Tupicoff v Federal Commissioner of Taxation

[1984] FCA 382

Re: GARY TUPICOFF
And: THE COMMISSIONER OF TAXATION
No. G62 of 1984
Income Tax
84 ATC 4851 / 56 ALR 151 / 4 FCR 505

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Fisher(1), Jenkinson(2) and Beaumont(3) JJ.

CATCHWORDS

Income Tax - Assessable Income - Taxpayer an Insurance Agent - Taxpayer restructuring activities so as to secure tax advantages - Incorporation of company - Taxpayer employed as "approved representative" of company - Family Trust - Income Splitting - Whether arrangements void as against Commissioner - whether taxpayer exercising "choice" principle - Ordinary business or family dealing - Consequences of s.260 - Source of income.

Income Tax Assessment Act 1936 ss.260, 19

Income Tax - Arrangements affecting liability - Arrangements void against Commissioner - Life insurance agent - Company formed to take over agency - Company trustee of discretionary trust - Beneficiaries include taxpayer, wife and children - Alienation of income - Income Tax Assessment Act 1936 (Cth), s 260.

Income Tax - Returns and assessments - Notice of assessment - Taxpayer assessed on income claimed to have been derived by trust - Taxpayer's wife assessed on same income as beneficiary under trust - Taxpayer producing wife's notice of assessment at hearing of appeal against own assessment - Conclusiveness of correctness of wife's assessment - Whether relevant to taxpayer's appeal against own assessment - Income Tax Assessment Act 1936 (Cth), s 177(1).

HEADNOTE

Held (per curiam): (1) Except for s 260, the arrangements carried out by the taxpayer - in resigning his appointment as commission agent for an insurance company, procuring the appointment in his stead of a company in the capacity of trustee of a newly formed discretionary trust the beneficiaries of which were the taxpayer and members of his family, and taking up employment with the trust for whom he then carried out the insurance selling activities previously carried out on his own behalf as an individual agent - were genuine arrangements which had the effect that any commission received following their implementation was income derived by the trust. No question of an attempted assignment of future income from the taxpayer's personal exertions arises in this situation.

Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443 at 475 and 480, per Taylor and Windeyer JJ; Spratt v. Commissioner Inland Revenue (1964) NZLR 272 at 277, distinguished.

(2) The real objective of the arrangements was the splitting of the taxpayer's income between members of his family, and therefore the arrangements were void as against the Commissioner pursuant to s 260.

Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443; Newton v. Federal Commissioner of Taxation (1958) AC 450; Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647, applied.

Deputy Federal Commissioner of Taxation v. Purcell (1921) 29 CLR 464; Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330; Federal Commissioner of Taxation v. Kareena Hospital (1979) 41 FLR 307, distinguished.

(3) Once s 260 operated to annihilate the arrangements, there were left exposed facts justifying the inclusion of the trust's income in the taxpayer's assessable income, namely that the taxpayer, by his exertions, earned the income.

(4) The evidentiary conclusivity of correctness given to a notice of assessment by s 177(1) cannot be used as a basis for challenging the correctness of another (allegedly inconsistent) assessment.

Richardson v. Federal Commissioner of Taxation (1932) 48 CLR 192 at 206-207, and 212, referred to.

HEARING

1984, October 8, 9; November 21. #DATE 21:11:1984

APPEAL

Appeal from judgment and orders of the Supreme Court of Queensland.

J H Byrne QC and P C Keane for the appellant.

The overt acts constituting the impugned "arrangements" are capable of explanation by reference to ordinary business dealing.

Newton v. Federal Commissioner of Taxation (1958) AC 450; Oakey Abbatoir Pty Ltd v. Federal Commissioner of Taxation (1984) 3 FCR 354; Gulland v. Federal Commissioner of Taxation (1984) 3 FCR 354 The case of Pincus v. Federal Commissioner of Taxation (1984) 3 FCR 354 is distinguishable because, in that case, the fact that the trustee could not lawfully have sued for its fees counted against the arrangements as being so explicable. Section 260 has no more application so as to set at nought a choice by a taxpayer to cease earning income by personal exertion than it does to a decision to divest himself of income producing assets.

