F & C Donebus Pty Limited v Commissioner of Taxation
[1988] FCA 434
•10 Aug 1988
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JUDGMENT No..%.fh%.S$
IN THE FEDERAL COURT OF AUSTRALIA 1
NEW SOUTH WALES DISTRICT REGISTRY 1 N.S.W. G281 Of 1988
GENERAL DIVISION 1 BETWEEN: F. & C. DONEBUS PTY LIItITED
Appellant
AND: COMNISSIONER OF TAXATION OF THE COMMONWEALTH OF
AUSTRALIARespondent
CORAM: DAVIES, WILCOX AND PINCUS JJ.
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CORRIGENDA
Amendment to the Reasons of Pincus 3. in the Full Court judgment delivered on 10 August 1988:
i Page 4 , para.1, line 3 , replace "other" with "or her". i I
Associate to fiIr Justice Pincus
29 August 1988
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1 I - 2 SEP1988 I FEDERAL COURT OF
i AUSTRALIA I PRINCIPAL REGISTRY I i 2-
CATCHWORDS ! INCOME TAX - Appeal from the Admlnistrative Appeals Tribunal -
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company sought deduction under s.59(1) of the Income Tax Assessment Act - transaction involving purchase of a refrigerator at grossly inflated price - meaning of "for the purpose of producing assessable income" - whether 5.260 of the Income Tax Assessment Act is applicable to the transaction - whether transaction a sham
Income Tax Assessment Act 1936 (Cth) s.54, s.59, s.260
Commissioner of Taxation v. Gulland; Watson v. Commissioner of i Taxation; and Pincus v. Commissioner of Taxation (1985) 160 C.L.R. 55. Oakey Abattoir Pty Limited v. Commissioner of Taxation (1984) 55 A.L.R. 291. F. L C. DONEBUS PTY LIMITED V. COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA NO. G281 Of 1988 Davies, Wilcox and Pincus JJ.
10 August 1988
Sydney
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IN THE FEDERAL COURT OF AUSTRALIA ) . . .. NEW SOUTH WALES DISTRICT REGISTRY ) No. G281 of 1988 ) GENERAL DIVISION On appeal from the Taxation Appeals
Division of the Administrative Appeals
Tribunal _ _ BETWEEN: F. & C. DONEBUS PTY LIMITED Applicant
AND : COMMISSIONER OF TAXATION - OF THE COMMONWEALTH OF AUSTRALIA Respondent
CORAM: Davies, Wilcox and Pincus JJ.
DATE : 10 August 1988 - PLACE: Sydney
MINUTES OF ORDER
THE COURT ORDERS THAT:
The application be dismissed with costs.
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NOTE : Settlement and entry of orders 1s dealt with in
Order 36 of the Federal Court Rules.
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IN THE FEDERAL COURT OF AUSTRALIA
) )
NEW SOUTH WALES DISTRICT REGISTRY
) No. G281 of 1988 1 GENERAL DIVISION )
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On appeal from the Taxation Appeals
Division of the Admlnistrative AppealsTribunal
BETWEEN: F. & C. DONEBUS PTY
LIMITED i
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Applicant
Respondent I . t
CORAM: Davies, Wilcox and Pincus JJ. DATE : 10 August 1988 - PLACE: Sydney
REASONS FOR JUDGMENT
Davles J.: This is an appeal from a decision of the Admlnistrative Appeals Tribunal ("the Tribunal") given on 5
February 1988 which affirmed a decislon of the respondent on an j. ! objection lodged by the applicant, F. & C. Donebus Pty Limited
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("the Company"), with respect to its income for the year ended 30
June 1979.
The company had sought a deduction under s.59(1) of the
Income Tax Assessment Act 1936 (Cth)("the Act"). Relevant provisions of the Act then read:- "54(1) Depreciation durlng the year of income of any
property, being plant, or articles owned by a
taxpayer and used by hlm durlng that year for the
purpose of produding assessable income, and of
any property being plant or artlcles owned by the j taxpayer which has been installed ready for use for that purpose and is during that year held in reserve by hlm shall, sublect to this Act, be an l allowable deduction. I ; ... . . l
59(1) Where any property of a taxpayer, in respect of I which depreclation has been allowed or is
allowable under this or the previous Act, is
disposed of, lost or destroyed at any time in the
year of income, the depreciated value of the
property at that tune, less the amount of any
consideration receivable in respect of the
disposal, loss or destruction, shall be anallowable deduction.
...
61 Where the use of any property by the taxpayer has
been only partly for the purpose of producing assessable Income, only such part of the
deduction otherwlse allowable under section fifty-four or section fifty-nine of this Act in respect of that property as in the opinion of the Commissioner is proper shall be an allowable
deduction. ..
62(1) In this Divislon, 'depreciated value' of any unit
of property at any time means the cost of the
unit to the person who owns or owned the propertyat that time less the total amount of
depreciation (if any) allowed or allowable In respect of that unit in assessments of the income
of that person, for any period prior to that
tlme, under thls Act or any previous law of the Commonwealth.
...
260. Every contract, agreement, or arrangement made or
entered Into, orally or in writlng, 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, dlrectly 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; : I. . !
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(c) defeating, evading, or avoiding any duty or
llabillty imposed on any person by this
Act; or(d)
preventing the operatron of this Act in any respect,
be absolutely vold, as agalnst the Commissioner,
or in regard to any proceeding under this Act,
but without prejudlce to such valldity as it may
have in any other respect or for any other
purpose. "TWO members of the Tribunal, Deputy Presldent C.J. Bannon, Q.C. and Mr G. Taylor ("the Majority Members"),
considered that the transactions relied upon to give rise to the
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deduction sought were struck down by s.260 of the Act. The other
member, Senior Member B.J. McMahon ("the Minority Member"), took
the contrary view but consldered that the use made by the Company
of the depreciable plant was so minimal as not to qualify for use
under s.54(1) of the Act and therefore to preclude a deductlon ofthe loss on resale under s.59(1) of the Act.
It was conceded by Rr D.H. Bloom Q.C., with whom Mr J.W.
Durack of counsel appeared for the Company, that the subject transactions were initiated with a view to achieving a taxation deduction. The scheme sought to take advantage of limitations In the legislation as it stood before the amendments effected by Act
No. 149 of 1979. M r C. Donebus and his wife, Mrs F. Donebus, were the
directors and principal shareholders of the Company. They llved In a flat above a shop in which an associated company, Riverina
Paint Supplies Pty Limited, of which presumably they were also directors and shareholders, carried on the business of supplylng
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paint and wallpaper and related products. At the rear of that
shop were premises from which the Company carried on Its business
as a painting contractor.
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The intendment of the scheme was that the Company would
purchase for a grossly inflated sum an article which had not previously been depreciated under the Act, would use that article
to gain assessable income for the Company and would resell it
after a short time for a substantial loss. See ss.54(1), 59(1) and 62(1) of the Act. However, as in the case of many schemes which seek by artificial means to create deductions, there were
flaws rn the execution, as I shall later mention.On 23 April 1979, Mrs Donebus sold to the Company a
Kelvinator Fooderama refrigerator which she had had in her
kitchen and which she had purchased sometime before for $30. The
sale price to the Company was $100,000.
On 23 April 1979, Mrs Donebus drew a bill of exchange on the Company for $100,000 expressed to be payable on demand. The
bill of exchange was accepted by the Company. It was immediately endorsed by Mrs Donebus to the Company. At the same tlme, Mrs
Donebus and the Company executed a loan agreement, also dated 23 i April 1979, under which Mrs Donebus agreed to lend to the Company
$100,000. The endorsement by Mrs Donebus of the bill of exchange in favour of the Company gave effect to the loan.
