Federal Commissioner of Taxation v Gulland

[1985] HCA 83

HIGH COURT OF AUSTRALIA

Gibbs C.J., Wilson, Brennan, Deane and Dawson JJ.

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v. GULLAND

(1985) 160 CLR 55

18 December 1985

Income Tax (Cth)

Income Tax (Cth)—Arrangement to avoid liability for tax—Medical practioner practising on own account—Change to practise as employee of unit trust—Payment of income to beneficiaries of trust—Whether arrangement void as against Commissioner—If so whether diverted income part of practitioner's assessable income—Medical practitioners practising in partnership—Change to practise as employees of unit trusts—Some former partners not connected with particular trust—Whether arrangement void against Commissioner—Whether Commissioner entitled to assess individual employee practitioner upon footing that party trust income was his—Income Tax Assessment Act 1936 (Cth), s.260.

Decisions

COMMISSIONER OF TAXATION

v.

GULLAND

WATSON

v.

COMMISSIONER OF TAXATION

GIBBS C.J.: These two appeals, which were heard together, require the Court to consider the operation of s.260 of the Income Tax Assessment Act 1936 (Cth), as amended ("the Act") in cases in which a medical practitioner, who had formerly been carrying on practice either in partnership or on his own, commenced to carry on the practice as an employee of a unit trust, with the result that some of the income which would otherwise have been his has actually or potentially been diverted into the hands of the beneficiaries of the unit trust, particularly members of his family.

2. The facts of the two cases are fully set out in the judgments of Dawson J., which I have had the advantage of reading. Their principal features were as follows.

3. In the first case, the taxpayer, Dr Gulland, was, at the commencement of the relevant year of income (that ending 30 June 1979) conducting a one-man medical practice. He had, in 1977, caused to be established a family trust, the purpose of which was to provide services (such as the employment of staff and the provision of management and office services) for the practice. The trustee of this trust had a discretion to distribute the income among, inter alios, the taxpayer, his wife and children. The taxpayer had power to remove the trustee of the family trust. During the relevant year of income he made the arrangements which it is sought to challenge under s.260. A unit trust was set up and the taxpayer and Dr Burke, who carried on another medical practice, became trustees; all the units in the trust were held by the trustee of the family trust. The taxpayer sold his practice to the unit trust and entered into a contract with that trust under which he was engaged to serve as an employee in the practice for an annual salary. A new service agreement was entered into between the trustees of the unit trust and the trustee of the family trust. The unit trust established a superannuation fund for the benefit of the taxpayer. In other respects, the practice was carried on by the taxpayer in the same way as before the arrangements were made. A curious feature of the case is that the assessment against which the taxpayer successfully appealed to the Federal Court actually reduced his taxable income - that is because the unit trust made a loss which the Commissioner treated as the loss of the taxpayer. The unit trust made further losses in the two subsequent years, so that in those years also there was no distribution of income to the family trust. These circumstances make it rather unfortunate that the present case was chosen as a test case.

4. In the second case the taxpayer, Dr Watson, carried on practice as a medical specialist in partnership with four other doctors. During the relevant income year (which was also the year ending 30 June 1979) there were established (1) a family trust under which the trustees (who were the taxpayer and his wife) had a discretion to distribute the income for the benefit of the taxpayer, his wife, children, remoter issue and charities; (2) similar family trusts for the other doctors; (3) a service trust controlled by the five doctors who had formerly been partners; and (4) a unit trust in which the units were held by the trustees of the family trusts respectively set up for the five doctors. The partners sold the practice to the unit trust, employment agreements were made between the unit trust and the five doctors, a superannuation fund was created for the five doctors as employees of the unit trust, and a service agreement was made between the service trust and the unit trust. In this case, unlike that of Dr Gulland, no relevant family trust or service trust had been in existence before the arrangements were made. The unit trust made a substantial profit in the relevant year of income.

5. In each case, after the arrangements were made, the taxpayer carried on a medical practice in much the same way as before. However, the income which Dr Gulland had previously derived from the practice now became the income of the unit trust and Dr Gulland instead received a salary from the trust which, as it happened, was larger than the net income which he would have derived from his practice. After the arrangements Dr Watson received a salary, smaller in amount than the interest in the net income in the partnership to which he would otherwise have been entitled; in other words, the income which ultimately derived from his personal exertion as a medical practitioner was split in such a way that he received part of it and part of it went to the beneficiaries of the trust. In these circumstances the Commissioner invoked s.260 of the Act which provides as follows:

"(1) Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly -

(a) altering the incidence of any income tax;

(b) relieving any person from liability to pay any income tax or make any return;

(c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or

(d) preventing the operation of this Act in any respect,

be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.

(2) This section does not apply to any

contract, agreement or arrangement made or entered into after 27 May 1981."

6. Section 260 creates many difficulties of interpretation, but some matters may now be taken as settled. 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 acts by which it was carried into effect. Not every arrangement which results in a saving of tax will be struck down by the section. For example, if one person disposes of income producing property to another so as to reduce the burden of taxation, the section will not avoid the transaction, for the incidence and burden of the tax will fall precisely as the Act intends, on the new owner: Deputy Federal Commissioner of Taxation v. Purcell (1921) 29 CLR 464, at p 473. In Newton v. Federal Commissioner of Taxation (1958) 98 CLR 1, at p 8; (1958) AC 450, at p 466, Lord Denning suggested a practical test for deciding whether an arrangement is one to which the section applies. He said:

"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 implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge 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."

The question, according 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 designed to bring about the result that less tax will be paid may nevertheless do no more than take advantage of an opportunity to reduce tax which 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 benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or the adoption of the beneficial course does not mean that s.260 is attracted. Stephen J. in Mullens v. Federal Commissioner of Taxation (1976) 135 CLR 290, at p 318, summed up in that way the effect of the earlier authorities which included W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66; Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd. (1957) 100 CLR 95; and Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62. The subsequent authorities - Federal Commissioner of Taxation v. Patcorp Investments Ltd. (1976) 140 CLR 247, especially at pp 298-299; Slutzkin v. Federal Commissioner of Taxation (1977) 140 CLR 314; and Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330 - are all consistent with this formulation. As Stephen J. further said in Mullens v. Federal Commissioner of Taxation, 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 ... "

These cases apply the principle of construction expressed in the maxim generalia specialibus non derogant. They show that Lord Denning's statement in Newton v. Federal Commissioner of Taxation needs to be understood subject to the qualification which I have indicated, but do not otherwise detract from the authority of that statement.

7. Two further aspects of s.260 need to be mentioned. First, s.260 is an annihilating provision, which enables the Commissioner to ignore the arrangement to which it applies, but does not permit him to substitute a new and fictitious set of facts in its place. In Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner (1976) 1 WLR 464; (1976) 1 All ER 503, Lord Diplock said, at p 475; p 511 of All E.R.:

" ... it is not a charging section; all it does is to entitle the commissioner when assessing the liability of the taxpayer to income tax to treat any contract, agreement or arrangement which falls within the description in the section as if it had never been made. Any liability of the taxpayer to pay income tax must be found elsewhere in the Act. There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made."

Secondly, the avoidance of tax (by which I mean to include any of the purposes mentioned in s.260) need not be the sole purpose of the arrangement. In Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647, at p 657, I respectfully dissented from the view, apparently accepted as correct in Mangin v. Inland Revenue Commissioner (1971) AC 739, at p 751, that the avoidance of tax must be the sole or at least the principal purpose of the arrangement, although I considered that it would not be enough to justify the application of the section that tax avoidance was an inessential or incidental feature of the arrangement. Subsequently, in Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner, at p 475; p 512 of All ER, Lord Diplock said:

" ... the section in any case does not strike down transactions which do not have as their main purpose or one of their main purposes tax avoidance. It does not strike down ordinary business or commercial transactions which incidentally result in some saving of tax. There may be different ways of carrying out such transactions. They will not be struck down if the method chosen for carrying them out involves the payment of less tax than would be payable if another method was followed. In such cases the avoidance of tax will be incidental to and not the main purpose of the transaction or transactions which will be the achievement of some business or commercial object ...

8. Notwithstanding the different view expressed by Bray C.J. in Jones v. Commissioner of Taxation (1977) 15 SASR 462, at pp 472-473, and Bayly v. Commissioner of Taxation (1977) 15 SASR 446, at pp 459-460, I do not understand that in that statement Lord Diplock was reverting to what was said in Mangin v. Inland Revenue Commissioner, or that his statement is inconsistent with what I said in Hollyock v. Federal Commissioner of Taxation. If tax avoidance is one of the main purposes of the arrangement in the sense that it is not inessential or merely incidental, that is enough.

9. The test suggested by Lord Denning in Newton v. Federal Commissioner of Taxation was applied in Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443; on appeal, (1966) 116 CLR 38; (1967) 1 AC 308, the facts of which bear some resemblance to those of the present case. In that case eight doctors, who had for some years practised in partnership, entered into a complicated arrangement, the effect of which, stated shortly, was that the partnership was dissolved, the doctors thereafter attended to the patients of the practice on behalf of a company, the fees received by that company from the patients, after deduction of expenses, were distributed between family companies established for each of the doctors and each doctor was paid a salary by his family company; in the result, the income of each doctor was reduced and part of the moneys paid to his family company was held in trust for members of his family. It was held in this Court, and on appeal to the Privy Council, that the arrangement was void as against the Commissioner by reason of s.260. Kitto J. said, at p.469 of 111 C.L.R.:

"The arrangement in the present case,

considered objectively as is thus required, may well seem to be characterized by several purposes and effects, some of them unconnected with taxation, including the protection of individual members of the group against liability for negligence; the making of superannuation provision for employees, including doctors employed to assist the group; the better organization of the group's activities and particularly its methods of accounting; and the making of provision for the doctors' families ... But the question remains, 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. Menzies J. thought they were not, and with respect I agree. The arrangement bears ex facie the stamp of tax-avoidance. An understandable purpose of providing for the doctors' families, and doing so quite honestly, is perfectly evident; but what is equally evident is a purpose of doing so by a method which will divert income away from the participating 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 first been derived by the doctors and then applied by them for the benefit of their families."