Purcell v. Federal Commissioner of Taxation (1921) 29 CLR 464; War Assets v. Federal Commissioner of Taxation (1954) 91 CLR 53; Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330; Mullens Investments Pty Ltd v. Federal Commissioner of Taxation (1976) 135 CLR 290; Slutzkin v. Federal Commissioner of Taxation (1977) 140 CLR 314; Peacock v. Federal Commissioner of Taxation (1976) 28 FLR 355; Jones v. Federal Commissioner of Taxation (1977) 15 SASR 462; Federal Commissioner of Taxation v. Kareena Private Hospital (1979) 41 FLR 307; Europa Oil (NZ) Ltd v. Inland Revenue Commissioner (NZ) (1976) 1 WLR 464. Section 260 has no application to the taxpayer's decision to resign from his employment with the insurance company, or to his choice to take up employment with the trustee company and thereby to pay income tax as an employee. There is no alteration of the proper incidence of tax so long as it is the trustee company which derives the income. What the company earned, albeit by reason of the taxpayer's skill and acumen was commission on the sale of insurance policies, not fees for his professional services. In this respect, it is closer to Peacock, Bayly v. Federal Commissioner of Taxation (1977) 15 SASR 446, and Jones than to Peate, Gulland v. Federal Commissioner of Taxation (1984) 3 FCR 354 and Watson v. Federal Commissioner of Taxation (1984) 15 ATR 917, in that income is not generated as the "fruits of a professional practice", but as a commission on the sale of a product, a sale which may as well be effected by the company or by the taxpayer. Alternatively, the Commissioner's inconsistent assessment of the taxpayer's wife as a beneficiary in the trust is, by reason of s 177(1), conclusive against the Commissioner.

R E Cooper QC and R Q Gotterson, for the respondent.

The arrangement was an assignment of future gross earnings or analogous thereto: Peate at 475, 480-481, Hollyock at 653-654. A sole trader cannot assign the products of personal exertion to avoid derivation of them: Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440 at 453-455. The insurance commissions were the products of the taxpayer's personal exertions and remained so after the erection of the arrangements. It is not necessary that a sham be found but there is sufficient evidence to so find. Alternatively, the arrangements constituted a scheme of pre-ordained, related steps, conditional on the fulfilment of each, and in which all the parties were friendly and the taxpayer retained effective control of the trust and thus the income: see Oakey Abbatoir, Peate and Pincus cases. The main purpose and effect was alteration of the incidence of tax on the income earned from the taxpayer's personal exertion by interposing a corporate trustee of a family trust to split the income of the taxpayer with his family.

The arrangements bear ex facie the stamp of tax avoidance and are not explicable by ordinary business or family dealings: see Gulland. In particular, corporate status did not require the trust element; the taxpayer's exposure to liabilities remained; and the company could not, conformably with the terms of its appointment as insurance agent, carry on business other than through the taxpayer's personal exertions: Hollyock, and Millard v. Federal Commissioner of Taxation (1962) 108 CLR 336 The "choice" principle does not apply because here there was a pre-existing arrangement which was interfered with, the transactions themselves did not attract particular tax consequences under specific provisions of the Act, and no new source of income was involved: see Pincus, Gulland, and Watson cases. When s 260 renders the arrangements void as against the Commissioner, what remains is income produced by the taxpayer through his labour. In the absence of any other person having beneficial property in it, it can only have been derived by the taxpayer: Federal Commissioner of Taxation v. Clarke (1927) 40 CLR 246 at 261 Section 177(1) only operates so as to provide conclusive evidence of the correctness of an assessment in proceedings where the Commissioner or the taxpayer to whom it was issued assert rights or liabilities flowing from it. The conclusive effect is limited to the particulars appearing in the notice so far as they relate to the assessment. The existence of the wife's assessment as issued does not prevent the Commissioner assessing the taxpayer on the derived income: Richardson v. Federal Commissioner of Taxation (1932) 48 CLR 192; Hancock v. Federal Commissioner of Taxation (1961) 108 CLR 258

Cur adv vult

Solicitors for the appellant: McCullough and Robertson.

Solicitor for the respondent: Australian Government Solicitor.