It was a term
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of the loan agreement that the loan should be interest free and that the principal should be repaid at the expiration of 32 : years. No actual money passed under these transactrons but the
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Company's books recorded an obligation to pay Mrs Donebus $100,000. As all the steps in the scheme had been pre-planned,
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the inference is that the agreement for the loan specified the
effective manner in which the $100,000, the purchase price of the
refrigerator, was to be pald. That being so, the purchase price was payable without interest at the expiration of 32 years.
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The starting point of a 5.59 deduction is, of course, the cost to the taxpayer of the depreciable unit. See s.62(1). Section 62(1) refers to "the cost of the unit" and does not refer
to price, as does the term "cost price" in s.31(1) or the term
"sale price" in s . 5 9 ( 3 ) . Notwithstanding that s.62(3), inserted into the Act by Act No. 149 of 1979, now enables the Commissioner to formulate a cost of a unlt of property purchased by a taxpayer
from a person with whom the taxpayer was not dealing at arms-length, the word "cost" in s.62(1) should be given its
ordinary meaning. The cost of a unlt is the monetary value of
the consideration given for the unit. where the consideration is a monetary sum payable at the expiration of 32 years without
interest, the cost of the unit is the present monetary value of
the consideration so payable.
Section 21 of the Act provldes that where, upon any
transaction, any consideratlon is paid or given otherwise than in cash, the money value of that consideratlon shall be deemed to
have been paid or given. In the present case, $100,000 cash was not paid for the refrigerator on its acquisition. At most, the
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Company came under an obligation to pay $100,000 in 32 years tune without interest. As Taylor J. said in McGain v. Federal
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Commissioner of Taxatlon (1965) 13 A.T.D. 556 at p.561:- . 1 "TO my mind it is obvious that the value of a contractual
rlght to the payment at some remote future time of a
specific sum is not the specified sum Itself; it 1s a . , lesser sum which can be commonly ascertained by the : appliction of an appropriate discount rate."
The cost of the refrigerator would not have been
$100,000 but quite a small sum. Taking an interest rate of 10%,
for example, the present value of $100,000, payable in 32 years
without interest, is only a few thousand dollars. Moreover, as
the obligation to pay any sum for the refrigerator was put off to_. I ' so remote a tlme in the future and as the obligation was to Mrs Donebus, one of the two directors and principal shareholders of the Company, and mlght not be enforced, it would have been open to the Tribunal to hold that the acqulsltion of the refrigerator cost the company nothing.
The Tribunal did not dlscuss this aspect of the matter. It appears to have assumed that the cost of the refrigerator to
the Company was $100,000. But the nomlnal purchase price of the '., ' ', refrigerator was not its cost.
The concluding point of the scheme was the sale price of
the depreciable article. The refrigerator was sold by the Company to Mr Donebus on 25 June 1979 for $100. That was the consideration receivable and no question arlses with respect to
It. i It had been intended that, in the meantime, the refrigerator would be leased by the Company to Frawood Nominees
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Pty Ltd, a company controlled by Mr A.J. Crowl, the accountant
for Mr and Mrs Donebus and for the Company. On 2 4 April 1979, a . . lease of the refrigerator to Frawood Nominees Pty Ltd for three
years at $10 per annum was executed by the Company and by Frawood
Nominees Pty Ltd. The $10 payment for the first year was in factpaid, but after the close of the year of income. The scheme had intended this to be a use by the Company of the refrigerator for the purpose of producing assessable Income. Mr Crowl, however,
did not have space for the refrigerator. He accordingly askedthe Company to keep it and neither he nor Frawood Nominees Pty
Ltd ever took possession of it. The Majority Members held that the arrangement with respect to the lease of the refrigerator was a sham and they turned their attention to another use to whlch I ’ l.’, the refrlgerator was put. Their conclusion was undoubtedly
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correct on the evidence before the Tribunal. It follows that the scheme as such failed, for an important element of it, the lease of the refrigerator to produce
assessable income, was void and of no effect.
The refrigerator was moved in April 1979 from Mrs
Donebus‘ kitchen down to the premises in which the Company
carried on its buslness as a painting contractor. It was there connected to the electricity and was available for use until the
Company moved to other premlses In 1981. Some employees used the I. refrigerator to store their drlnks and lunches thereln. Mr
Donebus gave this evidence:- . ,
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’ I . . . And how did F. and C. Donebus Pty Limited use the fridge?---well, like I said before, was a big workshop
and normally the boys kept their - and they pick up
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their Proprietary Limited cards, they go to work but they leave - they used to leave their drinks there or their lunches and they were coming back at lunch time.
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THE D.PRESIDENT: Is it still there, Mr Donebusl---The ', , workshop 1 s . -. No, the fridge?---Well, we left that workshop in 81. We moved to a bigger premises ---
Yes?---and we left the fridge there."
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Mrs Donebus gave this evidence:- . ,.
"The refrigerator, after the so-called sale, remained on I ,- the company's premises?---Yes, it did.
And was used by employees of the company?---Correct.
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At no cost to them?---No. When you say 'no', you agree wlth me?---Correct, sorry."
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The meanlng of the term "for the purpose of produclng
assessable income" has been enunciated In cases such as Ronpibon
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Tin NL and Tongkah Compound N.L. v. Federal Commissioner of
Taxation (1949) 78 C.L.R. 47 at pp.56-58, Amalgamated Zinc (de Bavay's) Ltd v. Federal Commissioner of Taxation (1935) 54 C.L.R.
295 at pp.303-4, 309, 310 and W. Nevill & Co. Ltd v. Federal
Commissioner of Taxation (1937) 56 C.L.R. 290 at pp.300-1, 305-6, 308. As was sald In Ronpibon Tin NL and Tongkah Compound NL v. Federal Cornmissloner of Taxatlon, in the passage cited above,
expenditure or use is not for the purpose of gaining assessable income unless it is incidental and relevant to that end.
Likewise, in Robert G. Nall Ltd v. Federal Commissioner of
Taxation (1937) 57 C.L.R. 695 at pp.711-712, Dlxon J. said:- "But, in matters of income tax, purpose is an elusive and
indefinite criterlon. The purpose of a payment when a
deduction is claimed for It becomes an attribute of the
transaction rather than a state of mind in some actual
person.
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Income must be the purpose of the expenditure lf its ... when rt IS said that gainlng or producing assessable deduction is to be allowed, no more can be meant than that the circumstances of the transaction must glve lt
the complexion of money laid out in furtherance of a I ," purpose of gaining income." In the present case, there was no clear evidence that
the refrigerator was used to produce or to promote the production
of income, as would have been the case had the lease transaction
with Frawood Nominees Pty Ltd not been a sham or had the
refrigerator had been acquired and installed as a necessary or
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useful employee amenity to improve the workrng conditions of
employees and therefore, to promote output, loyalty and the like.Indeed, there was little evidence upon which the Tribunal could have concluded that the Company used the
refrigerator for the purpose of its business or trade, let alone i for the purpose of produclng assessable income. The refrigerator
was purchased as the sublect of a taxation scheme. A taxation
deduction may add to profits but its gaining is not the gaining
of assessable income. The refrigerator was resold after 2months, as the scheme intended. It remained in the Company's premises and the evidence was that it was used from time to time ; . .
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by the Company's staff. Did this evidence support a conclusion that the refrigerator was installed for use in and to promote the
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Company's business or otherwlse for the purpose of producing assessable Income?