The question that then arose was what remained when s.260 had annihilated that arrangement. Menzies J. (whose decision was affirmed on appeal to the Full Court) answered this question as follows, at p.461 of 111 C.L.R. He said:

"What is left then is a group of doctors

practising together but without any formal agreement of partnership, using Westbank to receive all fees paid, to provide services for the group, to pay group expenses and to make distributions of what remained in agreed proportions and using their family companies to receive those distributions and to pay the individual expenses of practice. On this basis the assessable income of the doctors as a group was the total of gross fees earned."

In the Judicial Committee this question of the effect which the section had once it applied caused the greatest difficulty in the case and caused Lord Donovan to dissent. The majority of the Board, although agreeing with the conclusion reached by Menzies J. and the Full Court, gave rather different reasons for doing so; Viscount Dilhorne said, at p.44 of 116 C.L.R.; p.332 of A.C.:

"He (the Commissioner) was therefore entitled

to treat the partnership as continuing until, if in fact it had been in existence it would have been dissolved by operation of law. Until then he was entitled to treat the income in fact received by A.E. Westbank Pty. Limited as if it had been received by the partnership, and to treat as the appellant's share the same percentage of the net income of that company as he was entitled to of the income of the partnership; that is, the same percentage as that provided in the service agreement between the appellant, Raleigh and Westbank."

10. Before us, it was submitted that the decision in Peate v. Federal Commissioner of Taxation cannot stand with Mullens v. Federal Commissioner of Taxation, Slutzkin v. Federal Commissioner of Taxation and Cridland v. Federal Commissioner of Taxation. I do not agree. It is noteworthy that in the three later cases Peate v. Federal Commissioner of Taxation was not mentioned and it is unthinkable that it was intended to overturn it sub silentio. Moreover, for the reasons I have already given, Mullens v. Federal Commissioner of Taxation, Slutzkin v. Federal Commissioner of Taxation and Cridland v. Federal Commissioner of Taxation were not inconsistent with Newton v. Federal Commissioner of Taxation, but showed that the general rule enunciated by Lord Denning 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. It was submitted that the present cases fall within the principle laid down in that trilogy of cases, because by the arrangements the taxpayers (it was said) did no more than adopt the course, available under the Act, of creating trusts, the income of which would be taxed in accordance with the provisions of Div.6 of Pt.III. That argument (which could not be accepted consistently with Peate v. Federal Commissioner of Taxation) fails because it is simply not right to say that the Act allows a taxpayer the opportunity to have his own income from personal exertion taxed as though it were income derived by a trust and held for the benefit of a number of beneficiaries.

11. Then it was said that Peate v. Federal Commissioner of Taxation is distinguishable, for two reasons. First, it was said that in Peate v. Federal Commissioner of Taxation the company could not lawfully carry on a medical practice and further that the patients would not be entitled to a tax deduction for the fees which they paid to the company, whereas in the present cases the trustees are all members of the medical profession. In Peate v. Federal Commissioner of Taxation, Menzies J. did refer to this aspect of the matter (at p 460 of 111 CLR) and in Hollyock v. Federal Commissioner of Taxation (a case of a pharmaceutical chemist), at pp 657-658, I regarded a similar consideration as important. However, none of the members of the Full Court or the Judicial Committee in Peate v. Federal Commissioner of Taxation appear to have relied on this circumstance and it was plainly not the determining consideration in the case. Further, it was submitted that standards of ordinary and acceptable conduct have changed since Peate v. Federal Commissioner of Taxation was decided two decades ago and practices then unacceptable in a profession are now tolerated for the very reason that persons engaged in a profession would otherwise be in a position of disadvantage, from a taxation point of view, when compared with tradesmen and proprietors of small businesses. There is truth in that statement. However, when Lord Denning in Newton v. Federal Commissioner of Taxation spoke of "ordinary business or family dealing" he intended to refer to what was normal or regular, rather than to what had become common or prevalent; in any case, that reference was made by way of contrast to the words "without necessarily being labelled as a means to avoid tax" and it is the latter words which give the clue to Lord Denning's meaning: see Mangin v. Inland Revenue Commissioner, at p 751.

12. In my opinion the arrangements made by Dr Watson, like those in Peate v. Federal Commissioner of Taxation, bear on their face an indication of a purpose to avoid tax. It is true that the arrangement revealed other purposes as well, namely the desire to make adequate provision for the superannuation of Dr Watson and to benefit the members of his family. I do not think that the attempt to obtain deductions for contributions to the superannuation fund should be treated as merely another attempt at tax avoidance. It would have been possible, theoretically at least, for Dr Watson to provide for himself a superannuation scheme while he remained self-employed, but unless he were an employee, contributions to the superannuation scheme would not have been tax deductible. As at present advised I do not consider that s.260 would have frustrated an arrangement made by Dr Watson to become an employee for the purpose of enabling his employer to have the benefit of the deductions allowed by s.82AAC of the Act, even if the employer were a company or trust which he himself controlled. However the arrangements in fact made went far beyond what was necessary to take advantage of the tax benefit provided by s.82AAC. The creation of the unit trust, and the allocation of units in the trust to the trustees of the family trust, together with the employment agreement, viewed objectively, can only be regarded as an attempt to split the income from Dr Watson's practice, and thus to avoid tax which Dr Watson would otherwise have paid, or to alter the incidence of the tax payable on that income. I am unable to agree that tax avoidance was an inessential or incidental feature of the arrangement. At the very least it was one of the main purposes of the arrangement and s.260 accordingly applies.

13. In my opinion s.260 also applies to the arrangements made by Dr Gulland. I have already mentioned the points of distinction between the two cases. The introduction of another medical practitioner, quite unconnected with the practice, as co-trustee of the unit trust emphasized the artificiality of the arrangement. On the other hand, the arrangement, if effective against the Commissioner, would have increased rather than reduced Dr Gulland's income in the relevant income year, because the unit trust made a loss during that year. It does not follow that the arrangement did not have one of the purposes or effects described in s.260. Viewed as an arrangement intended to operate in future years, the objective purpose of the arrangement can be seen to be an attempt to avoid tax. Further, the arrangement had the purpose and effect of altering the incidence of tax in the relevant income year.

14. The fact that Dr Gulland's family trust was already in place leads to no different conclusion. The creation of the unit trust, and the issue of all the units in that trust to the trustee of the family trust, stamped the arrangement as one whose purpose or effect was to avoid tax or alter the incidence of tax.

15. In the Federal Court, Toohey J. considered that a critical point of distinction between the two cases was that in the case of Dr Watson there was an antecedent transaction between the parties (namely, the partnership) which the impugned arrangement affected, whereas the fact that Dr Gulland was carrying on practice alone could not be described as an antecedent transaction which was altered by the arrangement. For that reason he joined in upholding Dr Gulland's appeal. He relied on a passage from the judgment of Barwick C.J. in Mullens v. Federal Commissioner of Taxation, at p 302, which was cited with apparent approval by Aickin J. in Slutzkin v. Federal Commissioner of Taxation at p 326 and by Mason J. in Cridland v. Federal Commissioner of Taxation, at p 338. Barwick C.J. said:

" ... there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act. Section 260 is not directed to tax on income to which the taxpayer is entitled only by reason of the actual transaction into which the parties have entered."

Later, however, Barwick C.J. went on to say, at pp.302-303:

"Again, it is otherwise if, by reason of an

antecedent transaction or situation, the taxpayer was already subject to tax in respect of an income which that antecedent transaction or situation produced or would produce, or was not or would not be entitled to any deduction in the situation created by that antecedent transaction. In such a situation the avoidance of the impugned transaction, because it represented an endeavour to cast what had already been agreed into a form which avoided or lessened the amount of tax otherwise payable, would expose the antecedent situation which did not carry any right to a deduction. Just as there must be income, not derived from the impugned transaction but derived from the antecedent transaction between the parties which, when that transaction is struck down, is exposed as producing assessable income, so, in my opinion, in relation to a deduction, the avoidance of the impugned transaction must disclose a transaction or situation which did not entitle the taxpayer to a deduction."

This latter passage shows in my opinion that in the earlier passage the learned Chief Justice was using "antecedent transaction" to refer to an antecedent situation as well as to an antecedent transaction. In any case, however, there is nothing in s.260 that supports the view that that section can apply only when there has been an antecedent transaction between 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. The cases of Dr Watson and Dr Gulland cannot be distinguished on the ground suggested by Toohey J.

16. Clearly, in the case of Dr Gulland, when the impugned arrangement is annihilated, what is left is the situation in which the taxpayer is in receipt of the income from his practice. In the case of Dr Watson, Peate v. Federal Commissioner of Taxation provides the necessary guidance as to the effect of the annihilation. Whether one takes the approach of the Judicial Committee or that of the High Court in Peate v. Federal Commissioner of Taxation the result is that the income received by the unit trust should be treated as the income of the five doctors.

17. The Commissioner correctly did not contend that s.260 annihilated the service trust in either case. In Dr Gulland's case the service trust was in existence before the impugned arrangements were made and was unaffected by s.260. In Dr Watson's case, the creation of the service trust was part of the arrangement affected by the section. However the section renders void as against the Commissioner an arrangement only "so far as it has or purports to have the purpose or effect" of the kind described in the section. Authorities such as Cecil Bros Pty. Ltd. v. Federal Commissioner of Taxation (1964) 111 CLR 430 and Federal Commissioner of Taxation v. Phillips (1978) 20 ALR 607 indicate that each taxpayer was entitled to obtain the necessary services from a trust of his own creation, and that s.260 did not render void the arrangements made for that purpose.

