Gulland, Ian Ferris v Commissioner of Taxation of the Commonwealth of Australia

Re: IAN FERRIS GULLAND
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. WA G31 of 1983
Income Tax
55 ALR 65 / 84 ATC 4587 / 3 FCR 354

COURT

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Bowen C.J.(1), Toohey(2) and Fisher(3) JJ.

CATCHWORDS

Income Tax - assessable income - avoidance of tax - doctor previously operating as sole practitioner - creation of unit trust to purchase practice and employ doctor - objective purpose of arrangement - relevance of taxpayer's evidence - potential for income splitting - whether one of the main purposes - consideration of the "choice principle" - whether incidence of taxation altered - existence of antecedent transaction - whether ordinary family or business dealing

Income Tax Assessment Act 1936, ss. 82AAC, 260

Income Tax - Assessable income - Arrangements for avoidance of tax - Medical practitioner previously operating as sole practitioner - Creation of unit trust to purchase practice and employ doctor - Objective purpose of arrangement - Whether choice principle applicable - Income Tax Assessment Act 1936 (Cth), ss 82AAC, 260.

HEADNOTE

Held (per Toohey and Fisher JJ., Bowen C.J. dissenting), that s. 260 did not apply to a transfer of a medical practice from a sole practitioner to a company as trustee of a unit trust.

Newton v. Federal Commissioner of Taxation (1958) AC 450; Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647; Federal Commissioner of Taxation v. Lutovi Investments Pty Ltd (1978) 140 CLR 434; Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443, (1966) 116 CLR 38; Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330; Slutzkin v. Federal Commissioner of Taxation (1977) 140 CLR 314; Europa Oil (N.Z.) Ltd (No. 2) v. Commissioner of Inland Revenue (N.Z.) (1976) 76 ATC 6001; W.P. Keighery Pty Ltd v. Federal Commissioner of Taxation (1957) 100 CLR 66; Federal Commissioner of Taxation v. Casuarina (1971) 127 CLR 62; Mullens v. Federal Commissioner of Taxation (1976) 135 CLR 290; Bayly v. Federal Commissioner of Taxation (1977) 77 ATC 4045; Jones v. Federal Commissioner of Taxation (1977) 77 ATC 4058; Tupicoff v. Federal Commissioner of Taxation (1984) 84 ATC 4367; Federal Commissioner of Taxation v. Kareena Hospital Pty Ltd (1979) 1979 ATC 4667; Peacock v. Federal Commissioner of Taxation (1976) 1976 ATC 4375; Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440, referred to.

HEARING

Perth, 1984, June 15, 16; August 3. #DATE 3:8:1984

APPEAL.

Appeal from judgment and orders of Kennedy J.

M.J. McCusker Q.C. and R.K. O'Connor, for the appellant.

A.M. Gleeson Q.C. and M.C. Lee Q.C., for the respondent.

Cur. adv. vult.

Solicitor for the appellant: M.A. Bibby.

Solicitor for the respondent: Australian Government Solicitor.

G.F.V.

ORDER

The appeal be allowed.
The judgment of the Supreme Court of Western Australia be set aside and in lieu thereof the appeal to that Court be allowed.
The Commissioner of Taxation's assessment of income tax for the year ended 30 June 1979 be amended by excising from allowable losses the sum of $3,109.
The Commissioner of Taxation pay to Ian Ferris Gulland his costs of the appeal to this Court and of the appeal to the Supreme Court.

Appeal allowed. Judgment of the Supreme Court of Western Australia set aside and in lieu thereof the appeal to that court be allowed. Commissioner's assessment for the year ended 30 June 1979 be amended by excising from allowable losses the sum of $3,109. Commissioner to pay costs of the appeal to the Federal Court and the appeal to the Supreme Court.

JUDGE1

This is an appeal from the Supreme Court of Western Australia concerning the application of s. 260 of the Income Tax Assessment Act 1936 ("the Act"). The primary judge dismissed an appeal by the taxpayer, Dr. Gulland, against the rejection of his objection to his income tax assessment for the year ended 30 June 1979. The facts are set forth in the reasons for judgment of Toohey J. and Fisher J. and I shall not repeat them except so far as may be necessary in discussing my reasons. I am of opinion the appeal should be dismissed.

The evidence discloses that before the arrangement in question took place, Dr. Gulland was a general medical practitioner in sole practice. He paid the "Dr. I. Gulland Family Trust" ("the family trust") to provide administrative services to him. The trust's "specified beneficiaries" are Dr. Gulland's children. Dr. Gulland and his wife are "additional members of the class of general beneficiaries". In the relevant tax year, the "Gulland Medical Clinic Unit Trust" ("the unit trust") was formed. The trustees are Dr. Gulland and a Dr. Burke, who practices on her own account in a nearby practice. All units in the unit trust are held by a Dr. Brindal in his capacity as trustee of the family trust.

The Commissioner sought to avoid both the formation of the unit trust and all relevant dealings entered into by it. The Commissioner did not challenge the primary judge's decision that no part of the arrangement was a sham. He sought to support his application of s. 260 to the arrangement.

As the primary judge noted, in applying s. 260 it is not the motives of the taxpayer in entering the arrangement but the objective "purpose or effect" which is relevant (see Newton v Federal Commissioner of Taxation (1958) 98 C.L.R. 1 at p. 8 and Hollyock v Federal Commissioner of Taxation (1971) 125 C.L.R. 647 at p. 655; cf Federal Commissioner of Taxation v Lutovi Investments Pty. Limited (1978) 140 C.L.R. 434 at p. 466). In considering the application of s. 260, the relevant "purpose" is the effect sought to be achieved by the transaction. To ascertain this objective purpose, the Court will need to examine the circumstances of the case to be able to draw the correct inferences. I agree with Toohey J. that the evidence of the taxpayer may be relevant as to "purpose" as thus understood.

Dr. Gulland gave evidence with respect to the arrangement before the primary judge who, in his reasons for judgment, commented:

"The appellant's stated reason for entering into the foregoing arrangement was to establish a superannuation fund after he had become an employee. He denied that, at the time, he appreciated that the arrangement would result in a reduction in his personal liability for income tax . . . . He was familiar with the notion of income splitting; but he said that he regarded it as something which just might occur in the future, for he could see no immediate prospect of any advantage in that direction, there being insufficient income in the unit trust to do more than pay his salary and an amount of superannuation. But this was not an arrangement designed only for one financial year and the naming of the trustee of the discretionary trust as the beneficiary in the unit trust suggests that income splitting was a significant factor . . . . . I did not find the appellant's evidence as to certain advantages of the superannuation scheme in providing disciplined saving and greater control over investments to be very convincing."

Counsel for the Commissioner emphasised the decisions of the High Court and the Privy Council in Peate v Federal Commissioner of Taxation (1964) 111 C.L.R. 443 and (1966) 116 C.L.R. 38, in which s. 260 was held to be applicable. Peate's Case was of course decided before cases such as Cridland v Federal Commissioner of Taxation (1977) 140 C.L.R. 330 and Slutzkin v Federal Commissioner of Taxation (1977) 140 C.L.R. 314 developed an extended application of the "choice principle". Nevertheless, as Counsel pointed out, Peate's Case has never been overruled or called into question by the High Court in later cases and is concerned with facts basically similar to those in the present case. In it, a partnership of doctors was dissolved and a company was incorporated to receive the fees of the practice. The net profit of the company was in turn distributed to the family companies of the doctors who had formerly constituted the partnership. Every judge and law lord who heard the case in both the High Court and Privy Council held that the purpose or effect of the arrangements was the avoidance of income tax.

With respect to those who think otherwise, I am unable to accept the view that Peate's Case is to be distinguished from the present situation on the basis that, because of the relevant legislation at that time, the company in Peate's Case was unable to sue for the medical fees of the practice. I can find no reliance on this feature of the case in the judgments of either the Privy Council or the High Court on appeal. Further, I do not read the reference to this aspect by Menzies J. at first instance (at p.460) as constituting a basis for his decision. It may be that the use of an entity which cannot sue for fees may be relevant when considering whether the arrangement is capable of explanation by reference to "ordinary business or family dealing" (see Hollyock v Federal Commissioner of Taxation supra at pp.657-658). However, this does not impinge upon the relevance of Peate's Case to otherwise analogous situations.