The Minority Member pointed out that the principle of de minrmrs applies in this area of the law as in any other. He
considered that "The purpose of the applrcant in using the _ I
property was not for producing assessable Income. If any income were generated by the clrcumstances, it was quite incidental, casual or fortuitous." Such a finding, if it had been made by the Tribunal, would have precluded a conclusion that the
refrigerator was used by the company for the purpose of producing
I assessable income. The Majority Members did not examine this aspect of the matter in any depth and they did not refer to 5.61 of the Act
which provides for apportionment. The following passages appear from their reasons:-
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"The refrigerator, after the sale to the taxpayer, was
moved into its premlses, and was used by its employees to store lunches and drinks. Mr Bloom made it clear that he was relying on this as use by the taxpayer and the case was fought on that basis. The respondent dld not argue that this was outside the scope of the
particulars of objection. We accept that this was a use
by the taxpayer company durlng the relevant financial
year. Therefore the facts warrant a finding that the
taxpayer company bought the refrigerator for $100,000 in
April 1979, used it in its business, and sold it on 2 5 June 1979 for $100. ... ... We have had the advantage of reading draft reasons for decision prepared by Senior Member McMahon, and in view of our conclusion, there is no need to deal with his
view that the use made of the refrigerator by the taxpayer was so minimal as not to entitle the taxpayer
to a deduction. The use was certainly small and It was fortuitous that the employees were able to store their lunches in the refrigerator when the taxpayer needed a tax deduction."
On the whole, I think that the Malorlty, who had formed
a view adverse to the company on the application of s.260 of the Act, considered that they did not need to deal with and did not
form a concluded view on this aspect of the matter. They did not
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expressly find that the refrigerator was used by the Company for
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the purpose of producing assessable income. The Majority said
that the use of the refrigerator was small and fortuitous. I do
not read the Majority as saying that a small, fortuitous u s e is a .* --
I use for the purpose of produclng assessable income whlch ' , justifies the allowance of a total loss under 5 . 5 9 for which'
apportionment under s.61 need not be considered.
In my opinion, this aspect of the case should be considered before a view is formed as to the application of s.260. What was accepted by the Majority was that there had been a use by the Company of the refrigerator in the business of the
Company. That being so, it was proper to consider whether the refrigerator was used by the Company for the purpose of produclng assessable income, whether, if so , that was the only use to whlch the refrigerator was put, what was the cost to the Company of the refrigerator and what was the conslderation received on disposal. Attention should be given to s.61 of the Act which provides for
apportionment. The evidence before the Tribunal was not only that the refrigerator was used by employees for their lunches and
drinks but also that the refrlgerator was used by the Company as
the subject of the sham lease. Section 61 stipulates that, where the use of property is used by the taxpayer only partly for the
purpose of producing assessable income, only such part of adeduction under 5 . 5 4 or s.59 shall be allowed as is in the
oplnlon of the Commissioner proper. This sectlon gives adequate I , I l
power to determlne a proper deduction for such use, if any, as i was made by the Company of the refrigerator for the purpose of
producing its assessable income.
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I turn now to submissions that were put by Mr G.K.
Downes Q.C., with whom Mr D.B. McGovern appeared for the
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Commissioner.
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Mr Downes made a formal submission that the doctrine of L? , .
fiscal nulllty applied notwithstanding that it has been held in
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Oakey Abattoir Pty Ltd v. Commissioner of Taxation (1984) 84
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A.T.C. 4718 and Federal Commissioner of Taxation v . John (1987) 87 A.T.C. 4709 that the doctrine does not so apply. This Court
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is bound by those decisions. Even if that were not the case, I
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would not see the doctrine of fiscal nullity playlng any part in
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this matter. If by reason of the transaction the Company ended : .
up in the same financlal position as that from which It started,
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there would be no deduction under 5.59, not because of the t. . . application of the doctrine of fiscal nullity, but because there
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was no loss as between the cost and the sale price. Mr Downes also relied upon the doctrine of sham. referred to Snook v. London & West Riding Investments Ltd [l9671
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2 Q.B. 782. The doctrine has recently been discussed by
Lockhart, Beaumont and Foster JJ. In Sharrment Pty Ltd E, Ors v .
Official Trustee in Bankruptcy (NSW G348 of 1987 dellvered 3 June 1987). See also Oakey Abattoir v. Federal Commlssioner of Taxation, cited above, at pp.4724-5. The Majority Members correctly, In my opinion, applied the principle to strike down
the transaction of lease between the company and Frawood Nomlnees
Pty Ltd. In that respect, the documentation was a mere facade. Frawood Nominees never lntended to lease the refrlgerator for three years and never intended to take possession of it. This
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was clear not only from what occurred but also from the evidence
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of Mr Crowl.
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All members of the Trlbunal also correctly, in my
opinion, rejected the submission as to sham wlth respect to the
remainder of the transaction. The refrigerator was moved from
the kitchen of Mrs Donebus to the Company's premises. It was there connected and used in the Incidental manner I have already
descrlbed. There 1 s no reason to doubt that property passed from
Hrs Donebus to the Company on or about 23 April 1979 and from the! ' ).>
Company to M r Donebus on or about 2 5 June 1979. It was the intent of the scheme that that would happen and Mr and Mrs
Donebus understood and intended that it would occur. The passing
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of property in this manner was not in any way inconsistent with
the facts as they are known. There is no reason to consider the
payment of the sale price of $100 by Mr Donebus or the invoice
between Mrs Donebus and the Company of 23 Aprll 1979 and the loanagreement of the same date as being shams. Certainly, the Company did not intend to pay cash of $100,000 and Mrs Donebus
did not expect to receive $100,000 in cash. Nevertheless, the I .
I . ., Company's accounts for the year recorded the Company's
indebtedness to Mrs Donebus. The doctrine of sham strikes down that which was put up as a mere facade, not intended to have
legal consequences but to cloak the true transaction. In the _ . present case, the documents of the parties (other than the lease)
were intended to achieve their stated purpose.
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M r Downes also relled upon 5.260 of the Act and on this t
point his view was adopted by the Ma~ority Members but rejected
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by the minority Member. The majority said:-
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"However, we are unable to accept that there is no room
for the operatlon of s.260 of the Act to avold the
arrangement as against the respondent. If this review
had occurred within a reasonable tlme of the assessment
being raised, it is likely that the taxpayer's argument
would have succeeded. However, in the meantime, theHigh Court has decided Gulland v. Federal Commissioner
of Taxation 85 ATC 4765 and the Federal Court has
decided in Oakey Abattoir v Federal Commissioner of
Taxatlon 84 ATC 4718 at 4729, 4730 to strike down circuitous and artificial arrangements the sole purpose
of which is to avoid llability to tax, notwithstanding
the choice principle.We consider we should apply the view expressed in the latter case and decide that the arrangement outlined is void as against the respondent under s.260 of the Act,
I as it then stood."
The Ma~ority there laid emphasls upon the circuity and artificiality of the arrangements made and they relied
principally upon the declsion in Oakey Abattoir Pty Ltd v.Commissioner of Taxation, cited above. However, the Oakey
Abattoir case considered a scheme to avold tax on undistributed
profits. Such schemes may attract the operation of 5.260. See
- Bell v. Federal Commissioner of Taxation (1953) 87 C.L.R. 548,
Newton v. Federal Commissioner of Taxation (1958) 98 C.L.R. 1, Hancock v. Federal Commissioner of Taxation (1961) 108 C.L.R.
258, Mayfield v. Federal Commissioner of Taxation (No 1) (1961) 108 C.L.R. 303, Mayfield v. Federal Commissioner of Taxation (No
- 1 ) (1961) 108 C.L.R. 323 and Ellers Motor Sales Pty Ltd & Ors. v. Federal Commlssioner of Taxatlon (1969) 44 A.L.J.R. 1. In the Oakey Abattoir case, Fox, Fisher and Beaumont
JJ., applying well established principles, said at p.4730:-
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"Given its complexity, ~ t s artlficiallty, its circular operation and its sole purpose of avoiding liability to tax, the arrangement in this case goes well beyond mere entry into a transaction such as a university student
buying units in a trust. In our view, sec.260(l)(c) is
applicable to such an arrangement."The present scheme as originally proposed was not particularly complex or circuitous and was artificial only in the sense that
it was not at arms-length, was n o t based upon commercial reality
and had no object over the achievement of a deduction under s.59.