18. For these reasons I consider that in both cases the learned trial judge was correct in upholding the assessment made by the Commissioner. I would accordingly allow the Commissioner's appeal in the case of Dr Gulland and would dismiss Dr Watson's appeal.

PINCUS

v.

COMMISSIONER OF TAXATION

GIBBS C.J.: This appeal, like Watson v. Commissioner of Taxation (unreported, 18 December 1985) raises questions concerning the application of s.260 of the Income Tax Assessment Act 1936 (Cth), as amended ("the Act"), to a case in which medical practitioners, carrying on business in partnership, sell their business to trustees and thereafter work in the practice as employees, with the result that a portion of the fees earned by their work, less expenses, is available for distribution among the beneficiaries of the trust, who include their respective wives and children. There are, however, some points of distinction between Dr Watson's case and the present, and it will be necessary to consider whether the distinction is material. The facts are fully set out in the judgment of Dawson J. The taxpayer, Dr Pincus, had carried on a partnership, in equal shares, with Drs Backstrom, Richardson and Seet at two surgeries, Stafford Road and Stafford Heights. Drs Pincus and Richardson worked at Stafford Road and Dr Backstrom worked at Stafford Heights, while Dr Seet worked at both surgeries. The partnership was dissolved. The assets appertaining to Stafford Road were sold to Dr Backstrom as trustee of a unit trust, the beneficiaries of which were the families of Drs Pincus and Richardson by way of family trusts and the assets appertaining to Stafford Heights were sold to Dr Richardson as trustee of a unit trust, the beneficiaries of which were the families of Drs Backstrom and Seet. Thereafter, Dr Backstrom (as trustee) employed Drs Pincus and Richardson (full time) and Dr Seet (part time) at Stafford Road, and Dr Richardson (as trustee) employed Drs Backstrom (full time) and Seet (part time) at Stafford Heights. The decision to dissolve the partnership was first made by Dr Pincus because he was dissatisfied with the manner in which the partnership was conducted. When he discussed, with his advisers, the arrangements which should be made it was suggested to him that he create a trust scheme which would provide himself and his family with superannuation benefits. In fact the unit trust did institute a superannuation scheme, although not until some months later. The Commissioner invoked s.260 of the Act and it was held in the Full Federal Court that he was entitled to do so.

19. Before us it was submitted on behalf of the taxpayer that s.260 does not apply to a case such as the present and that Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443; on appeal, (1966) 116 CLR 38; (1967) 1 AC 308 is no longer good law. I have dealt with, and rejected, similar contentions in my reasons for judgment in Commissioner of Taxation v. Gulland (unreported, 18 December 1985); Watson v. Commissioner of Taxation and need not repeat those reasons here.

20. It was then submitted that Peate v. Federal Commissioner of Taxation is distinguishable for the following reasons. It was said that in the present case the decision to dissolve the partnership was made on 18 June 1978 and that at that time no final decision was made as to anything else. The sale of the assets of the partnership at Stafford Road and Stafford Heights respectively to Drs Backstrom and Richardson did not occur until 14 August 1978. It was submitted that the dissolution of the partnership, in itself, did not have the purpose or effect of avoiding tax but it did have the effect of terminating the existing source of the taxpayer's income. The result, it was submitted, was that the taxpayer, having dissolved the partnership, was free to decide to commence practice as an employee and that s.260 would have no application to any arrangements he made for that purpose. Particular reliance was placed on a passage from the judgment delivered by Lord Diplock in Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner (1976) 1 WLR 464; (1976) 1 All ER 503. Lord Diplock said, at p 475; pp 511-512 of All ER:

" ... the description of the contracts, agreements and arrangements which are liable to avoidance presupposes the continued receipt by the taxpayer of income from an existing source in respect of which his liability to pay tax would be altered or relieved if legal effect were given to the contract, agreement or arrangement sought to be avoided as against the commissioner. The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his affairs in relation to income from a new source in such a way as to attract the least possible liability to tax."

However, when the decision to dissolve the partnership was made, it was clearly intended to replace it by some other arrangement. In fact the partnership was formally dissolved by a "Deed of Dissolution and Sale", made on 14 August 1978, by which the assets of the partnership were sold to the two doctors as trustees. There was no lapse of time between the dissolution of the partnership and the other arrangements. In any case it would be wrong to regard the income after the dissolution as coming from a new source; the source remained the practice by the taxpayer of his profession at Stafford Road.

21. Alternatively, it was submitted on behalf of the taxpayer that even if s.260 applies, the annihilation of the tax avoidance arrangement will not leave exposed a partnership between Drs Pincus and Richardson at Stafford Road. It is well settled that s.260 does not impose any liability to tax; where the section annihilates an arrangement, the taxpayer will be liable to tax only if the actual facts then left exposed will be such as to render him liable. It was submitted that if the arrangement was rendered void by the section, the dissolution, which, as the Commissioner contended, was part of the arrangement, would itself be avoided, so that what would remain would be the partnership between the four doctors. It was then said that the Commissioner was inconsistent in assessing the taxpayer as he did.

22. Section 260 renders an arrangement void as against the Commissioner only in so far as it has or purports to have one of the purposes or effects specified in the section. The dissolution of the partnership, in itself, had no such purpose or effect, but it formed an integral part of the arrangement to which s.260 applied. The other elements of the arrangement, so far as it had the purpose or effect of tax avoidance by the taxpayer, comprised the sale of the assets to Dr Backstrom as trustee, the employment of Dr Pincus by the unit trust and the issue of the units in the unit trust to the family trust. However, when the section took effect, what was left after the annihilation of the arrangement was not the original partnership. The four doctors were in fact no longer practising in partnership, and the section does not require or permit fiction to be substituted for fact. The application of s.260 revealed that Drs Pincus and Richardson were practising in association and that Dr Seet was working part time in conjunction with them, although his remuneration for doing so came from the practice at Stafford Heights. It revealed that Dr Pincus in fact received, from the practice of his profession, not only the amount paid to him as "salary" but also the amount of profits distributed by Dr Backstrom as the trustee of the unit trust to Dr Pincus as trustee of the family trust.

23. The conclusion reached by the Federal Court was correct and the appeal should be dismissed.

COMMISSIONER OF TAXATION

v.

GULLAND

WATSON

v.

COMMISSIONER OF TAXATION

WILSON J.: I have had the advantage of reading the reasons for judgment in these matters prepared by the Chief Justice and by Dawson J. In each case I agree with the conclusion reached by their Honours and in substance with the reasons advanced in support of that conclusion. There is nothing that I wish to add.

2. I would therefore allow the Commissioner's appeal in Dr Gulland's case and dismiss Dr Watson's appeal.

PINCUS

v.

COMMISSIONER OF TAXATION

WILSON J.: I would dismiss the appeal, substantially for the reasons advanced both by the Chief Justice and by Dawson J.

COMMISSIONER OF TAXATION

v.

GULLAND

WATSON

v.

COMMISSIONER OF TAXATION

PINCUS

v.

COMMISSIONER OF TAXATION

BRENNAN J.: I have had the advantage of reading in draft the judgments of Dawson J. in these matters. I agree with his Honour's conclusions and, subject to what follows, with his reasons for reaching them. I can therefore state briefly the operation which I would attribute to s.260 of the Income Tax Assessment Act 1936 (Cth). That section is expressed to operate upon contracts, agreements or arrangements (hereafter indifferently described as arrangements) which have or purport to have any of the purposes or effects specified in pars.(a) to (d) of that section. Conveniently, though not exhaustively or precisely, the purposes or effects specified in pars.(a) to (d) may be described as tax avoidance. In terms, s.260 avoids as against the Commissioner any arrangement which has the effect of avoiding tax, whether or not tax avoidance is a purpose of the arrangement and irrespective of the means by which tax is avoided. The true scope of the section is more limited, but the limitations to be placed on the words used in s.260 and the principles which justify the placing of limitations on its words are problems of continuing difficulty.

2. One of the limitations to be placed on s.260 is justified by a familiar rule of statutory construction: generalia specialibus non derogant (Reg. v. Kelly; Ex parte The Victorian Chamber of Manufactures (1953) 88 CLR 285, at p 319). The Act contains a great number of specific and particular provisions which affect taxable income (as defined in s.6(1)) and a taxpayer's consequential liability for tax. The intention of the legislature in enacting specific and particular provisions which affect assessable income or add to or increase allowable deductions is that those provisions should have effect according to their tenor, so that a taxpayer who brings himself within a specific and particular provision which purports to confer a tax benefit should be entitled to have that benefit. That intention would fail if s.260 were to operate according to its literal terms, for s.260 would avoid any arrangement which brought the taxpayer within a specific and particular provision of the Act which conferred a tax benefit. It could not have been intended by the legislature that s.260 should prevail over the specific and particular provisions and destroy the tax benefits they were intended to confer. It is necessary therefore to read down s.260, a general provision, in order to provide for the operation of the specific and particular provisions of the Act. This approach to the construction of s.260 was taken by Stephen J. in Mullens v. Federal Commissioner of Taxation (1976) 135 CLR 290, 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, of which s.77A is one. To so understand s.260 would be wholly out of accord with general principles of statutory interpretation. Menzies J. recognized this when he remarked, in Ellers Motor Sales Pty.Ltd. v. Federal Commissioner of Taxation ((1969) 121 CLR 665, at p 677), that it was not to be thought that the specific provision of which the taxpayer had there taken advantage 'was given merely to be taken away by the operation of s.260', and see Federal Commissioner of Taxation v. Casuarina Pty.Ltd., especially per Gibbs J. ((1971) 127 CLR 62, at p 105)."