In my view, the present circumstances are substantially similar to Peate's Case. The income of the practice which was formerly assessable in the hands of the taxpayer is now derived by the unit trust which may distribute profits to the family trust. The fact that in practice no such profits were made in the relevant year does not negate this. An objective purpose which is apparent is income splitting; if this purpose is, in fact, present, the Commissioner need not wait until income splitting becomes manifest before attempting to attack the arrangement.

The fact that no income splitting did in fact occur here is a consideration to be taken into account in determining the purpose but, in my view, the circumstances indicate that the avoidance of tax was a main purpose nonetheless, just as it was in Peate's Case. As Kitto J. said (at p.469):

"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 need for the taxpayer to be an employee to enable tax deductible superannuation contributions to be made was undoubtedly also a main purpose (which the Commissioner also attacked). However, the way in which the arrangement was structured makes it apparent that income splitting was not simply inessential or incidental. The fact that it was one of the main purposes is sufficient to enable s.260 to operate; Newton's Case supra at p.10, Europa Oil (New Zealand) Limited (No. 2) v Commissioner of Inland Revenue (New Zealand) (1976) 76 A.T.C. 6001, Hollyock supra at pp.656-657.

Counsel for Dr. Gulland submitted that the arrangement was open to him as a choice offered by the Act. The "choice principle" ensures that s.260 is inapplicable if:

(a) the taxpayer has a choice under the Act of two or more alternative bases of transactions; or
(b) the taxpayer can create a situation by entry into a transaction which will attract particular tax consequences under specific provisions of the Act.
(See W.P. Keighery Pty. Limited v Federal Commissioner of Taxation (1957) 100 C.L.R. 66, Federal Commissioner of Taxation v Casuarina (1971) 127 C.L.R. 62, Mullens v Federal Commissioner of Taxation (1976) 135 C.L.R. 290, Cridland v Federal Commissioner of Taxation supra.) As Barwick C.J. stated in Mullens' Case (at p.302):

"Though the section speaks of the purpose in entering into the transaction, it can have no relevance if, being effective, the transaction does not alter the incidence of tax, as that expression has come to be understood. As I have already pointed out, 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."

However, I am of opinion that the present case does not come within the choice principle. The arrangement under attack, taken as a whole, altered the incidence of taxation as it previously fell upon the taxpayer. He was previously conducting a business of a general medical practitioner with a reasonably successful practice employing a trust to provide services to him. It was a practical way to run a business which had certain advantages and certain disadvantages in comparison with other methods. Just as in Peate's Case, the taxpayer then substituted one business arrangement for another with a main purpose of avoiding income tax. In my view it would be a misapplication of Barwick C.J.'s analysis of s.260 to hold that the section may operate to avoid the substitution of a partnership with such an arrangement but not operate to avoid this change from a businesslike sole practice operation. It may be that an alteration of the method of conducting a business as a sole trader may be more easily explicable as an ordinary family or business dealing; however such a change will in other instances be seen as altering the incidence of taxation.

The taxpayer in question here did not merely "create a situation by entry into a transaction" to attract particular tax consequences (Cridland supra at p.339). The arrangement here goes beyond mere entry into a transaction such as a university student buying units in a trust. Here, with a purpose of altering the incidence of taxation in which his income from his practice was taxable in his hands, the taxpayer set about creating an entirely different situation whereby by means of a number of agreements entered into by a trust which he set up for this purpose the income could eventually end up in the hands of a family trust rather than his own.

Although the fact that a taxpayer alters his position from a sole trader does not automatically mean either that he has or he has not altered the incidence of taxation, such a change of structure may often be explicable as an ordinary family or business dealing. However, I am of opinion that that is not so in the present case. The primary judge found that the arrangement showed no business purpose which could be identified; no limitation of liability was achieved and no advantage was gained in the running of the practice. The medical practice, so far as the patients were concerned, was conducted in virtually the same manner as it was before the arrangement was entered into. Dr. Burke did not contribute at all to the day to day running of the practice. Many of the steps to implement the arrangement were "carelessly executed" and the dates of the documents were "totally unreliable". The business name was not registered in the trustees' names.

Such matters, especially the total lack of any business purpose, lend weight to the view that the arrangement here bears "ex facie the stamp of tax avoidance." It is true that the absence of commercial reality does not in itself attract s.260. However, when the extraordinary aspects of the arrangement are aggregated, they indicate that the setting up of such a structure is far removed from any ordinary dealing. It is in this sense that the primary judge labelled the arrangement as "artificial" and held that this lent weight to his conclusion. Used in this sense, "artificial" does not mean the opposite of "real" - it was not argued before this Court that the transactions were a sham; the primary judge found that they were intended to have legal reality. However, "artificial" is here used in the sense that the arrangement was not ordinary, that is, not natural in the sense that it would not be carried out for merely normal business purposes. Even though the arrangement was intended to have legal effect, it was carried out with disregard for detail and without any benefit for the running of the practice. In my view it was not explicable by reference to ordinary family or business dealings.

Section 260 is, of course, an annihilating provision only. It operates in this case to avoid the whole of the arrangement particularised by the Commissioner. This results in the income of the practice being derived by Dr. Gulland; no reconstruction is necessary.

In my opinion the appeal should be dismissed with costs.

JUDGE2

The question in this appeal is whether s.260 of the Income Tax Assessment Act 1936 ("the Act") avoids transactions entered into by the taxpayer, Dr. Gulland.

In 1977 Dr. Gulland conducted a medical practice on his own account as a general practitioner in Maylands. In that year, on the advice of his accountant, he set up a service trust known as the "Dr. I. Gulland Family Trust" ("the Family Trust"). The Family Trust was created by a deed of settlement dated 8 April 1977. The settlor was Dr. Gulland's mother and the trustee was his former partner, Dr. Brindal. It should be said immediately that the establishment of this service trust was not challenged under s.260 or otherwise.

In 1979 Dr. Gulland's accountant suggested the creation of a "medical unit trust" which would employ Dr. Gulland and establish a superannuation fund for his benefit. Such a trust, the Gulland Medical Clinic Unit Trust ("the Unit Trust"), was established with Dr. Gulland and a medical colleague as co-trustees. There followed a number of formal agreements, the details and consequences of which are set out in the reasons for judgment of Fisher J. and need not be repeated here. But, in summary, there was an employment agreement between the trustees of the Unit Trust and the taxpayer; a management services agreement between the trustees of the Unit Trust and the Family Trust for the latter to provide services to the former; an agreement between Dr. Gulland as vendor and the trustees of the Unit Trust as purchaser for the sale of Dr. Gulland's medical practice in Maylands; an agreement or arrangement by which the trustees of the Unit Trust assumed responsibility for the lease of the premises at which the practice was conducted and for certain hiring agreements of office and surgery equipment; the issue of units in the Unit Trust to Dr. Brindal for the Family Trust and finally an agreement to establish and operate a superannuation fund for employees of the Unit Trust.

Before the learned primary judge the various agreements and arrangements just described were attacked by the respondent as shams. Although his Honour was critical of the manner in which some of the agreements were entered into, he rejected the contention that they were shams. He held them to be valid agreements intended to achieve the operation of which they spoke, though he expressed reservations about the status of Dr. Gulland as an employee under the employment agreement made with the Medical Clinic Trust. There is no cross-appeal by the respondent and this appeal must be determined on the footing that his Honour's findings concerning the circumstances in which the agreements were made, the dates upon which they were entered into and their legal effect are not the subject of any challenge. The only question before this Court is the operation of s.260.

The learned primary Judge expressed his view of the operation of s.260 in this way:

"The main purpose of the present arrangement was, in my opinion, to avoid income tax. This was to be effected by diverting what would otherwise have been the appellant's income from the practice to the trustees of the unit trust and by his then receiving back a lesser sum by way of salary. It would thus serve an income splitting purpose. It was then apparent that the trustees of the unit trust would seek to obtain a deduction against its assessable income by making a contribution to the superannuation fund for the benefit of the appellant, a deduction not available to the appellant whilst he was carrying on his practice on his own account. There was no reason, apart from fiscal considerations, why the appellant should not have made provision for his own superannuation. Any surplus held by the trustees over and above the superannuation contribution and the other expenses of the trustees was available for the family trust, in respect of which each member of the appellant's family, was a potential beneficiary."