Those matters are not necessarily sufficient of themselves to
attract the application of s.260 to transactions designed to
achieve one of the deductions provided specifically by the Act.
As Dawson 3 . said, in Commissioner of Taxation v. Gulland; Watson
v. Commissioner of Taxation; and Pincus v. Commissioner of
Taxation (1985) 160 C.L.R. 55 at p.110:-
"Section 260 1s not explicitly directed at contrived
arrangements or arrangements which are out of the
ordinary, but the fact that an arrangement is of thatnature is a circumstance which, when the purpose or
effect of the arrangement is to do any of those things which are referred to in para.(a) to (d), may
indicate that as a matter of construction thearrangement is one for the avoidance of tax to which
S. 260 is intended to apply."
The scheme, as planned, seems no more artiflcial or complex than
Ltd and Others v. Federal Commissioner of Taxation (1976) 140 the transactions considered in cases such as Patcorp Investments C.L.R. 241, Mullens and Others v. Federal Commissioner of
Taxation (1976) 1 3 5 C.L.R. 290 and Crldland v. Federal
Commissioner of Taxatlon (1977) 140 C.L.R. 3 3 0 . But, In any
event, it is not that scheme that has to be considered, for the
scheme was not implemented, the lease being a sham. The application of s.260 has to be considered in relation to other
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events that occurred including, on the Majority's frndlng, an
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actual use of the refrlgerator In the buslness of the Company. :
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the transaction. But a motive itself, whether sole, dominant, substantial or significant, is not relevant. As Gibbs C.J. sald in the Gulland; Watson and Pincus Trilogy, cited above, at p.65:-
"The section does not refer to the motives of the taxpayer or other person who entered into the
arrangement which it is sought to impugn; the purpose or
effect of the arrangement must be ascertained from the
terms of the arrangement itself and from the overt actsby which it was carrled into effect."
See also Newton & Ors v. Federal Commissioner of Taxation (1958)
I 98 C.L.R. 1, at p.8. Moreover, ~f the obtalnlng of a tax
deduction were the sole purpose of the use of the refrlgerator,
s.260 would not need to be considered.
The Act makes provision for the assessment of income, : ..
for the allowance of deductions, for the averaging of income, for
the imposition of tax upon taxable income, for the grant of
rebate,s of tax and for like matters. For a taxpayer to take
advantage of a provision of the Act 1 s not to avoid the r
consequences that the Act intends. Necessarily, the more specific the Act has been in the expression of the Act's intent, the less room there is to import princlples of a general
character, including the provisions of 5.260. In the Gulland; Watson and Plncus Trilogy, cited above, Gibbs C.J., with whom Wilson J. agreed, said at p.66-67:-
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" ' A s stephen J. further sald In mullens v. Federal
Commissioner of Taxation (1976) 135 C.L.R., at p.319: 'Section 260 of the Act, in performing ~ t s task of
'protecting the general provisions of the Act', cannot
be allowed to negative the Act's speclflc and particular
provislons ...'These cases apply the principle of construction expressed in the maxim generalia specialibus non derogant. ' "
At p.107, Dawson J., with whom Wilson J. also agreed, said:-
"An extreme view of the princlple laid down by these
cases would, however, tend to deprive s.260 of any practical effect. On the other hand, to apply the words
I of the section literally would give it an operation
which the rest of the Act shows it was not intended to
have. It was this dilemma which led Pullagar J. to
remark in Federal Commissioner of Taxation v. Newton, at
p.646, that s.260 has been regarded as a difficult
section. But the problem IS, as I have already remarked, one of reconclling s.260 with the rest of the
Act and so is a problem of construction. It is a matter
of construing the Act as a whole to determine where the
incldence of tax was intended to fall. Only by this
means might it be discovered whether or not a particular
transaction falls withln s.260."
Moreover, if the Company used the refrigerator in its buslness for the purpose of producing assessable Income, ~ t s
use
did not alter an existing circumstance, the nature of the
structure by which the taxpayer earned its income, or give riseto any deduction from which the nature of that structure would
have precluded the taxpayer. As Dawson J. sald in the Gulland; Watson and Pincus Trilogy at p.111:- "It should also be pointed out that the authorities draw
a distinction between an arrangement which modifles an
antecedent transactlon or situation and one which merely orders a taxpayer's affalrs in relatlon to Income from a new source or In relatlon to a deductlon from whlch the
previous transactlon or srtuatlon dld not preclude hlm.
In the former case, but not the latter, s.260 may have
an application for there may be an alteration of the
incidence of income tax, etc. See Mullen's case (1976)135 C.L.R., at p.302 per Barwick C.J. and Cridland's
case (1977) 140 C.L.R., at pp.338, 339 per Mason J. But the distinction can be of no assistance in this case
where, if there was no antecedent transaction, there was ! an antecedent situation consisting of the taxpayer's practice of his profession In a particular manner. The arrangement changed that sltuation and dld so in order to alter the incidence of income tax. The change, however, gave rise to no new source of income nor did it glve rise to any deduction from which the very nature of the previous situation did not preclude the taxpayer:
i
cf. EUrOpa Oil (N.Z.) Ltd. (No. 2 ) v. Inland Revenue Commissioner [l9761 1 W.L.R. at p.475."
l
I accept that there are circumstances where s.260 will operate so as to strike down the whole or a part of events that
I .
,- otherwise give rlse to the allowance of a deduction under the Act. However, if the refrigerator was not used in the Company's business for the purpose of producing assessable income, then the Company would not be entitled to a deduction and there would be
no room for the application of s.260 to any part of the events i that occurred. And if the refrigerator was used by the Company in part at least In its business for the purpose of producing
assessable income and a determlnation was made under s.61 as to a proper deduction havlng regard to circumstances of that use, it
may be questioned whether s.260 would apply to override the
deduction for which the Act makes specific provision. If it were found that a deduction was proper having regard to the terms of
5.59 and s.61 and to the use of the refrlgerator in the Company's business for the purpose of produclng assessable income, what
contract, agreement o r arrangement should be avoided by s.260?
See, eg., Cecil Bros Pty Ltd v. Federal Commissioner of Taxatlon(1964) 111 C.L.R. 430 at pp.438, 438-439; Federal Commissioner of
Taxation v. Janmor Nominees Pty Ltd (1987) 75 A.L.R. 15 and Federal Commissioner of Taxation v. - Lau (1984) 57 A.L.R. 107. I form no final view on this aspect of the matter. The facts necessary for its consideration have not yet been found by the
i
I
19.
Tribunal.
This Court can deal only with points of law and must
arrive at its decision upon the facts as found by the Tribunal.
Waterford v. The Commonwealth of Australia (1987) 61 A.L.J.R. 350 at 359, per Brennan J.. Though the application of s.260 is a polnt
of law, nevertheless, insofar as the application of s.260 depends
I upon matters of fact, it is essential that those facts be found
by the Tribunal, which is the judge of the facts, before the
point of law be considered by this Court. Federal Commissioner
of Taxation v. Brixius (1987) 87 A.T.C. 4963.Mr Downes submitted that the matter should not be remitted for rehearing, for the applicant could not be
successful. But this approach ignores the point that there are factual issues to be determined. Did the Company install the refrigerator? If so, did it do so to promote its busrness by
providing a useful employee amenity? If so , what was the cost of
the refrigerator to the Company? Was the refrigerator used by the Company wholly or partly for the purpose of producing
assessable income? If that use was a part use only, what is the proper deduction to be allowed rn respect thereof. On matters such as these the operation of s.59 depends. Such matters are relevant also to the operation of 5.260. In the absence of findings on these factual Issues, lt is premature, in my opinion, to hold, as a matter of law, that s.260 strikes down the whole or any particular aspect of the transactions under consideration.