As a taxpayer may choose to organize his affairs in such a way as to take advantage of tax benefits provided by the "specific and particular" provisions of the Act, a principle - the "choice principle" - gives expression to the scope of s.260. Mason J. in Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330, at p 339, stated the principle in these terms:

" ... (it) ... proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s.260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage."

As this enunciation of the principle 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 reading 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 which, as in the present cases, seeks to divert income from one taxpayer to another. Having ascertained the scope of s.260 it is necessary to consider what is the condition of its operation on cases which do not depend on a specific provision of the Act.

3. A disposition of income-yielding property could not have been intended to be within the net of s.260 merely because the disposition has the effect of relieving the disponor of tax liability which would have been imposed on him had he continued to receive the income yielded by the property. In Deputy Federal Commissioner of Taxation v. Purcell (1921) 29 CLR 464 Gavan Duffy and Starke JJ. (at p 473) said in respect of the corresponding provision to s.260 in the Income Tax Assessment Act 1915-1916 (Cth):

" The section, ... does not prohibit the

disposition of property. Its office is to avoid

contracts, &., which place the incidence of the

tax or the burden of tax upon some person or body contemplated by the Act. If a person actually disposed of income-producing property to another so as to reduce the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely, upon the new owner."

Although a simple disposition of income-producing property does not attract the operation of s.260, a larger transaction of which a disposition of property forms a part may be caught: see Hancock v. Federal Commissioner of Taxation (1961) 108 CLR 258, at p 283. The distinction between arrangements upon which s.260 operates and those upon which s.260 does not operate when both classes of arrangements have the effect of avoiding tax is not easily gleaned from an examination of the text of that section. But it can be said that an arrangement which has the effect of avoiding tax is not within the section unless the avoidance of tax is a purpose for which the arrangement was made. Section 260 does not operate on an arrangement unless it has a purpose as well as the effect of avoiding tax. (We can put aside arrangements which have or purport to have a purpose of tax avoidance but which do not have or purport to have a corresponding effect, for the avoiding of such an arrangement would leave the position of the taxpayer vis-a-vis the Commissioner unaffected.) If it can be predicated of an arrangement that among the purposes for which it was made is the purpose of avoiding tax then, provided that purpose is a substantial, not merely incidental, purpose of the arrangement, it is an arrangement on which s.260 operates (Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647, at p 657). To predicate of an arrangement that a purpose for which it was made is the avoidance of tax, something more is needed than a purpose to achieve what the arrangement is apt to effect if the arrangement is apt to effect a variety of consequences only one or some of which is the avoiding of tax. In Newton v. Federal Commissioner of Taxation (1958) 98 CLR 1, at p 8, Lord Denning delivering the judgment of the Privy Council said:

" 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 implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge 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."

A purpose of avoiding tax is not taken to exist when the means adopted to carry the arrangement into effect are fairly referable to ordinary business or family dealing and the avoidance of tax is merely incidental. If a purpose of avoiding tax is found to exist, the arrangement is caught by s.260 even though the advancing of ordinary business or family interests is one of the purposes and one of the effects of the arrangement. After the passage which I have cited from Newton, their Lordships went on to give instances of cases where it was thought that nobody could predicate of the arrangement that it was made for the purpose of avoiding tax in the sense which their Lordships had stated. Some of those instances, notably W.P. Keighery Pty.Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66, were in truth examples of cases which fell outside the net of s.260 not because they did not answer the test of purpose but because the case was covered by a specific provision of the Act and s.260 was inapplicable on that account.

4. Confusion is inevitable if the rule which requires s.260 to be read down is invoked to determine its application after its true scope is ascertained. The choice principle should not be applied when there is no occasion to invoke the rule generalia specialibus non derogant on which it is founded. If the choice principle were applied to deny the operation of s.260 on arrangements which do not depend on a specific provision of the Act, the choice principle would annihilate s.260 itself. The true reconciliation between the choice principle and the Newton test of purpose is to limit the former to cases depending upon a specific provision of the Act. It is not necessary now to consider the boundary between the two classes, but in principle only those arrangements or parts of arrangements which depend upon specific provisions fall outside the scope of s.260.

5. In the present cases, the respective arrangements are made, in greater or less degree, for purposes other than tax avoidance. In the case of Dr Pincus, one of the chief purposes of the arrangement was to carry to completion the dissolution of the partnership of which he had been a member. Nevertheless in every case, the means of implementing the arrangement was artificial as Dawson J. has demonstrated. The means are not fairly referable to ordinary business or family dealing, and the proper inference is that each of the arrangements was made for a purpose of avoiding tax. None of the arrangements attracts a specific provision of the Act. It is immaterial that a purpose or effect of an arrangement is to obtain an allowable deduction under s.82AAC for the trustees of a unit trust who set apart or pay money to a fund for the superannuation of an employed doctor. Section 82AAC provides no tax benefit for the doctor. None of the arrangements purports to obtain a s.82AAC deduction for the doctor. It follows that as between the respective taxpayers and the Commissioner, the arrangements are void.

6. An arrangement which, as between the taxpayer and the Commissioner, is avoided by s.260 nevertheless remains valid for other purposes. The arrangement has in law and in fact the effect which, as against the Commissioner, is annihilated. The situation that is left after s.260 has done its work is necessarily an hypothetical one having no existence in law or fact: it is the situation that would have existed had the arrangement not produced the specified effect. The difference between the situation which does exist in law and in fact and the hypothetical situation is the "effect" which attracts the operation of the section. Section 260 does not expressly prescribe what hypothesis is to be adopted for the purposes of the Act once an arrangement is avoided. One of the difficulties in the application of s.260 is ascertaining the hypothetical facts which, as between the taxpayer and the Commissioner must be taken to be the facts on which the determination of the taxpayer's taxable income depends.

7. When a taxpayer, prior to making an arrangement caught by s.260, has been in receipt of assessable income from a particular source and he would have continued to be in receipt of assessable income from that source but for the effect of the arrangement, the taxpayer is assessed to tax after the arrangement takes effect on the footing that he has continued in receipt of assessable income from that source. Thus in Europa Oil v. Inland Revenue Commissioner (1976) 1 WLR 464, Lord Diplock noted at p 475 ((1976) 1 All ER 503, at pp 511-512) that, under the corresponding provision in the Land and Income Tax Act 1954 of New Zealand -

" ... the description of the contracts, agreements and arrangements which are liable to avoidance presupposes the continued receipt by the taxpayer of income from an existing source in respect of which his liability to pay tax would be altered or relieved if legal effect were given to the contract, agreement or arrangement sought to be avoided as against the commissioner. The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his affairs in relation to income from a new source in such a way as to attract the least possible liability to tax. Nor does it prevent the taxpayer from parting with a source of income."

8. Critical to a resolution of the present cases is an understanding of what is to be regarded as an existing source of income. When the source of income is not simply income-producing property, but a business carried on by the taxpayer personally, the business activity in which the taxpayer engages may be in reality the source of income. And if that be so, it is immaterial that the taxpayer disposes of the business by an arrangement which transforms him into an employee of the disponee. Of course, when the source of income of a business is the activity of the proprietor and he remains working in the business after he sells or otherwise disposes of it, the question whether the income remains his for the purposes of the Act or whether it is the income of the disponee depends on whether the sale or disposition was fairly referable to ordinary business or family dealing and the avoidance of tax was merely incidental. If the sale or disposition of the business is for the purpose, inter alia, of avoiding tax in the sense explained in Newton, the sale or disposition is avoided as against the Commissioner and the taxpayer is taken to continue to receive income from his business activity.

9. In the present cases, the respective taxpayers have continued to carry on their medical practices as they had before the respective arrangements were made. The medical services for which fees are paid are rendered by the individual doctor or doctors engaged in the practice and the gross fees received by the respective unit trusts must be treated as the assessable income of the doctor or doctors engaged in the practice. In Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443, where a group of doctors disposed of their practice to a company which they formed to employ them and to enter into agreements for medical services with patients, Menzies J. found (at p.461):

" What is left then is a group of doctors practising together but without any formal agreement of partnership, using Westbank (the company which was formed in implementation of the arrangement) to receive all fees paid, to provide services for the group, to pay group expenses and to make distributions of what remained in agreed proportions and using their family companies to receive those distributions and to pay the individual expenses of practice. On this basis the assessable income of the doctors as a group was the total of gross fees earned."

Kitto J. agreed. He said (at p.471):

" It means that s.260 renders the arrangement void as against the Commissioner so far as it gave Westbank the beneficial property in fees collected and gave the quality of a resolution of a board of directors to the decisions of the doctors as to disbursement. What remains is the income produced by an association of doctors, received by them jointly, and subject to division in agreed proportions so that, in the language of s.19, each doctor's distributable share was dealt with as he directed. It follows that each doctor must be considered to have derived his proportion of the income."

10. Peate's Case was followed by Gibbs J. in Hollyock v. Federal Commissioner of Taxation. His Honour said (at p 658):

" ... it is not possible to regard this case as one in which the appellant has simply disposed of income-producing property. It is true that a considerable quantity of trading stock was included in the assets of the business, but the income derived by the appellant was derived from carrying on the business, and the trading stock yielded income only because the business was carried on.

...

Once the arrangement whose purpose was to avoid tax is annihilated, what clearly remains in the present case is that the appellant received the entire income from the pharmacy business."

The doctors who were conducting the respective practices with which we are here concerned have continued to conduct them, though the ownership of each practice has passed to the trustees of a unit trust. The circumstances in which those transactions occurred are set out in the judgments of Dawson J. and I need not repeat them. The respective assessments to tax were made on the footing that the gross fees or an appropriate proportion of the gross fees earned in the respective practices are assessable income of the respective taxpayers. That was the correct footing for making the respective assessments.