His Honour went on to point out that Dr. Gulland retained a large measure of control as a co-trustee of the Unit Trust and that, so far as his patients were concerned, the practice continued as before. His Honour could identify no business purpose in the arrangement and he concluded by saying:

"The very artificial nature of the arrangement provides, in my view, additional support for my conclusion that the avoidance of income tax was its main purpose".

The application of s.260 had curious consequences for Dr. Gulland, at least for the income year the subject of this appeal, the year ended 30 June 1979. For the year in question, he returned a taxable income of $19,405. The respondent assessed income tax on a taxable income of $16,296, a difference of $3109.00. His Honour pointed out:

"The difference is accounted for by a loss made by the Gulland Medical Clinic Unit Trust, which the Deputy Commissioner treated, in effect, as the loss of the appellant. The assessment was based on the application of section 260 of the Income Tax Assessment Act 1936, to the arrangements entered into by the appellant".

During the hearing in the Supreme Court, counsel for the respondent stated that the adjustment sheet accompanying Dr. Gulland's assessment should more correctly read:

"Taxable income returned: $19,405 Less 'salary' 5,001 $14,404

Add net income purportedly derived by unit trust 1,892 $16,296 =======

The figure of $1,892 is calculated as follows:

Gross fees: $12,130 Less deductions claimed $17,239 Less disallowed wages 5,001 Less superannuation 2,000 10,238 $ 1,892" =======

Even the corrected adjustment sheet was said to be subject to qualifications. One was that the assessment had been raised on the basis that the income claimed to have been received by the trustees was calculated on a cash basis, as had Dr. Gulland's earlier personal income. It appeared however that their income was in fact calculated upon an accruals basis so that if the cash basis were correct, to that extent the assessment was incorrect. The second qualification was that, if Dr. Gulland were to fail for reasons other than the application of s. 260, questions might arise as to certain of the deductions allowed to the trustees. As the appeal did not fail other than by the application of s. 260, no such questions arose.

In the course of his reasons for judgment, the learned primary Judge said:

"The motives of the appellant were fully canvassed before me, although it was acknowledged that it was the character of the acts done and transactions entered into with which s. 260 is concerned".

That statement is in accord with authority (see for instance Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647 at p. 655; Slutzkin v. Federal Commissioner of Taxation (1976-1977) 140 CLR 314 at p. 329) and was not challenged by appellant or respondent before this Court. Section 260 speaks of "purpose or effect". While it is possible to say of a written contract, agreement or arrangement that it has a particular effect, it will in many cases be difficult to infer the purpose of a contract, agreement or arrangement merely from the documents that constitute it. I accept the submission of counsel for the respondent that the evidence of Dr. Gulland is relevant, not as to motive, but to the extent that it may throw light upon the objective purpose of the arrangements into which he entered. In particular, the absence of any suggestion by a taxpayer that an arrangement had some business or family purpose may be relevant to a consideration of whether s. 260 operates.

Because his Honour concluded that the avoidance of income tax was the main purpose of the arrangements made by Dr. Gulland, it was unnecessary, as he said, for him to determine:

". . . whether, for an arrangement to be avoided under s. 260, its main purpose, or one of its main purposes, must be tax avoidance, or whether some less substantial purpose will suffice".

In this respect, Dr. Gulland's counsel took his stand on a statement by the Privy Council in Europa Oil (N.Z.) Ltd. (No. 2) v. Commissioner of Inland Revenue (N.Z.) (1976) 76 ATC 6001 at p. 6009. Dealing with a section of the Land and Income Tax Act 1954 of New Zealand, similar to s. 260, their Lordships said:

"Fourthly, 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".

Counsel for the respondent appeared to accept this formulation when he said: "We are searching for a main purpose". He added: "As long as it is not only an incidental purpose, it only has to be one of the purposes". Although the language is different, this formulation seems to have been taken from the judgment of Gibbs J. (as he then was) in Hollyock at p. 657 where his Honour said:

"The arrangement in the present case, considered objectively, can be seen to have several purposes, including the making of provision for the appellant's wife and the avoidance of death duty, but the avoidance of tax is clearly one of those purposes, and an essential purpose".

In Bayly v. Federal Commissioner of Taxation (1977) 77 ATC 4045 and Jones v. Federal Commissioner of Taxation (1977) 77 ATC 4058 Bray C.J. examined the authorities in which this aspect has been considered. His Honour found some divergence between what had been said in Europa and in Hollyock and considered himself obliged to follow what had been said in the former. But in truth there may be no divergence in what was said in those cases. In Europa, the reference was to transactions having as "their main purpose or one of their main purposes tax avoidance" (at p. 6009). In Hollyock Gibbs J. adverted to a situation in which the avoidance of income tax and the avoidance of death duties were equally important so that he expressed the matter, not in terms of main purpose or purposes, but by saying that s. 260 would not apply if tax avoidance was "an inessential or incidental feature of the arrangement" (at p. 657).

If tax avoidance is the main purpose or a main purpose of an arrangement, s. 260 will operate to avoid the arrangement.

It was Dr. Gulland's case that the main purpose of the arrangements into which he had entered was the obtaining of superannuation benefits, available in the case of employees but not in the case of self-employed persons. Those benefits were said to be twofold, a greater "end-benefit" on ultimate retirement or death and deductibility, to the employer, of contributions. It was part of that submission that any potential for income splitting was no more than an incidental consequence of arrangements which had, as their main objective, the attainment of superannuation benefits.

It was a further arm of Dr. Gulland's case that s. 260 operates only on arrangements made with respect to an antecedent transaction with the objective of avoiding tax consequences which would otherwise flow from that transaction. The section, it was said, has no application to a transaction or arrangement entered into by a taxpayer in the exercise of a choice given to him by the Act. It was said that there is no prohibition, statutory or otherwise, on a trust conducting a medical practice and that the employment of Dr. Gulland by the Unit Trust did not affect or seek to affect any antecedent transaction having tax consequences.

His Honour found the "choice" principle emanating from a number of cases including Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330 to be an "attractive argument". But, in his view, the matter before him was to be determined, not by those cases, but by Peate v. Federal Commissioner of Taxation (1962-1964) 111 CLR 443 (High Court), (1966) 116 CLR 38 (Privy Council). Of that decision his Honour said:

"It may well be that, since 1977, Peate's case has been left to operate only within a fairly narrow field; but in my view the appellant's arrangements come within that field".

The respondent sought to uphold the primary judge's conclusions by emphasising that Peate's case had never been doubted or overruled by the High Court, that it was binding on this Court and that the present appeal fell squarely within the authority of that decision. By way of elaboration, the respondent stressed what was said to be the extremely artificial nature of the arrangements made by Dr. Gulland, the absence of any commercial reality, and of any apparent business or family purpose. Borrowing an expression of Kitto J. in Peate's case, the respondent submitted that the arrangements made by Dr. Gulland bore "ex facie the stamp of tax-avoidance" (Kitto J. in 111 CLR at p. 469).

In considering the implications of Peate's case for the present appeal, one point should be made at the outset. Counsel for Dr. Gulland sought to distinguish the facts in Peate's case from those in the matter now before the Court by submitting that in the present case there is no difficulty in the recovery of fees for medical services rendered. In Peate's case the medical practice was conducted by a company which was not and could not be registered under the Medical Act of New South Wales and in consequence could not sue for fees. In the present case Dr. Gulland's practice is conducted, not by a company, but by registered medical practitioners (of whom he is one) as trustees. There is no difficulty in the trustees suing for any fees that may be outstanding and equally patients have no difficulty in claiming concessional rebates for fees paid.

But, in my view, Peate's case cannot be put to one side in this way. Of the eleven members of the High Court and of the Privy Council who heard the case, only Menzies J. adverted to "a company which could not sue for fees ... particularly in the circumstance that, to the extent to which patients paid fees to the company, their expenditure was not deductible under s.82F" (111 CLR at p.460). But it is clear from a reading of the judgment of Menzies J. that the inability of the company to sue for fees played no essential part in the decision he reached that s.260 was applicable. See in particular at p.460.