In my opinion, the decision under appeal should be set aside and the matter remitted to the Administrative Appeals Tribunal to be heard and decided again with or without the
hearing of further evidence. The respondent should pay the costs
of the appeal.I certify that this and the 19 preceding pages are a true copy of the Reasons for Judgment herein of the Honourable Mr Justice Davies.
Associate: + + a ~ Date:
l0 19**
Counsel for the applicant: Mr D.H. Bloom Q.C. wlth Mr J.W. Durack Solicitors f o r the applicant: J.W. Walker & D.K.L. Raphael Counsel for the respondent: Mr G.K. Downes Q.C. with Mr D.B. McGovern Solicitor for the respondent: Australian Government
SolicitorDate of hearing: 10 June 1988
i'
:
;"
. .
IN THE FEDERAL COURT OF AUSTRALIA ) 1
NEW SOUTH WALES DISTRICT REGISTRY No. NSW G.281 of 1988 1
GENERAL DIVISION )
ON APPEAL FROM THE TAXATION
APPEALS DIVISION OF THE
ADMINISTRATIVE APPEALS. . A TRIBUNAL
BETWEEN: F & C DONEBUS PTY LIMITED Applicant ,
-
AND : COMMISSIONER OF TAXATION OF
THE COMMONWEALTH OF : I AUSTRALIA Respondent I.
CORAM : DAVIES, WILCOX and PINCUS JJ PLACE: SYDNEY DATE : 10 AUGUST 1988
REASONS FOR JUDGMENT
WILCOX J: I have had the advantage of reading the reasons for judgment of Davies J. I need not repeat either the facts or the statutory provisions set out by his Honour. As it seems to me, two questlons arise for our
determination: firstly, whether s.260 of the Income Tax Assessment Act 1936 is capable of application to the subject
l
transaction; and, secondly, if so, whether the findings of fact made by the malority of the Administratlve
Appeals
I
Tribunal are sufficient to support the decision to apply the
1 -
section. .
I I
The critical features of the arrangement made between
:'
the applicant and its two directors, Mr and Mrs Donebus, was that the applicant should acquire from Mrs Donebus for $100,000 a refrigerator which she had purchased some time
i
earlier for $30, that the refrigerator should be used by the applicant in its business for a brief period and that it should be resold by the applicant to Mr Donebus for $100; thus yielding to the applicant a loss of $99,900. AS was expressly conceded, the sole motivation behind the transaction
was to secure a taxation deduction to which the applicant
would not otherwise have been entitled. More importantly,
bearing in mind that s.260 is concerned with objective purpose
and effect, the arrangement is explicable only as n exercise
in tax avoidance. The payment by a company of $100,000 for arefrigerator worth $30 makes no commercial sense. This
remains true even if, as part of the overall arrangement, it
has previously been agreed that the payment of $100,000 wlll immediately be loaned back to the company free of interest for
32 years; thus reducing the true cost of the refrigerator to the company to "only" a few thousand dollars.
t
There is no doubt that the present case falls within the literal application of s.260.
I
" , The case clearly involves
an arrangement which "has or purports to have the purpose or
l
i
3 . I I.
-. .
effect of ... defeating, evading or avoiding any ... liability
imposed on any person" by the Income Tax Assessment Act. However, equally, there is no doubt, upon the authorities, that not all transactions which fall within the literal
application of s.260 are caught by that section. As the High Court of Australia has explained upon several occasions, to apply s.260 to every case in which a taxpayer has so ordered its affairs as to create one of the situations referred to in
paras.(a) to (d) of 5.260 would be, effectively, to eliminate
from the Act numerous special provisions, the adoption of which by a taxpayer may alter the incidence of income tax or defeat or avoid a liability to tax which would otherwise
arise. The general provisions of s.260 cannot be allowed to
derogate from those special provisions. Arising from these
considerations, the High Court has recognized a principle,
often called "the choice principle", whlch states that,despite s.260 but within certain limits, a taxpayer may so
order its affairs as to take advantage of a special provision within the Act, notwithstanding that, in so doing, income will
be diverted from the taxpayer to another person or some
additional deduction will become available to the taxpayer.
The main problem about s.260 has been to define the
limits to which the choice principle is subject. Of
particular importance in the present case is the question whether the choice principle is confined to transactions which
have some basis in commercial reality or in family dealing, or
whether it extends to any transaction, however bizarre and
i
4 .
devoid of non-tax justification, which purports to come within
the literal wording of one of the special provisions in the ! Act. ; - L -
Upon this question this Court must look for guidance
in the pronouncements of the High Court. Unhappily, in
significant respects, the various decisions of the High Court
are not possible to reconcile. Each party can point toi r : ' ., statements made in the High Court at some stage which would
i
~ustify the determination in favour of that party of the question of principle which arlses in the present case. Under
i '
i I ,: \
these circumstances, it seems to me that little is to be
gained by my going through the decisions upon s.260 and
extracting passages in the reasons for judgment in particular
cases which seem to support the argument of one side or the .
other. In its most recent consideration of the section, in Commissioner of Taxation v Gulland, Watson v Commissioner of
Taxation and Pincus v Commissioner of Taxation (1985) 160 CLR
5 5 (henceforth "Gulland"), the High Court itself reviewed its
earlier decisions and set out the relevant principles. In so
2 .
! '
doing, the members of the Court expressly affirmed some . .
aspects of the earlier cases. To the extent that they did so, or that they made statements consistent with earlier decisions, those earlier decisions must be regarded as continuing to be good law. To the extent that, either expressly or impliedly, Gulland departs from the course
of
earlier decisions, those earlier decisions can no longer be ' _ regarded as correct. i . , '
..
Gulland was heard by a bench consisting of Gibbs CJ, Wilson, Brennan, Deane and Dawson JJ.
I
! '
.-,Deane J dissented.
Notwithstanding his distaste for some of the decisions made by the Court during the 1970s -- especially Commissioner of Taxation v Casuarina Pty Limited (1971) 127 CLR 62, Nullens v
Commissioner of Taxation (1976) 135 CLR 290, Slutzkin v
: I
Commissioner of Taxation (1977) 140 CLR 3 1 4 and Cridland v i : : Commissioner of Taxation (1977) 140 CLR 330 -- Deane J took i the view that they controlled the result in Gulland. The court was, as it were, hoist on its own petard of error. '
!
However, the other members of the Court did not see the matter in the same way. They thought that, in its twilight phase -- 5.260 havlng been amended in 1981 so as to apply only to transactions made on or before 27 May 1981 -- the section
still had work to do. Those Justices considered It possible,
without expressly over-ruling any of the earlier d cisions, to hold that s.260 applied so as to strike down -- for tax purposes -- the relevant transactions in each of the three cases. Separate reasons were delivered by each of Gibbs CJ,
Brennan and Dawson JJ. Wilson J agreed with both Gibbs CJ and
Dawson J. It is necessary to analyse each of the majority judgments. Gibbs CJ commenced his examination of the authorlties by referring, at p.66, to the advice
of the Judicial Committee
of the Prlvy Council in Newton v Commissioner of Taxation
I '
(1958) 98 CLR 1, in which Lord Denning, at p . 8 , suggested what :I' !
Gibbs CJ called "a practical test for deciding whether an
arrangement is one to which the section applies: I- I . . , I
"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 I .
implemented -- that it was implemented in that i particular way so as to avoid tax. If cannot so predicate, but have to acknowledge
you ' ;
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."