11. The objections to the assessments were rightly dismissed. The Commissioner's appeal should be allowed; Mr Watson's appeal and Dr Pincus' appeal should be dismissed.

COMMISSIONER OF TAXATION

v.

GULLAND

DEANE J: There was an element of tension between the main thrust of the judgment of the Privy Council in Newton v. Federal Commissioner of Taxation (1958) 98 CLR 1 and their Lordships' reference in it to the earlier decision of this Court in W. P Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66. The main thrust of the judgment lay in the statement of what has sometimes been described as the "predication" test of the applicability of s.260 of the Income Tax Assessment Act 1936 (Cth) ("the Act"):

"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 implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge 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" (Newton, at p.8).

The reference to Keighery's Case came in the context of the following four sentences (at pp.8-9):

"Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W. P. Keighery Pty. Ltd. v. Commissioner of Taxation. Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax, see Deputy Federal Commissioner of Taxation v. Purcell (1921) 29 CLR 464. But when one looks at the way the transactions were effected in Jaques v. Federal Commissioner of Taxation (1924) 34 CLR 328; Clarke v. Federal Commissioner of Taxation (1932) 48 CLR 56 and Bell v. Federal Commissioner of Taxation (1953) 87 CLR 548 - the way cheques were exchanged for like amounts and so forth - there can be no doubt at all that the purpose and effect of that way of doing things was to avoid tax".

2. In Keighery's Case, looking at the overall arrangement involving the allotment of shares and the manner in which it was effected, it was possible to predicate, as Dixon C.J., Kitto and Taylor JJ. acknowledged in their joint judgment (100 C.L.R., at pp.91-92), that it was "beyond question that the whole plan was carefully designed" to avoid the impending liability to income tax of either Aquila Steel Pty. Ltd. on its undistributed profits or of the recipients of those profits if they were distributed. The steps and transactions involved in turning the taxpayer company into a public one for tax purposes were plainly incapable "of explanation by reference to ordinary business or family dealing". Yet their Lordships, having enunciated the "predication" test, referred to Keighery's Case as an example of a case where it was not satisfied.

3. The test enunciated in Newton closely corresponds with the approach which had been adopted by Isaacs J. and Starke J. in their judgments in Jaques v. Federal Commissioner of Taxation, at pp 360, 362 (cf. per McTiernan J. in Hooker-Rex Pty. Ltd. v. Federal Commissioner of Taxation (1970) 123 CLR 71, at pp 84-86). It was subsequently applied in a series of cases in this Court to invalidate steps in arrangements which bore ex facie the stamp of tax avoidance (see, in particular, Hancock v. Federal Commissioner of Taxation (1961) 108 CLR 258; Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443 and, on appeal to the Privy Council, (1966) 116 CLR 38 (1967) 1 AC 308; Mayfield v. Commissioner of Taxation (1961) 108 CLR 303, at p 319; Mayfield v. Commissioner of Taxation (No. 2) (1961) 108 CLR 323, at p 334; Millard v. Commissioner of Taxation (1962) 108 CLR 336, at p 342; Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation (1970) 125 CLR 52, at pp 73-74; Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647, at pp 654-658). Nowhere in the judgments in any of these cases does one find any mention of Keighery or any consideration of the significance of the Judicial Committee's reference to Keighery in the judgment in Newton. In none of them was it suggested, let alone held, that the effect of that reference was to preclude the application of the Newton test to any case in which the taxpayer had created a set of affairs whose legal form would attract some liability to tax under the terms of the Act. During the period in which these cases were decided, there was no relevant mention of Keighery nor consideration of the effect of their Lordships' reference to that case in their judgment in Newton in the volumes of the Commonwealth Law Reports except in the judgment of Menzies J. in Ellers Motor Sales Pty. Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 665 and that of McTiernan J. in Hooker-Rex Pty. Ltd. v. Federal Commissioner of Taxation (1970) 123 CLR 71. In the Ellers Motor Case, Menzies J., without expressly referring to Newton, applied Keighery to preclude the application of s.260 to avoid the conversion of a private company into a non-private company. In the Hooker-Rex Case, McTiernan J. expressed the conclusion (at p.86) that the test laid down by the Privy Council in Newton "must limit the application of" the central passage in the majority judgment in Keighery. Implicit in that conclusion was the view that any approval of Keighery which could be implied from the mention of the case in Newton was confined to the bare proposition for which it was cited as authority and that the content of that proposition was limited by the context provided by the fourth and first sentences of the relevant extract of their Lordships' judgment (see above) and the actual decision in Newton. McTiernan J's view that the Privy Council's judgment in Newton had limited the authority of Keighery was further explained and was applied by his Honour in his dissenting judgment in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62, at pp 84-86. It was, however, rejected by the other four members of the Court in that case. The decision in Keighery's Case was expressly affirmed and it was stressed that the authority of Keighery had "not been weakened by the decision or the reasons in Newton ... or by the later cases in this Court" (per Walsh J., with whom Barwick C.J., Owen and Gibbs JJ. agreed, at p.103).

4. In Casuarina, as in Keighery, the central issue concerned the status of the taxpayer as a public (or non-private) company. Again, it could plainly be predicated, by looking at the artificial transactions and steps involved in complying with the formal requirements necessary to qualify a company as a public one for tax purposes, that the taxpayer had been turned into a public company to avoid the impending incidence of income tax. Viewed in context, the arrangement involving the critical allotment of shares bore ex facie the stamp of tax avoidance. If it were applicable, the Newton test was plainly satisfied. The basis of the decision in Casuarina was, however, the conclusion of a majority of the Court that that test was "incapable of being applied so as to avoid a transaction, consisting simply of an allotment of shares having the effect of depriving the allotting company of its 'private' character" (per Walsh J., at p.102). The rationale of that conclusion is to be found in what has been described as the "choice" principle which was derived from the passages from the joint judgments of Dixon C.J., Kitto and Taylor JJ. in Keighery (at pp.93-94) and in Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd. (1957) 100 CLR 95, at pp 113-114) which were set out and relied upon by Walsh J. in his leading judgment in Casuarina. Those passages included the following extracts:

"The very purpose or policy of Div. 7 is to

present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act" (Keighery, at pp.93-94; quoted in Casuarina, at p.99)

and

" ... To hold that s.260 applies in this case would be to give it an operation, not to effectuate an intention appearing from the Act to impose a liability, but to defeat an intention appearing from the Act to impose alternative liabilities according as the persons interested in a company elect to have or not to have a certain state of facts existing on the last day of a year of income. The appellant's contention based on s.260 must therefore be overruled." (Sidney Williams (Holdings) Ltd., at p.114; quoted in Casuarina, at p.100).

The wholesale amendments to applicable provisions of Div. 7 of Pt.III of the Act between the decision in Keighery and that in Casuarina, which were obviously designed to preclude artificial and formalistic steps to procure the taxation advantages of public company status, may have made it difficult to continue to discern the legislative intent to "present a choice" which had provided the foundation of the judgment in Keighery. Nonetheless, it was upon such a perceived legislative intent, for which Keighery was seen as continuing authority, that the decision in Casuarina was based.

5. Two further points should be made about the effect of the majority judgments in Casuarina. The first is that they left no room for conflicting applications of the "choice" principle enunciated in Keighery and the "predication" test applied in Newton and subsequent cases. The reason for that was that the majority judgments made plain that the "predication" test is incapable of being applied at all to a case coming within the "choice" principle. In such a case, that test is simply irrelevant. That being so, as the scope of the "choice" principle came to be subsequently expanded, the area of operation of the "predication" test and of s.260 itself was correspondingly reduced. The second is that, while Walsh J. did not expressly advert to the question whether the authority of Keighery was restricted to cases involving the conversion of a private into a non-private or public company, both Barwick C.J. and Gibbs J. expressed the view that the principle underlying Keighery and Sidney Williams was of more general application. Barwick C.J., after expressing his concurrence with the judgment of Walsh J., commented (at p.81):

"I should merely wish to say that there is, in my opinion, no room for the application of s.260 where the taxpayer has become liable for the amount of tax appropriate under the terms of the Assessment Act to the state of affairs obtaining at the date made relevant by that Act for the ascertainment of the taxpayer's liability. Steps taken to bring about that state of affairs cannot, in my opinion, qualify as action under s.260 to achieve any one of the four purposes or effects described in the section".

The present Chief Justice, having also expressed his agreement with the judgment of Walsh J., said (at p. 104):

" ... (Keighery and Sidney Williams) establish that where the Act itself imposes different tax liabilities on public companies on the one hand and private companies on the other, the conversion of a private into a public company is not, so far as the company is concerned, rendered void as against the Commissioner by s.260, notwithstanding that it will entail a reduced liability to tax. In such a case no liability to tax imposed by the Act on the company is avoided for whatever tax is appropriate to its situation remains payable. The same result follows in other cases in which the Act imposes different liabilities according as the taxpayer answers one description or another, and some examples of such cases were given by my brother Windeyer in his judgment in the present case. No doubt the formation of a public company may form part of an arrangement which has the purpose or effect of avoiding a liability imposed by the Act on some other person but the application of s.260 does not result from the mere fact that the company has become a public instead of a private company".