FPC

ORDER

1. The appeal be dismissed.

2. The Appellant Gary Tupicoff pay to the Respondent his costs of the appeal. Appeal dismissed with costs

JUDGE1

In this matter I have had the advantage of perusing in draft form the reasons of Beaumont J. I agree with his conclusion that the appeal should be dismissed and generally with his reasons. There is no need for me to restate the facts and I propose only to make observations on the application of s.260 of the Income Tax Assessment Act 1936 ("the Act") to the taxpayer's arrangements.

Counsel for the taxpayer sought to avoid the application of the section primarily on the ground that the overt acts constituting the arrangements were explicable as ordinary business dealings. Alternatively, he contended that by using a trustee company as the vehicle for what had been his personal agency activities the taxpayer was exercising a choice open to him under the Act (Cridland v Federal Commissioner of Taxation (1977) 140 C.L.R. 330). These submissions encompass the principal grounds upon which the Courts have refrained from applying s.260. On these grounds it is as open now as it was in 1977 for taxpayers to avoid, in respect of pre 27 May 1981 arrangements, the application of the section. Likewise, it is equally open to the Commissioner (in their absence) to seek to apply the section in like matters with reasonable prospects of success.

The trial judge correctly found, in my opinion, that the arrangements could not be explained as ordinary business, or for that matter family, dealings. The Commissioner's contention was that the application of Peat's case (Peate v Federal Commissioner of Taxation (1964) 111 C.L.R. 443, (1966) 116 C.L.R. 38) to the facts of this matter conclusively determined it in his favour on this ground. To the extent that Peate's case adopted and applied the ordinary business or family dealing test of Newton's case (1958) A.C. 450 to its particular facts, it is correct to say that the principles of Peate's case are applicable here. However the application of those principles to facts which are similar, although not identical, to Peate's case will not always produce the same result (of Gulland v Federal Commissioner of Taxation 84 A.T.C. 4587).

In my opinion the principles applied in Peate's case do produce in this matter a result favourable to the Commissioner, even though the facts are not identical. They particularly differ in that Peate's case dealt with the activities of professional men in earlier times and different circumstances. Such a favourable result is produced here because it is not possible objectively to discern any significant business or commercial purpose in the taxpayer's arrangements. Indeed careful attention seems to have been given to the retention of as much as possible of the pre-existing arrangements. The taxpayer retained his status as an accredited representative approved by National Mutal Life Association of Australasia Limited ("National Mutual") and as such he preserved for himself his existing benefits in superannuation, medical, accident and sickness funds conducted by National Mutual. Likewise he appears to have retained for the company the benefit of his existing bonus entitlements. On the other side of the coin he was required personally to indemnify National Mutual in relation to his company's activities. Thus he was not only subject to the same liabilities as before but he and the company doubtless became subject to new liabilities under the Trade Practice Act 1974.

The trial judge found that the subjective purposes which the taxpayer contended had motivated him to enter into the arrangements were insignificant. It is a matter of established law that they were also irrelevant. In any case neither those purposes nor the alleged objective purposes required the insertion into the arrangements of a discretionary trust. It is also pertinent to note, though not entirely relevant, that the discretionary distribution of income by the trustee appears to have been made with a view to minimising tax. The taxpayer's two children each received, in accordance with the trustee's distribution the maximum amount permitted without incurring liability to tax thereon.

Even though as a matter of law the taxpayer was employed by the trustee company, which held the agency from National Mutual, the source of the company's revenue and of the income distributed by it as a trustee was the personal exertion and expertise of the taxpayer. It cannot be said that the arrangements amounted to an assignment of future income, as contended by the Commissioner, even if the result sought to be achieved by the arrangements was the same as if such an assignment had been attempted. In my opinion the only significant discernable purpose was that of income splitting. The contention of the taxpayer that he avoided the application of s.260 on the ground of ordinary business was thus correctly rejected by the trial judge.