The facts in Peate's case are well known. The appellant, a medical practitioner, had for some years practised in partnership with other doctors. In 1956 the partnership was dissolved and several companies were formed and agreements made, the effect of which was that each doctor no longer practised in partnership but attended to patients on behalf of a company. The company also employed other doctors and some persons who were not doctors. The fees received by the company for medical services rendered were applied in accordance with decisions of those doctors in the group who were directors. Monies were disbursed in paying salaries and wages of outside doctors and other employees and in meeting the expenses of the company's business, also in making contributions to superannuation funds for the employees and in paying service fees. The service fees were received by family companies, one of which had been formed for each of the doctors in the group. The payment of service fees represented the distribution of the company's net income among the family companies in proportions agreed upon from time to time between the doctor directors.

At first instance Menzies J., on appeal the High Court unanimously, and on further appeal the Privy Council (Lord Donovan dissenting), held that the plan constituted an arrangement within s.260. Without referring to any of the judgments in detail, it is apparent that in the view of the High Court and the Privy Council the arrangements made were not fairly explicable except by reference to a purpose of reducing the incomes of the doctors from the practice of their profession and thereby avoiding income tax that would otherwise have been payable.

Since Peate's case the operation of s.260 has been narrowed by several decisions of the High Court, in particular Mullens v. Commissioner of Taxation (1976) 135 CLR 290, Slutzkin and Cridland. In Cridland at p.337 Mason J., with whom the other members of the court agreed, said:

"Although the very restricted operation conceded to section 260 by the course of judicial decision and the generality of the language in which the section is expressed stand in high contrast, the construction of the section is now settled. It is therefore a source of some surprise that it continues to be relied upon when its defects and deficiencies have been apparent for so long".

From those cases and from the earlier decision in W.P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66, a principle has emerged "that s.260 has no application to a case in which the Act offers to the taxpayer a choice of alternative tax consequences either of which he is free to choose, as for example, in the case of a company whether it should be constituted as a private or non-private company with the different taxation consequences appropriate to each class of company" (Mason J. in Cridland at p.339). However the principle is not confined to cases in which the Act offers 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". (Mason J. in Cridland at p.339).

Underlying those decisions, I think, is the notion that by adopting a choice offered by the Act or by entering into a transaction having tax consequences for which the Act makes specific provision, there will ordinarily be no antecedent transaction the incidence of tax of which is sought to be altered. Speaking of s.260 in Mullens, Barwick C.J. said at p.302:

"Though the section speaks of the purpose in entering into the transaction, it can have no relevance if, being effective, the transaction does not alter the incidence of tax, as that expression has come to be understood. As I have already pointed out, 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".

That statement was referred to with approval in both Slutzkin and Cridland.

It is against that background that some of the submissions made on behalf of the respondent must be considered. To point to the artificial nature of the transaction entered into by Dr. Gulland, the absence of commercial reality, even the absence of any business or family purpose is not enough to attract the operation of s.260. Thus in Cridland s.260 was held not to apply where an engineering student bought a unit of entitlement in two unit trusts for the sole purpose of averaging his income pursuant to Part III Division 16 as a person who carried on a business of primary production. The Act made specific provision for such a situation and the fact that the taxpayer entered into the transaction deliberately to gain the advantage of that provision did not bring s.260 into operation.

To the extent that some reconciliation is thought to be called for between Peate's case and more recent decisions of the High Court, the reconciliation may be found in the fact that in Peate's case the taxpayer did not merely select one of two choices offered by the Act or merely create a situation attracting tax consequences for which the Act made specific provision. He and the other doctors concerned dissolved their partnership and formed family companies, the operations of which have already been described. There was in truth an antecedent transaction (the partnership), the tax implications of which the doctors sought to alter by establishing a company. In such a case it is relevant to ask whether the transaction is capable of explanation by reference to ordinary business or family dealing (see Newton v. Commissioner of Taxation (1958) AC 450 at p.466) or whether, in the words of Kitto J. in Peate's case, the arrangement bears ex facie the stamp of tax avoidance.

In the case now before the Court Dr. Gulland was, immediately before the arrangements attacked under s.260, a medical practitioner in practice on his own account. It is true that there existed a service trust, the Family Trust, which was established to administer the practice and for which Dr. Gulland agreed to pay the cost plus 30% thereof as a reasonable charge. There is no doubt that the service trust was established with a view to diminishing the taxable income of Dr. Gulland. But until Dr. Gulland's tax return for 1979, no challenge had been made to the operation of that trust under s.260 or under any other provision of the Act. And no challenge was made to its validity before the Supreme Court or before this Court even though the service agreement was established for the sole purpose of reducing the tax liability of Dr. Gulland. Can the pre-existing arrangement fairly be described as an antecedent transaction for which the arrangement now under attack was substituted in order to obtain the benefit of a particular provision or provisions of the Act?

It is the position of the Unit Trust that is under attack. The assessment raised by the respondent, in reliance upon s.260, treated income returned by that trust, of which Dr. Gulland and Dr. Burke were trustees, as income of Dr. Gulland. Seen in that light, there was no antecedent transaction altered for the purpose of altering the incidence of income tax. Dr. Gulland was a self-employed practitioner who opted to become an employed practitioner. What the respondent argued was that the taxable income of the trust was in reality the taxable income of Dr. Gulland. The arrangements made in 1979 did not, in that respect, alter some antecedent transaction.

Although it was argued that the contract of employment was highly artificial and pointed to the unreality of a situation of a medical practitioner who purports to be both employee and co-employer, the respondent accepted the finding of the learned primary judge that this arrangement was not a sham and that it gave rise to rights and obligations enforceable at law.

Peate's case has been the subject of much comment and some criticism. In large part the criticism has stemmed from the argument that, in applying s.260, the High Court and Privy Council were driven to do more than merely annihilate the company arrangement into which the doctors entered. Their former partnership had in any event come to an end when the company was formed; to treat the doctors as still operating in partnership and assessable on the fees received by the company was to revive an arrangement that no longer existed. Though much oversimplified, this was the basis on which Lord Donovan dissented in the Privy Council. His Lordship had no doubt that the conditions precedent prescribed in s.260 existed but thought the section inadequate to meet the particular circumstances of the case before him.

If the arrangements made by Dr. Gulland in 1979 are avoided as against the respondent by the operation of s.260, the taxpayer remains as a self-employed practitioner assessable in respect of the income of the practice. A question may arise as to the role of the Family Trust, for in April 1979 that trust resolved to terminate the service agreement with Dr. Gulland and to enter into such an agreement with Dr. Gulland and Dr. Burke as trustees of the Unit Trust. If s.260 is held to apply to the arrangements made in 1979, it may be that not only is the income of the practice the income of Dr. Gulland but that the expenditure incurred in earning that income no longer includes what would be payable under the original service agreement. But that would not be an argument against applying s.260; it would simply point up the fact that, as a consequence of its operation, Dr. Gulland's income might have to be determined without reference to the service agreement made between him and the Family Trust.

But, in my view, the answer to the question raised by the present appeal is not to be found in Peate's case. That was a decision which turned very much on its own special facts, in particular the substitution of one arrangement for another for the purpose of reducing the taxable income of the doctors concerned. In the case now before the Court, there was no substitution of one arrangement for another. Dr. Gulland established a Unit Trust which employed him and acquired his practice. Before the Supreme Court and before this Court there was much debate as to whether the purpose of establishing these trusts and entering into agreements with them was to secure superannuation benefits or to split income. The establishment of such trusts and the making of such agreements are contemplated by the provisions of the Act and, there being no antecedent transaction to which s.260 can apply, I am of the opinion that the section has no application to the arrangements made by Dr. Gulland in 1979.

I should add that, since preparing these reasons, I have read the judgment of Shepherdson J. in Tupicoff v. Commissioner of Taxation (1984) 84 ATC 4367. The facts in that case were different from those in the present case and nothing said by Shepherdson J. leads me to conclude that in the matter now before the Court there was an antecedent transaction to which s.260 can apply.

The appeal should be allowed and the judgment of the Supreme Court set aside. In lieu thereof Dr. Gulland's appeal against the assessment of income tax for the year of income ended 30 June 1979 should be allowed and the respondent's assessment amended by excising from allowable losses the sum of $3,109. It is not possible for this Court, on the material available to it, to give effect to the first of the two qualifications to which the corrected adjustment sheet was said to be subject.