6. As I read his Honour's judgment, Gibbs J. was referring to cases where express provisions of the Act operate by reference to a specific status or state of affairs of the particular taxpayer (see also Federal Commissioner of Taxation v. Patcorp Investments Ltd. (1976) 140 CLR 247, at pp 298-300). His Honour's reference to the examples given by Windeyer J. in the course of his judgment at first instance in Casuarina tends to confirm that reading of his judgment since those examples were of cases where a "person (individual or corporation) may by choosing one legal status rather than another affect his liability to tax" (per Windeyer J., 127 C.L.R., at p.75). Be that as it may, the comments of Barwick C.J. were not so confined but would appear to have been carefully chosen to express the broad approach that steps taken to bring about any legal state of affairs upon which even general provisions of the Act could operate to impose some liability to tax could not attract the operation of s.260 regardless of whether one could discern in the Act a legislative intent that the taxpayer should have an effective "choice" between alternatives. It was that broad approach of Barwick C.J. which was subsequently to prevail in this Court. It was developed, adopted and applied in three subsequent cases in which the application of the "predication" test of Newton was held to be precluded. Those three cases are Mullens v. Federal Commissioner of Taxation (1976) 135 CLR 290, Slutzkin v. Federal Commissioner of Taxation (1977) 140 CLR 314 and Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330. They were all decided after the time when this Court became the final appellate court in matters involving the application or interpretation of the Act (see Privy Council (Limitation of Appeals) Act 1968 (Cth), s.3(1)(b) (ii)). They are of critical importance in the resolution of the present appeal.

7. In isssue in Mullens was the taxpayer's entitlement to deductions in respect of payments on shares in a petroleum exploration company. It could plainly be predicated of the contrived arrangements and transactions that they had been artificially structured to enable the taxpayer to obtain the benefit of the deductions. It was held by a majority of the Court (Barwick C.J. and Stephen J.; McTiernan J. dissenting) that the provisions of s.260 of the Act could not be applied to avoid the relevant transactions. More important for present purposes than the actual decision, however, were the reasons which the majority justices advanced for it. Barwick C.J. stated the essential content of those reasons in the following extract from his judgment (at p.298):

"The Court has made it quite plain in several decisions that a taxpayer is entitled to create a situation to which the Act attaches taxation advantages for the taxpayer. Equally, the taxpayer may cast a transaction into which he intends to enter in a form which is financially advantageous to him under the Act. W.P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation and Federal Commissioner of Taxation v. Casuarina Pty. Ltd. amply demonstrate this and are, in my opinion, very relevant to the resolution of this case. Also the general principle established by Inland Revenue Commissioners v. Duke of Westminster (1936) AC 1, must always be kept in mind. The Privy Council in Inland Revenue Commissioner v. Europa Oil (N.Z.) Ltd. (No. 1) (1971) AC 760, at p 771 said '... in a matter of taxation it is necessary to consider and respect the legal form in which the concession', i.e. the transaction 'was embodied. Their Lordships have no need to restate the principle laid down in such cases as Inland Revenue Commissioners v. Duke of Westminster'".

His Honour proceeded (at pp 298-299) to add a qualification to the general proposition that s.260 did not apply to avoid the creation by a taxpayer of a "legal form" to which the Act attaches taxation advantages. That qualification was that the provisions of s.260 could apply to a case where "the actual transaction into which the parties have entered involves the taxpayer in liability to tax or does not afford the taxpayer some benefit in taxation, such as a deduction, and that transaction is cast into another form which, if effective, would relieve the taxpayer of tax" (at p.298, underlining added). Otherwise, the effect of Mullens was to establish that, for the purposes of s.260, it is to legal form, rather than substance, that consideration must be given and respect paid. In its emphasis on legal form and disregard of substance, the approach of Barwick C.J. appears to me to be contrary to the general approach adopted by Isaacs J. in Jaques (see, particularly, Isaacs J's reference to "factitious liability" and "factitious payment" at p.360) and to the general approach to be discerned in the Privy Council's judgment in Newton (particularly, at pp.8-9).

8. In Slutzkin, a unanimous Court (Barwick C.J., Stephen and Aickin JJ.) applied the reasoning of the majority in Mullens to overrule a decision of Rath J. that the provisions of s.260 were applicable to expose the proceeds of a sale of shares as dividends in the hands of the vendors. In the course of his judgment, Barwick C.J. said (at p.319):

"...the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to tax, or subject him only to less tax than some other form of transaction might do. Inland Revenue Commissioners v. Duke of Westminster, too easily forgotten, is still basic in this area of the law. There is no room in that area for any doctrine of economic equivalence. To the legal form and consequence of the taxpayer's transaction, which in fact has taken place, effect must be given: see Inland Revenue Commissioner (N.Z.) v. Europa Oil (N.Z.) Ltd.".

As the above passage makes clear, this statement of a "choice" theory has nothing to do with a legislative intent to give a choice between specific alternatives. It is a general "choice" of legal "form" to which "effect must be given". Aickin J. (at pp.326) quoted extensively from the judgment of Barwick C.J. in Mullens including the statement that s.260 will not apply "if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act" (per Barwick C.J. in Mullens, at p.302). Aickin J. added (at pp.326-327) that, in his opinion, that was equally the position "where the actual transaction is one which stands wholly outside the operation of" the Act. His Honour also quoted (at p.327), with approval, that part of the judgment of Stephen J. in Mullens in which Stephen J., having referred to the situation where, as in Keighery, "the Act offers to the taxpayer a choice of alternative tax consequences", said (at p.318):

"So, too, if no question arises of a choice between two courses of conduct but, instead, the Act offers certain tax benefits to taxpayers who adopt a particular course of conduct; the adoption of that course does not establish any purpose or effect such as is described in s.260. Instead, an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will then represent a due and proper incidence of tax, there will be no relief from, or defeating of, liability to tax and the Act will have the very operation which the legislature intended."

Aickin J. commented (at p.327):

"That principle equally applies in a case of receipts with which the Act simply does not deal, i.e. capital receipts, save such as are for the purpose of the Act deemed to be income. To adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act, notwithstanding that such course is adopted with full knowledge of the provisions of the Act and with a conscious intention that the proceeds should not fall within the operation of the Act."

The third member of the Court in Slutzkin, Stephen J., while adding some comments of his own, indicated (at p.322) general agreement with the reasons for judgment of Barwick C.J. and Aickin J.

9. In Cridland, the full significance of what had been said and decided in Mullens and Slutzkin was explained and accepted by a Court of five Justices. Mason J., with whom the other members of the Court (Barwick C.J., Stephen, Jacobs and Aickin JJ.) agreed, quoted critical passages from the judgments of Barwick C.J. and Stephen J. in Mullens and summarized the effect of Mullens and Slutzkin as follows (at p.339):

"The decision in the Mullens Case and the

passages from the judgments to which I have referred show that the principle which underlies the Keighery Case is ... not confined to cases in which the Act offers two alternative bases of taxation; it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s.260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage.

The distinction drawn by Lord Denning in

Newton v. Federal Commissioner of Taxation, between arrangements implemented in a particular way so as to avoid tax and transactions capable of explanation by reference to ordinary business or family dealing has not been regarded as the expression of a universal or exclusive criterion of operation of s.260. Lord Denning's observations were applied neither in the Mullens Case nor in the subsequent case of Slutzkin v. Federal Commissioner of Taxation."

Mason J. went on (at pp.339-340) to underline the limited scope of any residual authority of Newton's Case. The decision in Newton must now be explained on the basis of a "finding of fact" that the moneys received by the taxpayers were or were deemed to be dividends. Unless Newton's Case is so explained, it would rest "on the use of s.260 as a charging provision, for the receipts would not have been liable to tax under the ordinary provisions of the Act unless they could be characterized as dividends" (at p.340). His Honour indicated that such a use (i.e. as a charging provision) of s.260 would be impermissible since it is now established that s.260 is not such a provision (see Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner (1976) 1 WLR 464; (1976) 1 All ER 503).

10. The effect of the decisions and judgments in Mullens and Slutzkin was to deprive s.260 of much of what one would have thought was its intended operation. With due respect to those who have seen the matter differently, it appears to me that the approach of Barwick C.J. in Casuarina, which was adopted and developed in Mullens and Slutzkin, unjustifiably divorced the provisions of s.260 itself from the other provisions of the Act. Thus, the statement of Stephen J. in Mullens (at p.318) that "an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted ... will have the very operation which the legislature intended" disregards the significance of s.260 to the legislative intent to be discerned in the Act. Again, the emphasis which Barwick C.J. and Aickin J. placed, in their judgments in Slutzkin (at pp.319 and 326), upon legal form to the exclusion of substance disregards the important function which s.260, with its emphasis on "purpose" and "effect", was plainly intended to serve in the Act as a whole. The propositions for which Slutzkin is authority - viz. that, in the application of s.260, effect must be given to "the legal form and consequence of the taxpayer's transaction" (per Barwick C.J., at p.319) and that "(t)o adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act" (per Aickin J., at p.327) - seem to me to deprive s.260 of most of its intended operation by effectively confining it to cases where the impugned transaction was properly to be seen not as an effective new transaction but as merely "cloaking" (per Mason J. in Cridland, at p.340) some "antecedent" and "actual" transaction or state of affairs "between the parties", "for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act" (per Barwick C.J. in Mullens, at p.302, quoted by Aickin J. in Slutzkin, at p.326). Mason J. was doing no more than stating the obvious when he referred to "the very restricted operation conceded to s.260" by the "settled" construction of the section: Cridland, at p.337. The ineffectiveness of the section, in the light of what had been established by the judgments in Mullens and Slutzkin, led his Honour to take the step of pointing out (at p.337) that more than twenty years had passed since Kitto J. had drawn attention to the need for legislative reform of its provisions. Mason J's pointed reference to that call for legislative reform was made in a judgment with which, as has been mentioned, the four other members of the Court concurred.