Even though the arrangements must be labelled as a means to avoid tax, the taxpayer was still entitled to contend, as he did, that he brought himself within the choice principle as explained by Mason J. in Cridland's case at page 339. His counsel submitted that s.260 has "no more application so as to set aside a choice by a taxpayer to cease earning income by personal exertion than it does to divest oneself of income earning property". In my opinion this submission is misconceived on a number of grounds. Here it is crucial to note that, although the taxpayer attempted to cease deriving income, he did not cease "the personal exertion" activities which heretofore had been the undoubted source of his income. Moreover section 260, on its application to dealings with income produced by personal exertion, operates in a manner markedly different from that when a disposition of income producing property is under consideration (contract Purcell v Federal Commissioner of Taxation (1921) 29 C.L.R.464 with Peate's case, Hollyock v Federal Commissioner of Taxation (1971) 125 C.L.R. 647 and Millard v Commissioner of Taxation (1962) 108 C.L.R. 336).

The taxpayer also contended that the Act gave him a choice as to the manner in which he conducted his business operations and that his decision to work as an employee of the trustee company was an exercise of that choice. In so doing he said he was choosing between the alternative arrangements open to him under Division 5 (Partnerships) Division 6 (Trust Income) and Division 7 (Private Companies) of the Act. In my opinion the principles enunciated by Mason J. in Cridland's case have no application to such choice. As Bowen C.J. said when discussing a like contention in Gulland's case, "the taxpayer did not merely 'create a situation by entering into a transaction' to attract particular tax consequences. The Chief Judge went on to make comments which can well be applied in this matter and which I adopt. He said at page 4590:

"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".

In my opinion the trial judge correctly found that the choice principle did not assist the taxpayer to avoid the application of s.260.

On a number of aspects of his argument counsel for the taxpayer placed reliance upon the decision of the Full Court of the Court in Federal Commissioner of Taxation v Kareena Private Hospital (1979) 41 F.L.R. 307. However, in my opinion he can gain no assistance from that case. There is a crucial fact difference in that the taxpayer company in Kareena ceased entirely, during the year of income under consideration, to carry on its income producing activities. It did not merely attempt, as in this matter, to divert the income of its activities into the hands of another. The taxpayer here continued to exercise his "skill and acumen" although, it was contended, on behalf of the company as trustee and not on his own account. Even if it is correct to categorise the income as commission earned on the introduction of a prospective purchaser of a policy rather than "the fruits of a professional practice" (as the doctors' income was described in Peate's case supra), in my opinion there is nothing in the distinction. The income of a taxpayer as a sole trader is the product of his personal exertion (Federal Commissioner of Taxation v Everett (1980) 143 C.L.R. 440 at page 454).

I agree with Beaumont J's reasons for judgment on the other aspects of this matter and in particular that the appeal should be dismissed with costs.

JUDGE2

I agree that the appeal should be dismissed with costs, for the reasons which Fisher and Beaumont JJ. have given.

JUDGE3

This is an appeal against orders made by a single judge of the Supreme Court of Queensland dismissing an appeal by the present appellant, the taxpayer, against an assessment for income tax in respect of the year ended 30 June 1980. In his assessment, which was confirmed by the learned judge, the Commissioner included, as part of the assessable income of the taxpayer, certain income not derived by him. The ground for the inclusion of this income as part of the taxpayer's assessable income was the operation of s.260 of the Income Tax Assessment Act, 1936, ("the Act").

Although the parties are at issue as to the proper complexion to be attributed to certain of the events in question, no serious dispute arises as to the primary facts. The taxpayer, a married man with two children now aged 12 and 11 years respectively, was, in July 1970, appointed an insurance agent by National Mutual Life Association of Australasia Limited ("N.M.L."). His appointment was made by a letter from N.M.L. to the taxpayer dated 3 July 1970, appointing him "to obtain new business for (N.M.L.)". The appointment was expressed to be subject to a number of conditions, including a provision that the appointment was personal to the taxpayer and that any benefit arising thereby was not assignable (cl.15) (cf. Australian Mutual Provident Society v. Allan (1978) 52 A.L.J.R. 407).

From time to time, the taxpayer received commission from N.M.L. as its representative for the introduction of life insurance business. He acted in this capacity until June 1978. In his activities as the agent or representative of N.M.L., the taxpayer was assisted in some minor respects by his wife, who was paid a modest salary on that account. In 1974, the taxpayer's wife was herself appointed an insurance agent by a company related to N.M.L. which offered fire insurance. That agency subsisted until 1978.