The respondent should pay the appellant's costs of this appeal and of the appeal to the Supreme Court.

JUDGE3

This is an appeal brought by Ian Ferris Gulland ("the taxpayer") against a decision of the Supreme Court of Western Australia given on 24 June 1983. That Court dismissed the appeal of the taxpayer against the assessment of income tax issued pursuant to the Income Tax Assessment Act 1936 ("the Act") against him by the Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner") in respect of the year of income ended 30 June 1979.

In his return the taxpayer disclosed his assessable and taxable income as $19,405, comprising, to the extent relevant $5,001 salary received subsequent to April 1979 from the Gulland Medical Clinic Unit Trust and $14,624 "net business income".

The Commissioner however in making his assessment reduced the taxable income as returned to $16,296 and identified this alteration in his adjustment sheet as follows:

"Salary $ 5,001 Loss from the Gulland Medical Clinic (3,109) Professional Income 14,624 Dr. Gulland and Brindal (385) Interest 165 ........ Taxable Income $16,296" ........

During the hearing before the trial judge counsel for the Commissioner indicated that, subject to two qualifications not presently relevant, the adjustment sheet should more correctly have read as follows:

"Taxable income returned $19,405 Less 'salary' 5,001 14,404 Add net income purportedly derived by Unit Trust 1,892 $16,296"

It is readily apparent that this figure of $1,892 added by the Commissioner is the difference between the salary of $5,001 returned by the taxpayer and the loss of $3,109 described in the original adjustment sheet as "Loss from the Gulland Medical Clinic". The end result was that the Commissioner in his assessment reduced the taxable income returned by the taxpayer from $19,405 to $16,296, against which assessment the taxpayer paradoxically, but understandably in the circumstances, objected. The taxpayer contended in effect that the Commissioner should not have disregarded the fact that he had earned a salary and that certain of the income, namely $1,892, assessed against him had been derived by the Gulland Unit Trust. He also disputed that s.260 of the Act had any application to his arrangements and that Peate's case hereafter referred to was a relevant authority. Consideration of these questions requires the facts to be related, although not in great detail, as they are not significantly in issue and have been fully stated by the trial judge. There is also no need to review in detail much of the oral and documentary evidence as the trial judge's findings that the arrangements were not a sham but intended to have and did have legal effect were not challenged. Much evidence is relevant only to these two topics.

The taxpayer is a medical practitioner who at all relevant times prior to the year of income was a sole practitioner operating on his own account and under his own name. In April 1977 on his accountant's advice his mother established by deed of settlement a trust in favour of the taxpayer, his wife and children. Dr. Brindal, a former partner of the taxpayer, was the sole trustee of this trust, which was named the "Dr. I. Gulland Family Trust", hereafter called "the Family Trust". The trustee had the power to determine the ultimate destination of the capital of the trust, and a discretion to distribute income among the beneficiaries. In default of exercise of the latter discretion, the income was divisible between the children of the taxpayer. The taxpayer had power to remove the trustee and appoint a new trustee in his place.

Pursuant to arrangements between the taxpayer and Dr. Brindal as trustee of the Family Trust, that Trust took over the management of the taxpayer's medical practice as from 8 April 1977. The services to be performed were prescribed and included employment of staff, payment of salaries, the issue and collection of accounts and general provision of management and office services. The taxpayer agreed to pay for these services on the basis of their cost to the Family Trust plus 30%. Pursuant to these arrangements certain office plant was purchased from the taxpayer and leased back to him. The Family Trust performed these services for the taxpayer for the years of income ending 30 June 1977 and 1978 and for the period expiring 5 April 1979. The Commissioner accepted the arrangements and issued assessments on the basis thereof. As much was made in the reasons of the trial judge and in argument on appeal of the income splitting potential of the Family Trust, particularly when it was introduced into the 1979 re-arrangement of the taxpayer's affairs, it is pertinent to note that relatively small sums of money were involved. Certainly they were insufficient to prompt or warrant the 1979 arrangements. In the year of income ending 30 June 1978 the trustees made payments for the benefit of the children of the taxpayer totalling $2,877 and in the year ending 30 June 1979 $3,808. Much the same position prevailed in the two succeeding years of income. In each of the years of income ending 30 June 1977, 1978 and 1979 the children were the only beneficiaries who participated in the net income of the Trust.

Subsequent to the establishment of the Family Trust and the arrangements for it to provide management services for his practice, the taxpayer had discussions with his accountant, a Mr. Osborne, regarding the possible creation of a superannuation fund for his benefit, because, as the trial judge found, he remained concerned about the financial well-being of his family and himself.

At the beginning of 1979, the taxpayer was 46 years of age with a wife and three children aged 17, 15 and 9 respectively. Apart from his house and a small amount of medical equipment and a motor vehicle his only asset was property inherited from his parents from which he was said to be receiving rent, though none was disclosed in his return of income for the year in question. He had taken out life assurance policies to the extent of approximately $60,000 and accidental death cover for an additional amount of $60,000 and was paying annual premiums totalling $1,132 on life policies and $814 on sickness and accident policies. Because of the medical and educational expenses of his family and rates and taxes incurred in each instance by the taxpayer in the year ending 30 June 1979 he was, in that year, only entitled to a concessional rebate of tax of 33.5 cents for each dollar of the premiums paid on his life policies. There is no doubt that at that time an employed person was in a more advantageous position than one who was self-employed, contributions for his superannuation being allowable deductions to his employer. This was acknowledged by both the Report of the Ligertwood Committee and the Asprey Report. The first steps to improve the position of a self-employed person were introduced by s.82 AAC of the Act enacted on 17 September 1980. By this provision he was entitled to an outright deduction of up to $1,200 and a concessional rebate of a further $1,200.

The trial judge found that the attraction to the taxpayer of a superannuation fund was "seen to be that it was a form of compulsory saving, allowing for the building up of a fund for the eventuality of the appellant's (taxpayer's) retirement or death, although it was acknowledged that, under some circumstances, earlier benefits could be obtained. It was an important consideration that contributions to the fund should constitute a taxation deduction. It was also said to be a material consideration that the appellant (taxpayer) should have some control over the investment of the fund".

Early in 1979 Mr. Osborne suggested to the taxpayer the creation of a "Medical Unit Trust" which would employ the taxpayer and establish a superannuation fund for his benefit. The taxpayer accepted this suggestion and made arrangements with a medical colleague, Dr. Burke, to act as co-trustee with him of the Unit Trust on the basis, in the words of the trial judge "that the proposal was essentially concerned with securing superannuation for the appellant (taxpayer) and that the obtaining by the appellant (taxpayer) of the status of an employee was a central feature of it".

In implementation of the proposal solicitors were instructed by Mr. Osborne by letter dated 26 February 1979 to prepare the necessary documentation for a Unit Trust, a superannuation fund, a management service agreement and a sale agreement for the sale of the medical practice of the taxpayer to the Unit Trust. It is at this stage only necessary to refer briefly to the contents of these documents.

The deed of trust establishing the Unit Trust bears date 1 March 1979. Mr. Osborne was therein described as "founder" being the settlor under the deed and the taxpayer and Dr. Burke were the trustees. The Trust, to be known as "The Gulland Medical Clinic Unit Trust" and hereafter called "the Unit Trust", was created with ten units, all of which were issued to Dr. Brindal as trustee of the Family Trust. It contained power for its trustees, inter alia, to invest its funds in carrying on the business of providing medical services, to employ a medical practitioner or other employees, and to enter into and maintain a superannuation fund for the benefit of any employee. The trial judge found that there was no doubt that the trustees had power to carry on the business of a medical practitioner, and that the trustees themselves were required to be qualified and registered medical practitioners entitled to practice in Western Australia. Dr. Brindal, who was at all relevant times the only unit holder, had power to remove any trustee of the Unit Trust and, under the terms of the Family Trust, was liable to be removed by the taxpayer as trustee of that trust.