11. It should be apparent from the foregoing that I have difficulty with the emphasis upon legal form and the disregard of substance which Mullens and Slutzkin require in the application of s.260. Uninstructed by authority, I should have thought that the legislative intent to be discerned in s.260 was that identified by Isaacs J. in Jaques and by the Privy Council in Newton, namely, that, if it can be objectively predicated that either form or substance must be explained as - to use the vernacular - a "tax dodge", it should be disregarded. As presently advised, I would not be disposed to extend the authority of the reasoning which prevailed in Mullens or Slutzkin by applying it to the resolution of other legislative provisions aimed at preventing tax avoidance. That reasoning must, however, be accepted (at least since Cridland) as having "settled" the construction of s.260. Indeed, it was not submitted on behalf of the Commissioner that the decisions in Mullens and Slutzkin should be reopened or that the reasoning underlying those decisions should be disregarded. The reason for that was, no doubt, that the calls by this Court for legislative reform have, after a quarter of a century of inaction by Governments of differing political persuasions, finally evoked some response. Section 260 has now, at long last, been amended so as not to apply to contracts, agreements or arrangements made or entered into after 27 May 1981 (see s.260(2)) and replaced by the new Part IVA of the Act as regards any "scheme" (defined in s.177A(1)) entered into after that date. In these circumstances, the present case must be determined by reference to the "settled" construction of s.260 for which the three most recent decisions of a Full Court of this Court stand as clear and unchallenged authority.

12. For the Commissioner, particular reliance was placed upon the decisions of this Court and of the Privy Council in Peate's Case. That case, so it was said, had never been disapproved and was applicable to govern the decision in the present one. In his judgment in the Federal Court in the present case, Fisher J. convincingly demonstrated the significant differences between the circumstances in Peate and the circumstances in this case. I find it unnecessary, however, to examine those differences. The reason is that the reasoning of the judgments in Peate's Case is quite inconsistent with the notions for which Mullens, Slutzkin and Cridland stand as clear authority. The point can be readily illustrated, at the cost of some repetition, by applying to the facts of Peate's Case some of the propositions established by the judgments in Mullens and Slutzkin.

"What is left then is a group of doctors

practising together but without any formal agreement of partnership, using Westbank to receive all fees paid, to provide services for the group, to pay group expenses and to make distributions of what remained in agreed proportions and using their family companies to receive those distributions and to pay the individual expenses of practice. On this basis the assessable income of the doctors as a group was the total of gross fees earned."

Upon either view, the Commissioner was entitled to arrive at the conclusion which he did and to make the assessment upon the basis which he did.

55. I would dismiss the appeal.

PINCUS

v.

COMMISSIONER OF TAXATION

DAWSON J.: This appeal was heard together with the appeals in Commissioner of Taxation v. Gulland (unreported, 18 December 1985) and Watson v. Commissioner of Taxation (unreported, 18 December 1985). It also concerns the application of s.260 of the Income Tax Assessment Act 1936 (Cth) to an arrangement for the conduct of a medical practice.

56. The appellant, Dr Pincus, is a medical practitioner who practised as a sole practitioner in general practice at Stafford Road, Stafford in Queensland and later established an additional surgery at Stafford Heights. In 1965, he entered into a partnership with another medical practitioner, Dr Backstrom. In 1971 and 1975 respectively, Dr Richardson and Dr Seet joined the partnership. Dr Pincus and Dr Richardson worked at Stafford Road, Dr Backstrom worked at Stafford Heights and Dr Seet worked at both places.

57. Early in 1978, Dr Pincus became dissatisfied with the way in which the partnership was operating. The dissatisfaction sprang, it appears, from the fact that not all of the partners were putting equal effort into the practice. Dr Pincus discussed with his brother, a barrister, and with Mr Lee, a solicitor, a change in the practice involving the creation of trusts. It was explained to Dr Pincus that a trust scheme might be created which would provide superannuation benefits for himself and enable income to reach members of his family as beneficiaries of a trust. The matter was considered by the partners who agreed at a meeting held on 18 June 1978 to implement the proposed scheme. On 14 August 1978, the following documents were executed:

(1) A deed of trust establishing the Stafford Road

Medical Centre Trust. Dr Pincus was the settlor, Dr Backstrom was the trustee and the wives of Dr Pincus and Dr Richardson each took a unit in the trust.

(2) A deed of trust establishing the Stafford

Heights Medical Centre Trust. Dr Pincus was the settlor, Dr Richardson was the trustee and the wives of Dr Backstrom and Dr Seet were the original unit holders.

(3) A deed of dissolution and sale. That part of

the practice carried on at Stafford Road was sold to Dr Backstrom as trustee of the Stafford Road Medical Centre Trust and that part of the practice carried on at Stafford Heights was sold to Dr Richardson as trustee of the Stafford Heights Medical Centre Trust.

(4) A service agreement providing for the

employment of Dr Pincus at the Stafford Road Medical Centre commencing on 14 August 1978 at an annual salary of $25,000.

58. The following steps were taken with regard to the practice at Stafford Road. A bank account in the name of "Dr Backstrom Trust Account" was opened. The staff formerly employed by the partnership became employed, as were Dr Pincus and Dr Richardson, by Dr Backstrom as trustee of the Stafford Road Medical Centre Trust. A notice was placed in the surgery at Stafford Road informing patients that the practice there would be conducted by the Stafford Road Medical Centre Trust and that Dr Pincus, Dr Richardson and Dr Seet would be in attendance. The name "Stafford Road Medical Practice" was registered as a business name, the name Stafford Road Medical Centre being unavailable, and the plates outside the surgery were changed. The letter-head used and the heading upon the accounts were altered to refer to the Stafford Road Medical Practice. Suppliers were asked to render accounts to the Stafford Road Medical Practice. The lease to the premises at Stafford Road previously occupied by the partnership was transferred to Dr Backstrom.

59. On 27 April 1979, the Stafford Road Medical Practice as employer, and Dr Pincus and his wife as trustees, entered into a trust deed to establish a superannuation plan known as the Stafford Road Medical Practice Superannuation Plan.

60. On 24 October 1978, cheques for $10,792 and $10,761 were deposited to the credit of the partnership bank account as payment for the goodwill of the practice carried on at Stafford Road and Stafford Heights and other property. Dr Pincus's share of the money deposited was $5,338. Also on 24 October 1978, Dr Pincus paid $5,400 to the Pincus Children Trust of which he was the trustee and his children were beneficiaries. This trust had been established some years before. $5,399 of the $5,400 deposited was used to purchase 5,399 units in the Stafford Road Medical Centre Trust. A similar number of units was purchased by the R.G. Richardson Family Trust.

61. In the year of income in question, which ended 30 June 1979, Dr Pincus, in an amended income tax return dated 23 November 1979, disclosed an assessable income which included $23,000 being gross salary paid by the Stafford Road Medical Practice, and $9,817 being Dr Pincus's share of the partnership profits. By an assessment issued on 21 May 1980, Dr Pincus was assessed to income tax based upon a taxable income of $28,045 for the year ended 30 June 1979.

62. The net income of the Stafford Road Medical Centre Trust for the year ended 30 June 1979 was $28,808. Half of this amount, namely $14,404, was distributed to Dr Pincus's children as beneficiaries of the Pincus Children Trust.

63. On 11 March 1983, an amended assessment was issued to Dr Pincus. By an adjustment sheet which accompanied the amended assessment, the alteration which was made was identified as follows:

Taxable income previously assessed $28,045

Add: Share of net income - Stafford Road Medical Practice 14,404

Taxable income as shown in attached notice of assessment 42,449

It is apparent that the alteration was made in reliance upon s.260 of the Income Tax Assessment Act.

64. Dr Pincus objected to the amended assessment but his objection was disallowed and he requested that it be treated as an appeal to the Supreme Court of Queensland.

65. The learned primary judge (Kelly J.) made a number of findings. In particular, he found that a substantial purpose of the arrangement made by Dr Pincus was to minimize his income tax. The trial judge said:

"The realities of the situation appear to me to

be that the practice at Stafford Road was carried on in essentially the same way after the arrangements came into force as it had been carried on prior to their doing so. There was certainly a change in the legal structure but I have no doubt that Dr Backstrom, although in law the employer of the appellant and the other doctors who worked at Stafford Road, exercised no real control over the way in which the practice was conducted. In the result the appellant continued to earn income in much the same way as he had previously done but with a change in the structure in which that income was being earned."

Upon this basis the primary judge held that s.260 applied but held that Dr Pincus had made a full and true disclosure of all the material facts necessary for his assessment so that the amendment of his assessment was not authorized under s.170 of the Act. The Commissioner successfully appealed to the Full Court of the Federal Court which also dismissed a cross-appeal by Dr Pincus in relation to the primary judge's finding under s.260. It is against that aspect of the Federal Court's judgment that Dr Pincus brings his appeal to this Court.

66. The primary judge reached his conclusion that s.260 applied to the arrangement in this case upon the basis of the reasoning in Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443, on appeal (1966) 116 CLR 38; (1967) 1 AC 308. Before us, as before the Federal Court, the argument put on behalf of Dr Pincus in relation to s.260 was confined to a submission that Peate's Case is no longer good law and, in any event, this case is distinguishable from Peate's Case. An alternative submission was put that if the arrangement in question is struck down by the application of s.260, there is no identifiable income derived by the taxpayer upon which he would have been liable to tax if the arrangement avoided by the section had not been made; in particular, it is said that no partnership between Dr Pincus and Dr Richardson is exposed by the avoidance of the arrangement.