In 1977, the taxpayer approached N.M.L. with a view to procuring the appointment of a corporate entity, controlled by the taxpayer, as an insurance agent in lieu of the taxpayer in his personal capacity. As at that time, N.M.L. had appointed more than 100 agents in Queensland, four of which were companies. N.M.L. informed the taxpayer of certain guidelines to be met as a condition of the appointment of a corporate agent. In particular, the agency had to have carried on business for at least three years and had to have gross earnings from commissions in excess of $30,000.00. The taxpayer was eligible under these guidelines.

In late 1977 or early 1978, the taxpayer was shown a memorandum prepared for N.M.L.'s general manager dated 3 October 1977 headed "Representatives-Incorporation of Agencies". The memorandum was devoted to a consideration of fiscal matters. It read, in part, as follows:

"Following the 1977 Federal Budget, we have had several enquiries concerning the effect of that Budget on representative's companies and agency trusts. . . .

In the case of agencies conducted through the medium of trusts, the increase in the company tax rate is of no significance because companies whose sole function is to act as a trustee of a settlement, do not pay any primary company tax. However, the restructuring of the present income tax system in the Budget can make trading trusts less attractive in future. . . . (T)rusts for children under sixteen years will be tax free up to $1,040. . . . The Treasurer also announced that the Government would 'crack down on tax avoidance practices' . . . As far as (N.M.L.) representatives who seek to form trading trusts are concerned, they should not only qualify under our guidelines but they should also be told of the current uncertainty in respect of trusts and their possible limited use. More than before will it be necessary to ask representatives who want to convert their agencies to seek proper professional accounting and legal advice as to the general usefulness and prudence of such a step at this stage."

By memorandum dated 2 February 1978, a sales support officer of N.M.L. informed the taxpayer of an enclosed letter and attachments which, it was said, were sent to representatives who qualified for conversion to a proprietary company. The enclosures were described in these terms:

"Enclosure Number 1:

This is a summary of the advantages and disadvantages of incorporation. The primary tax rate stated therein for private companies has since increased to 46%.

Enclosure Number 2:

This is an illustration showing the effect of private company's taxation. As well as the changes referred to above the rates for personal income tax have also changed with the result that the illustrations in this enclosure are no longer up to date but are guidelines only.

Enclosure Number 3:

Sets out provisions to be included in the Memorandum and Articles of Association.

Enclosure Number 4:

This is a draft copy of a corporate Letter of Appointment."

By the enclosed letter dated 2 February 1978 addressed to the taxpayer written on behalf of the Queensland manager of N.M.L. and headed "Conversion to Company and/or Trust", the taxpayer was informed that it was the policy of N.M.L. that:

". . . selected representatives may conduct their business with the Association through proprietary limited companies upon such terms and conditions as the Association shall approve. In addition, the Association does not object in principle to the formation of a trust in the context of your appointment and you will have to decide whether you intend to incorporate with or without a trust or whether you wish to continue as an individual representative as at present.

If you intend to form a business trust, you must nevertheless incorporate a proprietary limited company whose sole function will be to act as trustee of the settlement. Before you make a decision, you and your legal and accounting advisers should consider all relevant matters. Whether the incorporation or the formation of a trust will result in an advantage or disadvantage to you will depend on the particular facts of your case - personal and financial - and a careful investigation should be made before you so decide.

It must be understood that the formation and the operation of a company - whether with or without a trust - is your personal responsibility and any expenses associated with it must be borne by you. The Association does not take any responsibility, financial or otherwise, in relation to your decision and its implementation and expressly exempts itself entirely in relation thereto.

In any case, this letter is not to be regarded as an invitation to form a trust."

A number of administrative matters were foreshadowed:

"A new Letter of Appointment will be issued to your company in due course. Notwithstanding the fact of incorporation and without derogating from the new relationship between the Association and the company intended to be established, the intention is to retain and continue as far as possible a personal link between you and the Association. This will be achieved by your company nominating you as its sole representative to act on its behalf in the obtaining of new business under its Letter of Appointment - in short, you will be your company's accredited representative to the Association for the purpose of that Letter. In that capacity, and so long as you continue in that capacity, you alone will be eligible for membership of the Field Staff Superannuation Fund, the Field Staff Accident and Sickness Plan and the Field Staff Non-Contributory Medical Benefits Scheme and for any other privileges and advantages granted generally to individual representatives.

