Fletcher.  We say you do the weighing and at the end result of that process you have a determination of whether or not it is colourable or genuine.  They seem to say, “No, you go to colourable or genuine first”.  They seem to require that you find that before you go to the weighing, which Fletcher said one should carry out.

GLEESON CJ:   The principle discussed in Fletcher to which they referred, is that in the passages they quote on page 65?

MR BLOOM:   Yes, it is, your Honour, particularly in paragraph 60, your Honour.

GLEESON CJ:   Well, between lines 15 and 20, on page 65, they cite a passage that says:

If, for example, a particular item of assessable income can be earned by making a lesser outgoing in one of two possible ways, one of which is a loss or outgoing of the kind described in s 51(1) and the other of which is not, it will ordinarily be irrelevant that the taxpayer’s choice of the method which was tax deductible was motivated by taxation considerations ‑ ‑ ‑

MR BLOOM:   We accept that, your Honour.  It is the next passage at paragraph 60, however, that raises a different test where there is disproportion.

GLEESON CJ:   Well, they say:

the disproportion…..may give rise to a need to resolve the problem of characterization ‑ ‑ ‑

MR BLOOM:   By a way of, inter alia, “direct and indirect objects and advantages which the taxpayer sought”.

McHUGH J:   Yes, I know, but Fletcher states a principle.  The words are not to be construed as if they were provisions in Acts of Parliament.  Statements by judges are not intended, for the most part, to be definitive.  They state general principles.

MR BLOOM:   But, your Honour, statements by judges of the High Court are generally given the respect they ought to be given and in the application of them ‑ ‑ ‑

McHUGH J:   That is comforting, but ‑ ‑ ‑

MR BLOOM:   I was not saying it for that reason, your Honour.  But in the application of them, as one sees, statements of that kind are very important.  Now, the question here is a simple one.  Where one finds as a fact that there are tax minimisation objects, are they to be weighed in this process, because the Full Court and the Tribunal say, “No”, but the trial judge says, “Yes”.

McHUGH J:   Well, paragraph 70, they say:

We should add that, to the extent that there was a disproportion between the fees and assessable income, there was nothing in the evidence to suggest that the case was one where the incurring of the outgoing could be characterised as not genuinely but rather colourably incurred in gaining or producing assessable income so as to fall within the principle –

expounded in Fletcher.

MR BLOOM:   But, your Honour, paragraph 67, the refer to the evidence that they say does not exist and say it is not relevant.  Now, when they are talking, in paragraph 70, they must be saying there is no other relevant evidence because they have already excluded, in 67, the very evidence of the tax minimisation aspects upon which we would rely.  That, coupled with the ‑ ‑ ‑

McHUGH J:   But they say…..seems to be relevant.  Well, what is relevance?  It is a question of fact.  They got it wrong, on your argument.

MR BLOOM:   Well, your Honour, the narrow point is, and I cannot put it better than this, to what extent is an object of tax minimisation relevant in this weighing process?

McHUGH J:   The answer is, it depends on the circumstances.

MR BLOOM:   Well, your Honour, then I know what your Honour will say, if your Honour pleases.

GLEESON CJ:   We do not need to hear you, Mr Jackson.

This case turned on the application of well established principles to the facts and circumstances of the particular case and does not warrant a grant of special leave.  The application is refused with costs.

AT 9.47 AM THE MATTER WAS CONCLUDED