Gibbs CJ commented:
"The question, accordlng to this test, is whether the arrangement, on its face, must
necessarily be labelled as a means to avoid
tax. That test is a useful one, and It has often been applied, but it does not provide a
guide to the decision of every case. An arrangement which is not capable of explanation by reference to ordinary dealing ! - and which on its face is obviously deslgned to :.; bring about the result that less tax will be pald may nevertheless do no more than take advantage of an opportunity to reduce tax whlch the Act itself provides. A line of decisions illustrates that if the Act offers
to the taxpayer a choice of alternative tax consequences, either of which he is free to
choose, or offers certain tax beneflts to taxpayers who adopt a partlcular course of conduct, the choice of the advantageous
alternative or the adoption of the beneficial
course does not mean that s.260 is attracted." L i ,
The Chief Justice referred to authority and quoted the words
of Stephen J in Nullens at p.319:
"Section 260 of the Act, in performing its task of 'protecting the general provisions of the
Act', cannot be allowed to negative the Act's specific and particular provisions ... ."
Gibbs C J went on to deal with Peate v Commlssioner of Taxation (1964) 111 CLR 443; (1966) 116 CLR 38. That case
I
was there particularly relevant, because of its factual similarities to Gulland. But it is presently material to
note, firstly, that, as Gibbs CJ pointed out, - Peate applied
the test suggested in Newton: secondly, that, in applying
that test, the question was asked "whether the overt acts that were done under the plan are fairly explicable without an
Inference being drawn that tax-avoidance is a purpose of the
arrangement as a whole": and, finally, that, at p.70, Glbbs
CJ rejected the submission that Peate had been over-ruled by ...: Mullens, Slutzkin and Cridland. His Honour went further,
commenting that these cases were not inconsistent with Newton "but showed that the general rule enunciated ... in that case is displaced when the purpose of the arrangement in question
is to make use of a tax advantage for which the Act provides".
According to thls approach the relevant question is whether,
l .
assuming a purpose of avoiding tax, the method adopted is
merely to make use of a tax advantage for which the Act provides. I will return to this questlon later. However, before leaving the ~udgment of Gibbs CJ, it IS relevant to note his Honour's comment at p.73:
"there is nothing in s.260 that supports the
view that that section can apply only when
there has been an antecedent transactionbetween the parties. An arrangement will, for
example, be within the section if it alters the incidence of income tax in a case in which the only relevant antecedent circumstance is
that the taxpayer is in receipt of income".
A similar situation must apply where the relevant antecedent circumstance is that the taxpayer is not entitled to a particular deduction. i
!
L .
In his reasons for ~udgment Brennan J referred to
I .
many of the cases mentioned by Gibbs CJ. At p.70 he quoted I '
the statement of MaSOn J in Crldland:
, = .
I.'
"...[it]...proceeds on the footing that the taxpayer is entitled to create a situatlon by entry into a transaction which will attract
I tax consequences for which the Act makes
specific provlsion and that the validity of the transaction is not affected by s.260
merely because the tax consequences whlch it
attracts are advantageous to the taxpayer and
he enters into the transaction deliberatelywith a view to gaining that advantage."
Brennan J went on, at p . 7 9 : "As this enunclation of the prlnclple
recognizes, the choice principle operates only to the extent necessary to give effect to a 'specific provision' of the Act. The choice
principle gives expression to the scope of s.260 ascertained by readlng down the words of the section in order to allow other and specific provisions of the Act to have their
intended operation. The choice principle is
inapplicable when the arrangement does not , attract a tax benefit conferred by a specific
provision but is an arrangement whlch, as in ..
the present cases, seeks to divert income from one taxpayer to another."
At p.81 his Honour added that "only those arrangements or parts of arrangements which depend upon specific provisions
fall outside the scope of 5.260".
Adopting the test postulated by Brennan J, the
question in the present case is whether the subject transaction takes advantage of a tax benefit conferred, upon their proper construction, by specific provisions of the Act, such as ss .54 and 5 9 .
!
Dawson J also discussed the early cases on 5.260, and
particularly Newton and - Peate. At pp.109-110, after quoting a passage from the advice of the Judiclal Committee in Peate, - his Honour made a comment whlch gives an important clue to hls
approach to the section.
,-
"This passage emphasizes, I think, the ! artificial character of the arrangement as being the circumstance which brought it within
the ambit of 5.260. Its very complexity polnted to its contrived nature and took it
beyond the range of transactions ordlnar-llyencountered in the organization of affairs for
business or Dersonal reasons. It was, to use the phraseolbgy of Isaacs J. in Jaquesp Case
(1924) 34 C.L.R.,at pp.359-360, a situation
which was manufactures and did~not represent a true business operation or reorganization of the taxpayer's affairs for personal reasons.
With it might be contrasted the arrangement in
KeigheryIs-Case which, whilst its purpose was no less t h m Peate's Case to avoid paying more tax than was necessary, did not need to be contrived but represented the mere exercise
of a choice offered by the Act. .. It is, I think, a notion of this kind that Kitto J. had in mind in Peate's Case, when he said:
'The arrangement bears ex facie the
stamp of tax-avoidance. An understandable purpose of provlding
for the doctors' families, and doing ! so quite honestly, is perfectly ' . evident; but what is equally ! evldent is a purpose of doing so by a method which will divert income
away from the particlpatlng doctors
to or for the benefit of their
families, to the end that a
substantial part of the tax might be
avoided which would have been
incurred if the income had firstbeen derived by the doctors and then
applied by them f o r the benefit of their families.'
Section 260 is not explicitly directed at contrived arrangements or arrangements which are out of the ordinary, but the fact that an
arrangement is of that nature is a circumstance which, when the purpose or effect
of the arrangement is to do any of those t ' i ,
things which are referred to in pars.(a) to
(d), may indicate that as a matter of
construction the arrangement is one for the
avoidance of tax to whlch s.260 1s intended to apply. It may indicate that the choice or choices made by the taxpayer are not available
by reason of the presence of 5.260 in the Act, however much they may have been available in the absence of that section. It is in the end
a matter of construction whether the section
applies in a particular case. It must be conceded that to say as much is not to lay
down a test of any great precision, but the
reconciliation of s.260 with the other
provisions of the Income Tax Assessment Ac IS of Its very nature an exercise which may have to be performed whenever a contract, agreement
or arrangement is impugned by reference to it.
The result is to preclude the formation In
advance of rules with any more exact
application."
The present case features a contrlved arrangement, a transaction which is out of the ordinary; nonsensical, in a
business sense. As I read the judgment of Dawson J, these
features indicate that the transaction is one to which s.260
applles. It is true that it is possible to bring the transaction withln the literal application f specific provisions of the Act, namely 55.54 and 5 9 , but Dawson J did
not regard that matter as concluslve. He thought that the
whole of the relevant clrcumstances must be considered. It ISnoteworthy that, at p.113, before setting out hls conclusion
about Dr Gulland's case, Dawson J returned to the matters of lack of buslness purpose and artificiality before saylng:
"For these reasons, this IS a case in which s.260 was lntended
to apply . . .".
The critical significance of artificiality and lack of buslness purpose is expressed more clearly In the judgment
!
of Dawson J than it is in the judgments of Gibbs CJ and Brennan J. Nonetheless, it seems to me that each of their Honours adopted similar reasoning. I have already referred to the fact that Gibbs CJ resurrected, at least in a qualified manner, the Newton test; a test which -- as Deane J showed at pp.92-93 -- might have been thought to have been buried by
Nullens and Cridland. The resurrection seems to me to be
significant; the whole point of the Newton test was that it required the question to be asked: whether "the transactlons
I !
are capable of explanation by reference to ordinary business I or family dealing, without necessarily being labelled as a means to avoid tax". It is true, as I have said, that Gibbs
CJ added a qualification relating to cases in which the
i
taxpayer does "no more than take advantage of an opportunity , . to reduce tax which the Act itself provides". But, read in
their context, these words must be taken to refer to asituation which is fairly contemplated by the Act, a transaction which makes commercial or familial sense; even
though the form it takes may be dictated by a desire to take advantage of an option conferred upon taxpayers by the Act.