For the purpose of calculation of bonus commission, etc., but for no other purpose, (without express notice in writing being given in respect thereto by the Association to your company) any business produced by the company will be deemed to have been produced by you and be aggregated with that produced by you prior to your appointment as your company's representative."

The possibility of the formation of a trust was also adverted to:

"If you intend to form a trust for the purpose of carrying on your business you should bear in mind that the future of discretionary trusts, including trading trusts, is by no means certain and the possibility of legislative or judicial intervention can never be excluded. It is also uncertain whether and to what extent the Commissioner of Taxation will try to apply Section 260 of the Income Tax Assessment Act to such trusts. Section 260 of the Act deals with the tax avoidance schemes and declares them void as against the Commissioner. The possibility of detrimental effects cannot be excluded.

If you, nevertheless, intend to form a trust for the purpose of carrying on your business it will be necessary to establish a proprietary limited company to act as trustee of the settlement. . . .

After you and your legal and accounting advisers have studied this letter, if you propose to form a trust for the purpose of carrying on your business, it would be prudent to seek a prior clearance from the Deputy Commissioner of Taxation if this can be obtained. Should you then have some points on which you require clarification, in such case contact Mr J D Allan or Mr H W Tidd who will be able to assist and advise you on the further steps to be taken in connection with the conversion."

By letter dated 16 May 1978, the taxpayer's solicitors, Messrs. McCullough and Robertson, forwarded to N.M.L., for its approval, draft memorandum and articles of association of Gary Tupicoff (Insurance Nominees) Pty. Limited ("the company") and a draft deed of trust which was said to constitute a family trust for the benefit of the taxpayer and his family. Mr. John Allan, Assistant Sales Manager (Operations) of N.M.L., presumably Mr. J.D. Allan, supra, wrote a note dated 16 May 1978 on this letter to Mr. Bruce Williams, a legal officer employed by N.M.L.:

". . . (W)ill you please have a look at these as soon as possible and let me know if they are OK or if not what alterations are necessary. . . . "

By letter dated 22 May 1978, Mr. Allan replied to Messrs. McCullough and Robertson, suggesting a number of alterations to the draft documents, concluding:

"When the approved documents duly registered are received by us we will be in a position to commence the new arrangements for Mr. Tupicoff."

The company was incorporated on 1 June 1978. The taxpayer and his wife were the first directors. At the first meeting of directors held on 1 June 1978, the taxpayer was appointed chairman of directors. Subscribers' shares, being two ordinary shares, were allotted. One ordinary share was allotted to N.M.L.. Transfers of the subscribers' shares to the taxpayer and his wife, as to one share each, were approved. It was resolved that, until otherwise resolved, the company undertake no activity other than as trustee of "The Gary Tupicoff Family Trust". The trust deed for the Trust was tabled and it was resolved that it be executed by the company.

The deed of trust, dated 1 June 1978, was made between Lennard Tupicoff, the taxpayer's father, as settlor and the company as trustee. The trusts constituted by the deed were discretionary as to income and capital. The beneficiaries were defined in thes terms:

"(a) The Primary Beneficiary

GARY TUPICOFF (in this Deed referred to as the primary beneficiary').

(b) The Primary Beneficiaries

(i) The primary beneficiary.

(ii) JUNE THELMA TUPICOFF wife of the primary beneficiary.

(iii) Any child or adopted child of the primary beneficiary and/or the said JUNE THELMA TUPICOFF. (in this Deed together referred to as 'the primary beneficiaries')

(c) The Secondary Beneficiaries

(i) Any grandchild or remoter issue of the primary beneficiary and/or the said JUNE THELMA TUPICOFF.

(ii) Any spouse of any child adopted child or grandchild or remoter issue of the primary beneficiary and/or the said JUNE THELMA TUPICOFF. (in this Deed together referred to as 'the secondary beneficiaries').

(d) The Tertiary Beneficiaries

(i) The trustees of any trust or settlement (howsoever created) the capital or income of which is or may be held in whole or in part (and whether absolutely contingently or otherwise) for any one or more of the primary beneficiaries and secondary beneficiaries provided that no part thereof is or may be held for the settlor or any other person or corporation settling property upon the trusts of this settlement.