Three further documents, a sale agreement, an employment agreement and a service agreement all bear date 5 April 1979 although the trial judge was unable to be satisfied that this date was the date of execution of any of the documents. On 5 April 1979 the taxpayer offered in writing to sell to the trustees of the Unit Trust his medical practice including the goodwill and plant and equipment but excluding book debts for $6,304. This offer was accepted on that day. There was much debate at trial and in the reasons for judgment concerning the figure placed on goodwill but there is no advantage in considering this topic at this stage. The purchase price was never paid but remained in the books of the Unit Trust as a loan by the taxpayer.

At this meeting on 5 April 1979 the taxpayer and Dr. Burke as trustees of the Unit Trust decided to employ the taxpayer as a salaried medical practitioner at a commencing annual salary of $20,000 on the terms and conditions of an employment agreement which the trial judge found was not executed until some 2 or 3 weeks later. There was again much debate as aforesaid on the amount of the salary and this was one of the matters relied upon by counsel for the Commissioner on the appeal. In the agreement the taxpayer and Dr. Burke as trustees of the Unit Trust are described as "the employer" and the taxpayer as "the Doctor". It was executed by Dr. Burke and the taxpayer as trustees and by the taxpayer in his employee capacity.

The minutes of the meeting on 5 April 1979 also record that the trustees would enter into a management services agreement with Dr. Brindal as trustee of the Family Trust to provide management services to the Unit Trust. The management services agreement also bore date 5 April 1979 but the trial judge found that it also was executed subsequent to that date. It provided for Dr. Brindal as trustee of the Family Trust to supply the necessary management and administrative services for the conduct of the medical practice of the trustees. It was in somewhat similar terms, except as to remuneration, as the 1977 agreement between the taxpayer and Dr. Brindal, the termination of which agreement was recorded in the minute book of the Family Trust on that date.

This meeting of the trustees of the Unit Trust also dealt with the establishment of the superannuation fund, resolving that it be established and that Fund Fidelity Pty. Ltd, be the trustee of the fund. Upon preparation of the necessary trust deed it was to be submitted to the Deputy Commissioner of Taxation for his approval. It appears that it was contemplated that an ultimate benefit of $205,010 would be made available for the taxpayer, the necessary annual contribution by his employers, the trustees of the Unit Trust, being initially $5,485. It is not known whether the Commissioner or his Deputy approved this amount as an allowable deduction, but for this and each of the two succeeding years contributions of $2,000 were made.

The meeting also required that the taxpayer register the Business name "Gulland Medical Clinic" on behalf of the trust. The necessary document was signed by the taxpayer but not Dr. Burke whose name is not mentioned therein. There is, in the light of the trial Judge's findings, no need to refer to the manner in which the practice was thereafter conducted except to note the finding of the trial judge that the only possible indication that patients would have of any change in the practice was the reference to the Unit Trust on forms of accounts and receipts. Moreover Dr. Burke, although she saw the financial statements relating to the activities of the Unit Trust, did not seek to interfere with or take any part in the management of the medical practice.

The assessment under challenge by the taxpayer was based on the application of s.260 to the abovementioned arrangements. The first question the trial judge found necessary to determine was whether the arrangements between the taxpayer and Dr. Burke amounted merely to a sham. Notwithstanding his view that many of these arrangements were artificial and carelessly executed and that the dates of documents were totally unreliable, he found that they were intended to have legal reality and to create rights and obligations. They were entered into with the genuine intention of creating a trust to carry on the taxpayer's practice and to employ him therein. This finding was not challenged on the appeal.

The trial judge then considered whether the documents which the parties intended to have effect according to their tenor, produced in law the results intended. In this regard he reviewed the contract for sale of the goodwill of the practice and the contract of employment. He had no difficulty in finding that the former contract was effective. The contract of employment posed for him greater difficulties, first as to whether the taxpayer could enter into a binding contract with himself and Dr. Burke as trustees. If so, the next question was whether the contract could properly be characterised as a contract of employment. Each of these questions he determined in favour of the taxpayer and neither was subject to challenge on the appeal, except to the extent that counsel for the Commissioner contended that the taxpayer was not in law an "employee" for the purposes of s.82 AAC of the Act.

The essential question before this Court on appeal was whether s. 260 operated to avoid the arrangements as against the taxpayer. The finding of the trial judge was that that section did avoid the arrangements, which avoidance left exposed a situation in which the taxpayer, in his personal capacity, was in receipt of the income of the medical practice. The Commissioner at trial gave particulars of the arrangements which he challenged as follows:

"(i) The formation of the Gulland Medical Clinic Unit Trust.

(ii) The employment agreement made between the trustees of the Gulland Medical Clinic Trust and the appellant.

(iii) The management services agreement made between the trustees of the Gulland Medical Unit Trust and the Gulland Family Trust.

(iv) The sale agreement made between the appellant as vendor and the trustees of the Gulland Medical Clinic Unit Trust as purchaser for the sale of the appellant's medical practice at 54 Eighth Avenue Maylands.

(v) The agreement or arrangement whereby the trustees of the Gulland Medical Clinic Unit Trust purported to assume responsibility for the practice premises at 54 Eighth Avenue Maylands.

(vi) The agreement or arrangement whereby the Gulland Family Trust purported to assume the appellant's responsibility as lessee under leases for office and surgery equipment.

(vii) The issue of units in the Gulland Medical Clinic Unit Trust to Dr. C.E. Brindal for the Gulland Family Trust.

(viii) The establishment and operation of a superannuation fund for the purported employees of the Gulland Medical Clinic Unit Trust."

The trial judge made a number of findings of fact which are relevant on this aspect of the appeal, if only, in some instances, for the purpose of explaining and thereby assisting the Court to determine the nature of the arrangements. In respect of the taxpayer's stated reason for entering into the arrangements he said as follows:

"The appellant's stated reason for entering into the foregoing arrangement was to establish a superannuation fund after he had become an employee. He denied that, at the time, he appreciated that the arrangement would result in a reduction in his personal liability for income tax. However, he expected no longer to be liable for the payment of provisional tax, and he anticipated that he would obtain a refund of provisional tax which he had already paid. It was clear that the appellant had in the past been concerned with assessments of provisional tax which he had received. He was familiar with the notion of income splitting; but he said that he regarded it as something which just might occur in the future, for he could see no immediate prospect of any advantage in that direction, there being insufficient income in the unit trust to do more than pay his salary and an amount of superannuation. But this was not an arrangement designed only for one financial year and the naming of the trustee of the discretionary trust as the beneficiary in the unit trust suggests that income splitting was a significant factor. Furthermore, the appellant conceded that there could be a limit to the extent to which the service trust could operate to split his income. He also acknowledged that an important advantage of the arrangement was that a tax deduction would be available to the trustees of the unit trust for their superannuation contribution. I did not find the appellant's evidence as to certain advantages of the superannuation scheme in providing disciplined saving and greater control over investments to be very convincing."

The tax return of the Unit Trust for the year of income ended 30 June 1979 disclosed, as mentioned above, a loss of $5,109 after payment to the taxpayer of a salary of $5,001 and providing for him a contribution of $2,000 to the superannuation fund. In the year ended 30 June 1980 the Unit Trust made a loss of $731 after paying the taxpayer a salary of $20,004 and contributing $2,000 to the superannuation fund. The loss incurred by the Unit Trust for the year ended 30 June 1981 was disclosed as $4,859. In that year the salary paid to the taxpayer was $24,672 and a like amount of $2,000 was contributed to the superannuation fund on his behalf. There was in consequence no distribution of income in any of these years to Dr. Brindal as trustee of the Family Trust as there was no income to distribute. This is not an irrelevant matter for consideration on the question of income splitting. It was confirmatory of the taxpayer's evidence that he did not see the arrangements as providing any immediate prospect of advantage by way of income splitting.

The trial judge said that the Commissioner sought to identify two relevant purposes within the meaning of s. 260. The first was to secure superannuation benefits not otherwise available to the taxpayer, "the key being to secure an income tax deduction in relation to contributions to the fund". The second was that of income splitting. It was said that even if the trustees did not obtain a deduction of the amount of their contribution to the superannuation fund, there would still be available to the taxpayer the benefit of income splitting which would secure a reduction in his personal income tax.