The test adopted by Brennan J leads to a similar
result. His Honour read down 5.260 only to the extent ! ,: , . I :
necessary "to allow other and specific provisions of the Act to have their intended operation". Once again one must
consider whether the relevant transaction was one fairly
contemplated by the specific provisions of the Act. For the above reasons, it seems to me that the majority in the Tribunal were correct in reading Gulland as a
decision "to strike down circumstances and artificial arrangements the sole purpose of which is to avoid liablllty
to tax, notwithstanding the choice prlnciple".
!
The majority also relled upon the decision in Oakey
Abattoir Pty Limited v Commissioner of Taxation (1984) 55 ALR
291. This case was declded by a Full Court of this Court (Fox, Fisher and Beaumont
JJ) prior to the decision of the
1;
! ' High Court In Gulland. The case is slgnlficant, for present
purposes, because it was one in whlch a taxpayer purported to take advantage of a specific option conferred by the Act: the right given by s.82R(6) to have interest payments under a
convertible note treated as a dlvidend for the purposes of calculating "the undistributed amount" under Div.7 of Part 111 of the Act. Notwithstanding this fact, the Court unanimously struck down the transaction. Referring to what had been said by Bowen CJ, in the Full Court in Gulland, and anticipatlng
i
what I think is the correct reading of the High Court's
decision In that case, the Court, In Oakey Abattoir, said at
I p.304:
"If there were no more to the case than the
payment of interest on the notes, we would be disposed to agree with the appellant that, in
accordance wlth the reasoning in Cridland, the motives of the taxpayer are not sufficient to entitle the Commissioner to invoke 5.260. But we think that the present case should be
viewed with the wider perspective that thepayment of interest was merely one step In a
circuitous series of transactions which bore 'ex facie the stamp of tax avoidance' (Gulland
v FC of T (1984) 55 ALR 6 5 ; 15 ATR 892. . To
borrow the language of Bowen CJ in Gulland, su ra this taxpayer dld not merely, as in transaction' to attract particular tax
&And , 'create a situation by entry into a consequences. Glven Its complexlty, its
artiflciality, Its circular operation and its
sole purpose of avoiding liability to tax, the I '
arrangement in this case goes well beyond mere I ; ' entry into a transactlon such as a unlversity
student buying unlts In a trust. In our view, l
s.26O(l)(c) is applicable to such an arrangement."
I .'
13.
On 16 November 1984 the High Court (Glbbs CJ, Wilson and Brennan JJ) refused speclal leave to appeal agalnst thls
decision. In announcing the Court's decision, the Chief Justice said that "the Court sees no reason to doubt the correctness of the actual concluslon reached on the facts of the case".
Mention should be made of a further case, not i
referred to by the Tribunal: HcLean v Commissioner of
Taxation (1986) 86 ATC 4288. In that case a taxpayer clalmed
I
deductions pursuant to ss.36 and 36A of the Act in connectlon
with share trading losses. Tadgell J, of the Victorlan
^.
Supreme Court, held that he relevant transaction was void
against the Commlssioner, pursuant to s.260. In so doing, his
Honour referred to Gulland and went on, at p.4309: i , . "AS wlll now be evldent, I regard the
arrangements for the acqulsition and disposal
by Tactown of the unllsted shares as having had stamped on their face an indicatlon that
their sole purpose was to avoid tax; and a purported tax avoldance was thelr undoubted effect. Conslstently with (Gulland), I
l ,
conclude that any application of ss.36A, 36, r > ' 28 and 51 of the Act to the dealings by the
partnership in the unlisted shares is
lrreconcilable with the existence and purposeof s.260. I cannot accept the submission that
any of those provislons, properly construed, allows a taxpayer the opportunity to treat
dealings dependent on these arrangements a though they give rise to deductible trading
losses ... The requisite deemlng relied on an impermissible use, amounting to an abuse, of ss.36A and 36."
It seems to me that the reference to an "abuse" of
speciflc provisions of the Act neatly summarizes the modern
I
approach to the application of the choice principle to s.260,
i
as explained in Gulland and as Illustrated by both Oakey
!
Abattoir and McLean. The word "abuse" is an apt description ' , r of the present applicant's attempt to earn a deduction under ss.54 and 59 of $99,900 in connectlon with its refrigerator.
I share the view of Davies J that there is no reason
why, as a matter of principle, s.260 may not apply to the
transactions giving rise to the present case.
In relation to the second question, whether the
Tribunal has made the flndlngs of fact necessary to support the application of s.260, I respectfully part company wlth Davies J. It seems to me that, inherent In the reasons of the majority, IS a finding that the subject transactions were
"circultous and artificial". Upon the primary facts, as found
by the majority, this conclusion is irresistable. It is true
that, by modern standards of tax avoidance ingenuity, the
scheme was a simple one. But it was circuitous, in the sense I .' : that no money actually changed hands In the purchase of the
I
refrigerator. And it was highly artificial. It is also true I- ? . I that the precise cost of the refrigerator was not calculated
by the Tribunal, but I do not see that it was necessary for the Tribunal to do thls before concluding that the purpose and effect of the transaction was to obtaln a taxation deduction
in a contrived and artiflcial manner. The determination of the cost of the transaction would not depend upon any further
evidence or any finding of fact. The cost of the refrigerator IS merely a matter of calculation, the amount being directly
,I-
dependent upon the assumed Interest rate over the period of I, ,
I
!
the loan. But any commercial interest rate would yield a cost many times the true value of the refrigerator. Similarly, as
it seems to me, there is little to be gained by attempting
further to quantlfy the extent of the actual use of the
I (
refrigerator. The relevant question is the purpose and effect ..: of the transaction. It is clear that this refrigerator was not purchased because of a perceived need to provide a
facility for the employees of the applicant. The objective I . purpose of the transaction was to obtaln a taxation advantage. ! :
And, except in the most incidental way, thls was its sole
effect. As was inevltable having regard to the uncontested i
primary facts, the majority held that the use of the
!'
refrigerator by the applicant was small and fortuitous.
I ,'
It appears to me that the Tribunal has made all of the findings of fact necessary to support its concluslon that
s.260 has application to the relevant transactions. The
Tribunal made no error in law in dismissing the appeal. The application ought to be dismissed, with costs.
I certify thls and the fourteen (14)
preceding pages to be a true copy of
the Reasons for Judgment of Associate : his Honour Justice Wilcox.
Date: 0 Aug
i - * I i
IN THE FEDERAL COURT OF AUSTRALIA ) NEW SOUTH WALES DISTRICT REGISTRY
) N.S.W. G281 of 1988
! GENERAL DIVISION ) I
ON APPEAL FROM THE
TAXATION APPEALS
DIVISION OF THE
ADMINISTRATIVE APPEALS
TRIBUNAL
BETWEEN: F. & C. DONEBUS PTY LIMITED
Appellant
AND: COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF
AUSTRALIA
Respondent
CORAM: DAVIES, WILCOX AND PINCUS JJ. DATE: 10 AUGUST 1988
REASONS FOR JUDGMENT
PINCUS J. :
The appellant taxpayer appeals from an Administrative
Appeals Tribunal declslon refusing it a deduction under the Income
Tax Assessment Act 1936; the case concerns a depreciation scheme suggested by an accountant. He sald to Mr Donebus, a director of the appellant: "The arrangement works llke this. The company buys the fridge from your wlfe for say $100,000.00, then leases it to one of my companles and then later sells the fridge, say to you, for $100.00 or so and claims a tax deduction for the loss on the sale of
the f r idge . "
All that was done. In Aprll 1979, the appellant bought
a refrigerator, worth about $30, for $100,000 and It resold the
refrigerator on 25 June 1979 for $100. The parties to these transactions were as the accountant suggested they should be,
i.e., the vendor was Mrs Donebus, one of the prlncipal
shareholders of the appellant, and the purchaser was her husband Mr Donebus, the other principal shareholder.