(ii) Any company (other than the trustee for the time being hereof) all shares in which are held by or on behalf of any one of more of the primary beneficiaries and secondary beneficiaries.

(iii) Any such charities as the primary beneficiary or after his death his legal personal representative shall before the vesting day appoint to be beneficiaries for the purpose of this Deed

(in this Deed together referred to as 'the tertiary beneficiaries').

AND IT IS HEREBY DECLARED that all of the foregoing beneficiaries listed under the foregoing clauses are in this Deed referred to as 'the beneficiaries'."

Until the vesting date, which is 80 years after execution of the deed or such earlier date as the trustee should determine, the trustee is to stand possessed of the income of the trust in any financial year upon trust for the beneficiaries in such shares as the trustee shall in its absolute discretion determine. In default of such determination, the income shall be held upon trust for the primary beneficiaries in equal shares (cl.1(a)). The trustee is to stand possessed of the capital of the trust fund upon the vesting day in trust for the beneficiaries then living or such one or more of them in such shares as the trustee in its absolute discretion might determine. In default, the capital of the fund shall be held upon trust for such of the primary beneficiaries as shall then be living (cl.2). The trustee is empowered to revoke the trusts and, in lieu thereof, to resettle the trust fund (cl.33). The primary beneficiary, the taxpayer, is empowered to remove any trustee and to appoint new or additional trustees (cl.34).

On 6 June 1978, Mr. J.D. Allan wrote to the taxpayer in these terms:

"Incorporation

We enclose the following documents for completion.

1) Resignation of Original Letter of Appointment.

Please sign and date the three copies and return them all to me.

2) Nomination of 'Accredited Representative' Form.

Please sign and date the three copies and return them all.

3) Authorised Persons.

Please sign and date under 'The Common Seal' of your Company and return the three copies to us.

4) Corporate Letter of Appointment.

Please complete on Page 7. The original may be held by you and the other two copies are to be returned to us.

As advised by phone the commission account number of your Company is 617274. This should be used on all proposals introduced by you after the 1st June 1978. . . ."

By memorandum dated 8 June 1978, the taxpayer returned to Mr. Allan the documents previously mentioned duly executed. The resignation instrument was dated 6 June 1978 and addressed to N.M.L.. In it, the taxpayer referred to his letter of appointment dated 3 July, 1970 and tendered his resignation thereunder with effect from 1 June, 1978. The document (omitting formal parts) reads:

"1. I refer to my Letter of Appointment dated 3rd July 1970 and wish to tender my resignation thereunder with effect from 1st June 1978.

As you are aware Gary Tupicoff (Insurances Nominees) Pty. Ltd. will apply for an appointment as representative of the Association from that date in terms of the current Letter of Appointment applicable to companies.

2. I do hereby declare and irrevocably agree that in the event of my Company being appointed as aforesaid I shall at all times hereafter personally indemnify and keep indemnified the Association against all actions, proceedings, claims and demands of any person or persons, company or companies resulting from the incorporation of my Company and from the appointment of my Company as representative of the Association and by reason of its acting as such representative under the Letter of Appointment issued by the Association and also against all costs, damages and expenses which the Association may incur or sustain by reason, or as a result of such incorporation and appointment of my Company and of its acting as aforesaid."

The nomination of accredited representative was addressed to N.M.L. in these terms:

"This Company, at a meeting of its Board of Directors held on 2nd June 1978, has resolved to submit to The National Mutual Life Association of Australasia Limited the name of Mr Gary Tupicoff as 'accredited representative' as referred to in the Letter of Appointment dated 1st June 1978.

The nomination as accredited representative is for the general purposes of the Letter of Appointment, membership of the Field Staff Superannuation Plan, the Field Staff Accident and Sickness Benefits Plan and the Field Staff Non-Contributory Medical Benefits Plan and for any other purpose or purposes as determined from time to time by the Association.

The Company requests that any amounts which have been and shall hereafter be debited against the commission account of Mr Gary Tupicoff are to be debited against the Company's commission account as from the date of its appointment as representative of the Association and in consideration of the Association's appointing the Company its representative, the Company irrevocably accepts responsibility for repaying to the Association any advances, credits or loans which have been or will be made or granted to Mr Gary Tupicoff and remain outstanding.