The contention put by the taxpayer to the trial judge was that the purpose of the arrangement was to obtain for the taxpayer an entitlement to superannuation, which could only be made available to him as an employee. The obtaining of this benefit was, to some extent at least, dependent upon the employers being able to obtain an income tax deduction under s. 82 AAC of the Act of their contributions to the superannuation fund.

The trial judge acknowledged that although the motives of the taxpayer were fully canvassed before him, it was the character of the acts done and transactions entered into with which s. 260 was concerned. On this point he found that the main purpose of the arrangements was to avoid income tax by diverting what would otherwise be the taxpayer's income from the practice to the Unit Trust and by him receiving back a lesser sum by way of salary. Whilst acknowledging that the taxpayer could not obtain deductions for contributions to the superannuation fund as an employee, he said that there was no reason, apart from fiscal considerations, why the taxpayer should not have made provision for his own superannuation and that, even though no surplus funds were in early years available from the Unit Trust for dstribution to the Family Trust, the arrangement clearly offered scope for future income splitting. He said this was undoubtedly appreciated when the Family Trust was selected as beneficiary of the Unit Trust. In making his ultimate finding he relied upon the fact that, as far as the patients were concerned the practice continued as before and on the fact that, as he said, no business purpose, such as limitation of liability, could be identified in connection with the arrangements. He reiterated his view that "the very artificial nature of the arrangement provides, in my view, additional support for my conclusion that the avoidance of income tax was its main purpose". During the course of his reasons he stated his view that the appeal before him was to be determined by Peate's case (Peate v Federal Commissioner of Taxation (1964) 111 C.L.R. 443, (1966) 116 C.L.R. 38). Although he acknowledged that Peate's case had, since 1977, been left to operate only within a very narrow field, his view was that the arrangements came within that field, although he did not attempt to specify the metes and bounds thereof. Reliance, he said, had been placed by the taxpayer on the line of cases culminating in Cridland v Federal Commissioner of Taxation (1977) 140 C.L.R. 330, which established and illustrated the application of the principle of choice. His Honour acknowledged that if those cases stood alone, the choice argument would be attractive. His conclusion however was that the matter was to be determined by Peate's case.

It is my opinion that the trial judge erred in adopting this approach. The appropriate course was to identify what were the principles for which Peate's case stood as an authority in 1979. These principles should then, to the extent appropriate, have been applied to the facts in this present matter. In this regard it is necessary to bear in mind that more than 22 years intervened between the dates of the two arrangements. During that period standards of acceptable conduct as well as the operation of s. 260 had changed. If his decision was (to use the relevant words of Newton's case) that the arrangements must necessarily be labelled as a means to avoid tax, he was obliged to consider whether the choice principle was applicable before finding that the provisions of s. 260 avoided the arrangements.

Peate's case has not, as the trial judge said, been critically examined or questioned otherwise than by single judges but this because there has not been at appellate level any cause so to do. However, as he acknowledged, it has now only application within a very narrow field, though counsel for the Commissioner on the appeal was not prepared to agree with this statement. It is my opinion that on a number of grounds there is no scope for it to be applied uncritically to avoid what at first glance have the appearance of somewhat similar arrangements. It has without doubt been affected by "the very restricted operation conceded to s. 260 by the course of judicial decision" since 1966, See per Mason J. in Cridland's case supra at page 337 Even the legislature has at least recognised the limitations of s. 260 by inter alia enacting Part 1VA of the Act in June 1981. Subsequent judicial decisions and changing times must be taken into account when considering the very general language of the members of the various courts who heard Peate's case. In particular what was accepted in 1979 as an "ordinary business or family dealing", particularly by professional men, differed, in my opinion, greatly from what was the norm in 1956 when Dr Peate entered into his arrangements.

I regard Peate's case, with respect to those matters in issue in it and the present case, as authority for the following proposition. A matter to be accorded considerable weight, in assessing an alleged ordinary business or family dealing, is if the dealing purports to vest an activity in a person or body which is prevented by professional or statutory controls from pursuing that activity. Such a transaction might well only be explicable as a means to avoid tax, as it would be an unlikely feature of an ordinary business or family dealing.

The trial judge was of the view that Menzies J. in Peate's case did not see his conclusions on the topic of legal or professional controls as vital to his decision. It has been said that this was not the ratio of his decision. This is doubtless correct. The words however that Menzies J. used on this aspect of Peate's case have attracted judicial attention and appear as follows on page 460:

"It is true that I do regard this incorporation of Raleigh and the seven other doctors' family companies as colouring everything that was done here but, even without this, I would have concluded that it was not an ordinary business transaction for a body of professional men who are entitled to sue for fees for medical services to transfer their practices, their libraries and their instruments to a company which could not sue for fees and to become that company's servants in the conduct of their profession, particularly in the circumstance that, to the extent to which patients paid fees to the company, their expenditure was not deductible under s. 82F. What, outside a profession, might be regarded as an ordinary business transaction may, within a profession, have an altogether different appearance."

Other members of the Court did not expressly refer to this particular passage but endorsed the general view of Menzies J. at page 459, namely

". . . when all that is done is looked at and in particular when the role of Raleigh is examined there is a strong prima facie case that the purpose and effect of what was done was to obtain increased tax deductions from assessable income and to divide what would otherwise have been Dr. Peate's taxable income between himself, his wife and his children."

It is pertinent to remember that the role of Raleigh was to carry on a medical practice the fees payable to which it could not recovery by suing and which were not deductible to the patients. Numerous judges, in considering s. 260's impact upon arrangements bearing some similarity to those in Peate's case, have used these matters as a ground of distinction.

Bray C.J. said in Jones v Federal Commissioner of Taxation 77 A.T.C. 4,058 at 4,067

"The fact that the appellant is a registered pharmaceutical chemist makes the transaction appear at first sight unusual to a lawyer's mind, because the notion of a professional man working in the course of his profession as a salaried employee of a lay employer seems disturbing or, to some minds perhaps, shocking. In this connection it is an important, though not a decisive, consideration that in my view there is nothing illegal in the ownership of the McLaren Vale pharmacy business by Mrs. Jones in the circumstances of this case. Here the case falls in line with Peacock's case and not with Peate's case or Hollyock's case."

In Federal Commissioner of Taxation v Kareena Hospital Pty. Limited 79 A.T.C. 4667 at 4684 Lockhart J. relied on this aspect of Peate's case as one of the grounds for distinguishing it. He said in respect of an argument that the facts in Peate's case provided a close analogy to the matter before him:

"In my opinion Peate's case is clearly distinguishable from the present case. First, a fundamental distinction between Peate's case and the present is that only a qualified medical practitioner, being a natural person, could carry on the profession of medicine under the Medical Practitioner's Act of New South Wales, so that at all times the carrying on of the medical practice necessarily involved the activities of Dr. Peate and his fellow practitioners. In the present case the carrying on of a hospital business is an activity which may be legitimately engaged in by corporations as well as by natural persons . . .".

I refer also to the discussion of the same topic by Brennan J. on page 4673 of that case.

In Hollyock v Federal Commissioner of Taxation 71 A.T.C. 4202 the present Chief Justice of the High Court had to consider an arrangement by a chemist to sell a half share in a pharmacy business to his wife. After deciding that what was done did not seem capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, the Chief Justice said at page 4206

"An important feature of the case is that the business which the appellant declared that he held in trust was one that could lawfully be carried on only by a pharmaceutical chemist, so that it remained necessary for the appellant to carry on the business and his wife could not lawfully join with him in carrying it on. As Menzies J. said in Peate v F.C.T. supra at p.460 'what, outside a profession, might be regarded as an ordinary business transaction may, within a profession, have an altogether different appearance'. Millard v. F.C.T. (1962) 118 C.L.R. 336 provided another example of a case in which the business whose income was the subject of the agreement avoided by sec. 260 - that of a bookmaker - could only be carried on by a person who had the necessary registration'."

In Jones v Federal Commissioner of Taxation supra at page 4,067 Bray C.J. said of the arrangement in that case, which contained no illegal activity on the part of the wife, that

"In my view the arrangement is capable of explanation by reference to ordinary family dealing and is not necessarily to be labelled as a means to avoid tax. It falls within the class of cases illustrated by Peacock v Federal Commissioner of Taxation 76 A.T.C. 4375 rather than within the class of case illustrated by Peate's case (116 C.L.R. 38) or Hollyock's case above."