67. There is, I think, no reason why Peate's Case should no longer be regarded as having been correctly decided. Whilst the interpretation of s.260 has undergone some vicissitudes during the twenty or so years since that case was decided, its authority has not been challenged. Nor does it seem to me the principles which were sought to be applied in that case are other than in accord with those principles which have been laid down in later cases. True it is that limits to the application of s.260 have been identified which may now be more apparent than they were at the time of the decision in Peate's Case. Thus in Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330, at p 337, Mason J. was able to refer to "the very restricted operation conceded to s.260 by the course of judicial decision". However, the restrictions are but a recognition of the fact that s.260 does not deny a taxpayer a choice which is offered by the Act itself unless there is something other than the making of such a choice to indicate that a contract, agreement or arrangement has the purpose or effect of avoiding tax in a way which is prohibited by the section. It is only by the adoption of such an approach that it has been possible to reconcile s.260 with the rest of the Act. That approach was, however, clearly laid down in W.P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66 some time before the decision in Peate's Case and there was no suggestion in the latter case of any divergence from it. Rather, the decision in that case is an example of a taxpayer seeking to avail himself of the choices offered by the Act by means of a contrived scheme which could only be explained upon the basis of tax avoidance. It was a scheme which did not aid the taxpayer in the practice of his profession or in the ordinary organization of his affairs and constituted a quite extraordinary arrangement when viewed apart from the provisions of the Income Tax Assessment Act. Because the arrangement went beyond the simple exercise of a choice offered by the Act in seeking to avoid tax, s.260 was held to apply and to deny to the taxpayer the choice which he would otherwise have had. It is that circumstance which distinguishes Peate's Case from Keighery's Case and the cases which followed it (see Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62; Mullens v. Federal Commissioner of Taxation (1976) 135 CLR 290; Slutzkin v. Federal Commissioner of Taxation (1977) 140 CLR 314 and Cridland v. Federal Commissioner of Taxation). There is no inconsistency and no reason to suppose that the decision in Peate's Case is no longer good law.

68. An aspect of the submission that Peate's Case should no longer be followed was the contention that, when it was decided, professional men were set apart from other taxpayers, and particularly from those whose personal exertion contributed little to their income, in a way which deprived them of tax advantages available to others. That, it was said, is no longer so. It is, of course, conceivable that the nature of professional practice may change in such a way that an arrangement of the type struck down in Peate's Case will no longer be seen as an artificial contrivance for the purpose of tax avoidance but as the exercise of a choice in the ordinary course of things which brings with it a tax advantage. That would not, however, be to deny the principles laid down in Peate's Case. It would merely be to require their application to changed circumstances. And, as I remarked in Gulland's Case, the application of those principles may in each case require a separate consideration of the circumstances in which a contract, agreement or arrangement is impugned by reference to s.260.

69. No particular change in circumstance was claimed to have occurred which would distinguish the way in which medical practices are now conducted from the way in which they were conducted at the time Peate's Case was decided, unless it be the suggestion that it is now no longer necessary for a medical practitioner to sue for fees in his own name. It is, to say the least, arguable that this is not so in Queensland having regard to the provisions of s.48 of the Medical Act 1939 (Q.), but in any event it is hardly a sufficient ground upon which to deny the application of Peate's Case. It was no more than a relevant circumstance in that case that the company providing medical services could not sue for fees. It was not decisive as a reason for concluding that the arrangement there was no ordinary business or professional transaction. See Peate's Case, 111 C.L.R., at p.460, per Menzies J.

70. Counsel for Dr Pincus sought, in any event, to distinguish Peate's Case. He submitted that in this case the dissolution of the partnership formed no part of the arrangement subsequently made. Thus, he said, Dr Pincus's income from the partnership ceased upon its dissolution and the income which Dr Pincus received as a result of the arrangement was from a new source. The significance of this was said to be that s.260 presupposes the continued receipt of income from an existing source in respect of which the impugned arrangement seeks to alter the incidence of tax or to relieve the taxpayer from liability to pay tax. Dr Pincus was free, it was argued, to choose the way in which he received his income from a new source and s.260 had no application.

71. The basis of these submissions is to be found in the observations made from time to time that s.260 has no application where there has been no antecedent transaction or situation whereby income is derived because the operation of the section is dependent upon an alteration in some existing liability to pay tax. In Europa Oil (N.Z.) Ltd. v. Commissioner of Inland Revenue (1976) 1 NZLR 546, at p 556, it was said of the New Zealand equivalent of s.260:

"The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his affairs in relation to income from a new source in such a way as to attract the least possible liability to tax."

In Mullens v. Federal Commissioner of Taxation, at pp 302-303, Barwick C.J. added, after citing the foregoing passage:

" ... it seems to me that by parity of reasoning, s.260 may be said not to be concerned with the right to a deduction which the only relevant transaction between the parties would produce in the future.

Again, it is otherwise if, by reason of an

antecedent transaction or situation, the taxpayer was already subject to tax in respect of an income which that antecedent transaction or situation produced or would produce, or was not or would not be entitled to any deduction in the situation created by that antecedent transaction. In such a situation the avoidance of the impugned transaction, because it represented an endeavour to cast what had already been agreed into a form which avoided or lessened the amount of tax otherwise payable, would expose the antecedent situation which did not carry any right to a deduction. Just as there must be income, not derived from the impugned transaction but derived from the antecedent transaction between the parties which, when that transaction is struck down, is exposed as producing assessable income, so, in my opinion, in relation to a deduction, the avoidance of the impugned transaction must disclose a transaction or situation which did not entitle the taxpayer to a deduction."

See also Federal Commissioner of Taxation v. Patcorp Investments Ltd. (1976) 140 CLR 247, at pp 298-299 and Slutzkin v. Federal Commissioner of Taxation, at p 320.

72. Even if it be assumed that the partnership would have been dissolved in any event and forms no part of the arrangement under which Dr Pincus now carries on his professional activities, that fact does not, in my view, lead to the conclusion for which he contends. The new arrangement did not produce a new source of income in the sense in which the cases use that term. Dr Pincus's source of income whilst he was a sole practitioner, whilst he was practising in partnership, and now under the substituted arrangement, has been, and is, the same, namely the practice of his profession as a doctor. The form of arrangement under which he has practised from time to time has not altered the source of his income in any relevant sense. The source of his income tax has been his professional activities as a medical practitioner whether he has been a sole practitioner, a partner or an employee. It is from those activities that his income has derived and his liability to tax has arisen.

73. When speaking of the source of a taxpayer's income, the Privy Council, in Europa Oil (N.Z.) Ltd. v. Commissioner of Inland Revenue, was, in the context, speaking of the real, or ultimate, source of income and not of the vehicle by which it was conveyed to the taxpayer. The legal structure within which an income may be derived by a taxpayer may vary but the source of that income may remain the same. So it was that in Gulland's Case the taxpayer did not derive his income from a new source when he ceased to be a medical practitioner in practice on his own account and commenced to practise his profession as an employee. And in Mangin v. Inland Revenue Commissioner (1971) AC 739, a farmer who leased his land to trustees who were to employ him to work it in the same way as he had done previously and to pay the income to beneficiaries, did not rid himself of the source of income constituted by his farming activities, however much the arrangement may have reduced the income derived by him from that source if the provisions of the arrangement were to be given effect.

74. The final argument put on behalf of Dr Pincus also proceeded upon the basis that the partnership was dissolved for reasons unconnected with tax and formed no part of any arrangement to which s.260 might be applied. Upon this basis it was said that to strike down the arrangement under s.260 would not be to affect the dissolution which must be accepted as having occurred. Thus, the argument continued, in the absence of the partnership which had been dissolved and of the impugned arrangement by reason of the application of the section, Dr Pincus derived no income in respect of which it could be said that there was any alteration of the incidence of income or the avoidance of tax by other means. The argument is one which seeks to rely upon the fact that s.260 is an annihilating provision which may strike down an arrangement but does not permit the reconstruction of a state of affairs which has ceased to exist as the basis upon which to charge tax. It is, however, little more than a variation of the previous argument that upon the dissolution of the partnership the taxpayer commenced to derive income from a new source and was free to choose the manner in which he did so without any constraint imposed by s.260. Upon this argument, the choice is one bestowed by the provisions of the Income Tax Assessment Act which is not inhibited by s.260 because that section is not concerned with new sources of income but with the alteration of antecedent transactions or situations with the specified purpose or effect.

75. The argument, however, ignores the reality of the situation in that both before and after the dissolution of the partnership and the application of s.260, Dr Pincus was without interruption carrying on the practice of his profession in a manner which was essentially the same, however much the income which he derived thereby might flow through different channels. The source of income was the same and the effect of s.260 was to preclude Dr Pincus from the choices which he might have had were he to have been setting up practice afresh or for the first time.

76. Accepting the dissolution of the partnership and disregarding the arrangement which took its place, Dr Pincus carried on practice at Stafford Road in association with Dr Richardson. As a result they were in receipt of income jointly and so were in partnership within the meaning of the definition of partnership contained in s.6(1) of the Income Tax Assessment Act. The expenses of the practice were paid by Dr Backstrom on behalf of Dr Pincus and Dr Richardson but were nevertheless, by reason of s.19 of the Act, met out of the income derived by them. Dr Pincus and Dr Richardson were in receipt of the net profits of the practice as partners and that portion of those profits which, under the arrangement, was received by Dr Pincus as trustee for the Pincus Children Trust is to be treated as income derived by him.

77. The appeal should be dismissed.

Orders

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v. IAN FERRIS GULLAND

Appeal allowed. In accordance with the conditions imposed

on the grant of special leave, order that the costs of the application for special leave and the appeal in this Court be paid by the appellant and that the order for costs in the Full Court of the Federal Court of Australia be not disturbed.

Order that the judgment and order of the Full Court of the

Federal Court (other than the order for costs) be set aside and the appeal to that court be dismissed. STANLEY HENRY WATSON v. THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appeal dismissed. In accordance with the condition imposed on the grant of special leave, order that the costs of the application for special leave and the appeal in this Court be paid by the respondent.
DAVID FABIAN PINCUS v. THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appeal dismissed. Adjourn the question of costs to a date to be fixed.