It is necessary to add little to this account of the facts. It should be mentioned, however,
that the refrigerator was
moved, about the time of its sale to the appellant, from lts locatlon in Mrs Donebus' kitchen downstairs to the appellant's
premises, where employees used It to store drinks and lunches.
It was that usage which was relied on by the appellant, to satisfy the depreciation provisions referred to below; there was a
purported lease, but It may be ignored. The price was paid to the vendor by the appellant's accepting a brll of exchange, which she immediately indorsed to It. Her doing so was by way of carrying out an agreement (made on the same day as that on whlch the bill was accepted and indorsed) to lend the appellant the same sum,
$100,000, on interest-free terms, the loan being repayable in the year 2012. The question 1 s whether the appellant is entltled to deduct $100,000 mlnus $100, o r some other amount, as depreclatlon.
It was held below by a ma-~orlty of the Tribunal that the
respondent Cornmissloner was entitled to rely upon the provlslons of 5.260 of the Income Tax Assessment Act to annlhllate what they descrlbed as "the arrangement". Counsel for the appellant complalned that the learned members did not identify what arrangement it was that was struck down. One would not have
thought it necessary to ponder on that problem very long; it would seem clear that If s.260 applied, it would entitle the respondent to ignore the whole sequence of deallngs. Here, the effect of annihilation, so often one whlch creates conceptual difficultles in applying s.260, presents no problem.
Subject to one Important qualification, there is no room
for doubt about the application of s.260. As senior counsel for the respondent pointed out, ~f the scheme worked, ~t would presumably have worked equally well if one added a few zeros to
the figures (other than the true value of the refrlgerator). Looking at the matter objectively, lt is inconceivable that such transactions had any commercial or other non-fiscal purpose; their purpose must have been tax avoidance. Where buslness transactions make no conceivable commercial sense and have, if not caught by s.260, a considerable tax effect, they must prima facie be within that provision's scope.
The quallfication one must make is that, as was argued
on behalf of the appellant, there 1 s room for dispute as to the
applicatlon of what has come to be known as the choice principle.
Many buslness people try to arrange thelr affairs so as
to minimize tax, if lawfully able to do so. It might even be unlawful, on the part of directors of a publlc company, not to attempt to exercise their functlons so as to achieve that result for their company and thereby enhance returns to the shareholders.
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Section 260 cannot have been intended to make a business person, at the risk of having hls other arrangements annlhllated, proceed as If it were not one of his or her maln concerns to Incur no greater liabllities (including tax liabilities) than necessary.
For example, if at a particular tune it 1s deslrable from the tax polnt of view to carry on business as one sort of company rather than another, the taxpayer company is free to choose, as - W.P. Keighery Proprietary Limited v. Federal Commissioner of Taxation
(1957) 100 C.L.R. 66 recognises.
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Experience shows, however, that uninhlblted access to tax minimization schemes leads
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to some undesirable consequences: I '. I
unfair distribution of the tax burden, the spending of an I . I excessive amount of effort and money on such schemes, and a stream of speclflc antl-avoidance measures which unduly complicate the law.
The difficulty in using the choice principle is to give
such an application to the provisions of 5.260 as reasonably to
accommodate these confllctlng considerations.
Attempts, over many years, to reduce s.260 to preclse
terms have shown that there is no magic key, but reference to the choice principle has been a recurrent theme. Its expression commonly requires one to dlstlngulsh between provlsions of the Act
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which are "specific" or "partlcular" and others which do not merit those adjectives. But in some cases, at least, In which s.260 has been applied in favour of the Commlssloner, one can ldentlfy provisions of the Act which would, were there no s.260, prescrlbe
the tax consequences of what has been done. It cannot be enough !. ! i to attract the operatlon of the choice prlnclple that, however contrlved and artificial the scheme, one can point to sections in the Act which comprehensively govern the arrangements made, if
these arrangements are not struck down.
Those consideratlons are relevant here. The Act
contains provislons which would prescribe the tax consequences of such arrangements as are in issue, if they were effected so as to fall within them: ss.54(1), 59(1) and 62(1). They are set out In the reasons of Davies J., which I have had the advantage of reading.
The effect of those provisions is that, if the
refrigerator was used from Aprll to June for the purpose of producing assessable Income, then the appellant is entitled to a deduction, being the cost of the refrigerator to it less the $100 sale price.
choice principle. They appear to be no less specific than s.51. MC Bloom Q.C. argued that the provisions fall within che It has been said that s.260 cannot operate to defeat a deductlon allowable under s.51: Federal Commissloner of Taxation v. Janmor
Nominees Pty Ltd (as trustee of J. Redman Famlly Trust) (1987) 75
A.L.R. 15, following Federal Commlssloner of Taxatzon v . - Lau (1984) 57 A.L.R. 107, which ln turn applied dlcta in Cecil Bros. Pty Ltd v. The Commlssioner of Taxation of the Commonwealth of Australia (1964) 111 C.L.R. 430.
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The remarks made in the High Court in the Cecil Bros. case do not express a prlnclple on which was based the view that s.260 could not operate to extinguish a deduction otherwise properly allowable under 5.51. It is reasonable to infer,
however, that the result mentioned was thought to follow from the choice principle; see the argument at p.437 (last sentence).
The scope of that princlple, when most recently examlned
by the High Court, was not seen necessarily to be as wide as ~t might have been thought to be at other times in the history of exposition of s.260. It was expressed by Gibbs C.J. In Federal Commissioner of Taxatron v. Gulland (1985) 160 C.L.R. 55 at p.66
as follows: " ... if the Act offers to the taxpayer a choice of alternative tax consequences, elther of which he is free to choose, or offers certaln tax benefits to taxpayers who adopt a particular course of conduct, the cholce of the advantageous alternative or the adoptlon of the beneficial course does not mean that s.260 is attracted". Brennan J. was Inclined to speak of the
principle as relating to "specific and particular" provisions of the Act (p.78) and Dawson J. introduced hls discussion of some of
the relevant cases by saying (p.105) : " . . . 5.260, on the one
hand, clearly seeks to reduce the opportunitles which a taxpayer has to avoid the payment of income tax whereas, on the other hand, those very opportunlties may be provided by other provislons of the Income Tax Assessment Act whlch contemplate means by whlch a taxpayer may organlze hls affairs so as to incur a greater or lesser tax liabllity according to the decislon which he makes". Wilson J. agreed (p.77) in substance with the reasons of Gibbs C.J. and Dawson J..
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None of these approaches would readily yield the result
that the depreciation provisions evince an intention to take
deductions claimed under them out of the reach of s.260. It is
not easy to see how one could describe them as offering "certain
tax benefits to taxpayers who adopt a particular course of
conduct" or contemplating "means by which a taxpayer may organize
his affairs so as to incur a greater or lesser tax llabillty according to the decision which he makes". I can see nothing in the depreciation provisions which suggests with sufficient strength a legislative intention that they must always prevail
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over s.260. Their intention does not seem to be of the kind ! I-
described by Gibbs C.J. or Dawson J., but rather simply to govern I. .
the mode of calculation of a particular sort of deduction allowable to those carrying on a business.
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One cannot pretend that the cases in which the choice principle was or might have been used
are easily reconcilable, but
the proper course appears to be to pay close attention to the most recent expressions of the principle in the High Court. On that
basis, the better view is that he choice principle is
inapplicable to the circumstances of the present case. The opinion of the majority of the Tribunal that s.260 operates so as
to justify the respondent's assessment must be upheld.
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It follows that it is unnecessary to deal with any of the other points in the case; I agree with Wilcox J. that the appeal must be dismissed, and with costs.
; certify that. this and the 6 Preceding pages ars a t:ua copy of the reasons for 1ud;ment hcreln of His Honour
Mr. Justice Pincus , /id. et "&-&ate
Dated 10 * g - l y f g
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