In Peacock's case it was permissible for a wife to become a partner in a surveyor's business, even though she was not qualified as such.

In the present matter there was no professional or statutory restriction on the trustees of the Unit Trust carrying on the medical practice. There is therefore this distinction, which I see as significant, between the facts of this case and Peate's case. It follows that I can not accept that the decision in Peate's case can be applied as being closely analagous to the present matter.

The trial judge drew attention to the general finding of Menzies J. in Peate's case, set out above, that there was a strong prima facie case that what was done there was to increase deductions and split income. He and other judges felt that the arrangements were so exceptional in the case of professional people that they necessarily carried the stamp of tax avoidance. I have already set out Menzies J's comments concerning the position in which professional men, and doubtless many others, stood in the middle of this century. There is no doubt that times and circumstances have changed and had changed by 1979 when the taxpayer made his arrangements. Menzies J. said at p.459:

"To arrange for the formation of a company in which all the shares would be held in trust for two children and then that Dr. Peate should transfer his professional practice, his books and his instruments to that company and become its servant in the practice of his profession . . . is not, to my mind, explicable by reference either to ordinary business or ordinary family dealings . . ."

It was accepted in argument that such a transaction, namely the sale of a medical practice to a company, can these days be so explicable, though it was not so in 1979 when the taxpayer sold his practice.

I refer also to the observations of a general nature which Menzies J. made at pages 445-6 of Peate's case and which were set out by the trial judge in his reasons. These comments purported to set apart the professional man from the mainstream of the community in a way which differs from the state of affairs existing now and in 1979. Menzies J referred to the expedient of a professional man assigning his earnings to his wife and children as unacceptable in 1956 but it is not so at the present time (see Cf Everetts' case infra). Taylor J. at page 475 also expressed his distaste for the assignment of professional income and Kitto J. at p.469 had the same concern with the diverting of professional income of doctors to or for the benefit of their families. It is relevant to note that on the same page Kitto J. saw "the making of superannuation provision for employees", including employed doctors, and "the making of provision for the doctors' families" as not being necessarily connected with taxation. Windeyer J. for his part indicated at page 479 that he could not see that

"for a medical practitioner to enter into an agreement to become the paid servant of a company which was to make it its business to hire him out as a servant of another company is surely not an ordinary business dealing."

Such general statements may well have reflected attitudes prevalent in 1956, but by 1979 there had been a considerable swing in favour of permitting professional persons to arrange their affairs in favour of their families in the same way as builders, plumbers, carpenters etc, albeit by more sophisticated means. Such re-arrangements were necessarily at all times subject to professional and statutory restrictions. The decisions of the Courts who heard Federal Commissioner of Taxation v Phillips (1978) 20 A.L.R. 607 are indicative of this trend. In that matter a firm of chartered accountants formed in 1971 a Unit Trust which acquired furnishings and equipment owned by the firm and took over the employment of the staff. Units in the Unit Trust were held by the families of the partners and associated companies. The trustee of the Unit Trust permitted the firm to use the furniture and equipment, for the use of which and for secretarial services the firm was charged. There was no doubt that the establishment and operations of the Unit Trust (which were very similar to those of the Family Trust in the present matter) did enable some income splitting. This arrangement was considered acceptable both by the Supreme Court of New South Wales and the Full Court of this Court and the payments made by the firm to the Unit Trust were allowable deductions under s. 51 of the Act. The question of s. 260 was expressly abandoned by the Commissioner.

In Federal Commissioner of Taxation v Everett the High Court ((1980) 143 C.L.R. 440) and the Full Court of this Court ((1978) 21 A.L.R. 625) as well as Meares J. of the Supreme Court of New South Wales (16 A.L.R. 605) found acceptable an assignment by a solicitor to his wife who "happened to be a qualified solicitor" (143 C.L.R. at page 445) of portion of his share in his firm together with a share of profits, the solicitor constituting himself a bare trustee of the assigned share.

Neither of these decisions nor any of the reasoning therein is entirely in accord with the general comments of members of the High Court in Peate's case. For these reasons I do not consider that this appeal can be determined by the application of the decision in Peate's case to the facts of this appeal.

It is necessary in my view to consider in their context the overt acts which constitute the arrangements, for the purpose of determining in the light the tests in Newton's case whether s. 260 has application. Are the transactions as a whole capable of explanation by reference to ordinary family or business dealings, or are they necessarily to be labelled as a means to avoid tax? In applying these tests, which are a gloss on the section, it is proper to note that they are only one method of approach. (See Cridland's case p.338). However it is the appropriate manner in which, in my opinion, initially to consider this matter. Equally it is important to draw attention to the use of the words "capable of explanation" on the one hand and "necessarily to be labelled" on the other. I have added the emphasis.

My assessment of the overt acts which constitute the arrangements is that they are capable of explanation by reference to ordinary family dealings. I would attach far more significance than did the trial judge to the pursuit of superannuation benefits. This was a perfectly understandable objective for the taxpayer, as it is generally for persons with dependants and no substantial assets, to seek to provide for himself and his family when he retired through age or incapacity. It was very much in the family interest and in particular the interest of his wife that appropriate provision should be made. However it is unarguable that, desirable as it was to achieve these benefits, it was extremely difficult for them to be provided by a professional man at the time, bearing in mind the then existing professional and statutory restrictions including the restriction on incorporation. Equally, in my opinion, it was not reasonable to expect that an appropriate level of benefits could be "purchased" without the assistance of the provisions of the Act and in particular those relating to the deductability of premiums or contributions. The transaction into which the taxpayer entered, on my findings, for the purpose of making provision for superannuation was, perforce, complex and highly technical as well as doubtless distasteful to many equity lawyers. However if the objective was to be achieved there was no alternative. It is not appropriate, in the light of the finding that the arrangements had the legal effect intended, to call them artificial except in the sense that they were not normal and indeed were somewhat unusual. It may also be that in the end the taxpayer did not technically qualify as an "employee" under s. 82 AAC of the Act, but that is not a matter for our consideration.

The trial judge however found that the arrangements must necessarily be labelled as a means to avoid tax. In making this finding he appears to have attached considerable significance to the fact that the Family Trust was the beneficiary of the Unit Trust and thus it was possible to engage in further income splitting. For my part I do not see the introduction of the Family Trust into the arrangements as being of any great significance. If a Unit Trust was to be the means whereby the whereby the taxpayer would seek to achieve superannuation benefits it was necessary as a matter of law that that Trust have a beneficiary. For the taxpayer to be the sole beneficiary, and thereby perhaps to minimise the prospects of an allegation of income splitting, would result in the trustees of the Unit Trust becoming virtually bare trustees for one of themselves and invite the contention that the Unit Trust structure was a sham and a facade. To provide that the Family Trust should be the beneficiary was sensible and reasonable in the circumstances and does not necessarily require the inference that it was inserted for the purpose of avoiding tax. This was particularly so as the Family Trust was an existing trust, acceptable to the Commissioner and most unlikely to receive, in its capacity as a beneficiary, any income in the foreseeable future from the Unit Trust. I do not see the inclusion of the Family Trust in the arrangements as having in the circumstances any significant tax avoidance consequences. It was to my mind a relatively incidental feature of the arrangements.

I conclude therefore by finding that for the reasons mentioned s. 260 does not avoid the arrangements. I find that it is not necessary to label the arrangements as having either the main or a main purpose of tax avoidance (See Europa Oil N.Z. Ltd. (No.2) v Commissioner of Inland Revenue (N.Z.) 76 A.T.C. 6001) and that Peate's case is not conclusive authority to the contrary.

It is strictly therefore not necessary for me to consider the argument based on the choice principle. I would draw attention however to the manner in which this principle was stated by Mason J. in Cridland's case at p.339, namely

"It 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 special 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 trial judge found the argument based on the choice principle attractive. It appears he would have accepted it but for Peate's case. In my opinion Peate's case was not a bar to a decision favourable to the taxpayer on the basis of the choice principle. I also find the application of the choice principle "attractive" but it is not necessary for me to determine whether it is available on the facts of this matter.

I would allow the appeal and direct the Commissioner to pay the costs thereof as well as in the Supreme Court.

[1984] FCA 227

03 AUGUST 1984