For and on behalf of Gary Tupicoff (Insurances Nominees) Pty Ltd

G. Tupicoff (sgd.) Signature of person authorised to sign."

By the letter of appointment dated 1 June 1978, N.M.L. appointed the company to obtain new business for N.M.L..

The learned judge made the following findings as to the manner in which the company carried on its business:

"After this series of dealings (i.e. the transactions just described) was completed the taxpayer continued selling life assurance for NML. He operated from the premises at 54 Jephson Street and later from the city office of NML in Edward Street, Brisbane. I am satisfied the name of the company appeared at the premises he used. For business correspondence the taxpayer used a letterhead on which the name of NML was prominent. Prior to the company's incorporation this letterhead showed the taxpayer as the representative. After incorporation the letterhead showed the company's name and the accredited representative to be the taxpayer. On 5th July, 1978 NML had supplied the taxpayer with different styles of its letterhead which might be adapted for use by the company.

On 2nd June, 1978 the company opened a current account with The Commercial Banking Company of Sydney Limited at Toowong. Following a merger of banks the company continued the account with the National Australia Bank Limited.

As from 30th June, 1978 the company became the registered group employer with the Australian Taxation Office.

From NML's side, in June, 1978 it commenced a commission account in the name of the company. It continued this account thereafter. Such account disclosed details of commissions paid or credited to the company.

During October and November, 1978 National Mutual Fire Insurance Company Limited kept commission accounts in the taxpayer's name. From December, 1978 National Mutual Fire Insurance Company Limited commenced to keep commission accounts in the name of the company.

After the company came into existence the taxpayer, while engaged in selling insurance, used a business card provided by NML. This card showed the name of the company but was so designed that the name of the taxpayer and his office of managing director were to the fore."

The company, as trustee for the Gary Tupicoff Family Trust, lodged an income tax return for the year ended 30th June, 1980. The profit and loss statement of the company (as trustee) for that year showed a net profit before tax of $10,492.45. The return disclosed that the sum of $10,492.00 had been distributed as follows:

To Vanessa $1,040.00

To Cynthia $1,040.00

To the taxpayer's wife $8,412.00

The gross profit for the company in that year was $35,003.88 derived from the following commissions received:

From N.M.L. $33,820.71

From National Mutual Fire $1,183.17 $35,003.88

By his assessment issued on 4 August 1981, the Commissioner assessed the taxpayer to income tax on a taxable income of $18,569.00. He included as income the sum of $18,292.00 being $10,492.00, the net income of the Gary Tupicoff Family Trust, plus the salary of $7,800.00 shown in the taxpayer's return. The sole ground of objection argued in the appeal is that the assessment should be reduced by excising from the assessable income the sum of $10,492.00.

In the Supreme Court, the Commissioner sought to uphold his assessment on two alternative grounds. First, he argued that the transactions entered by the taxpayer, the company and N.M.L. in June 1978 were all a "sham" and that, in reality, what occurred was an attempt by the taxpayer to alienate his future income, that is to say, income actually derived by the taxpayer from his personal exertions as an insurance salesman. Alternatively, the Commissioner invoked s.260.

Although the learned judge did not need to deal with the "sham" argument, it was necessary, in the context of s.260, that his Honour make certain findings as to the purpose or object sought to be achieved by the taxpayer in entering into the transactions now in question. After referring to, inter alia, the memoranda of N.M.L. dealing with the fiscal advantages offered to an agent by incorporation, his Honour said:

"The taxpayer, in evidence before me spoke of a number of advantages which he said he saw would be gained by incorporation. They were in summary:-

(a) To protect and provide family assets;

(b) To provide his wife with the prospect of earning a greater income through favourable exercise by the trustee of the discretion under the proposed trust deed;

(c) To provide a more advantageous business structure in that his status and prestige would be enhanced, there would be greater flexibility in employment of others to assist in gaining income and greater flexibility in the types of insurance business in which the company could engage;

(d) To facilitate any possible sale of the business;

(e) To obtain advantages of limited liability.

The taxpayer conceded that at the time he entered into the arrangements he was aware of the prospect of tax advantages for him but said that any such advantages were not a principal object of the incorporation of the company, the setting up of the trust, his resignation and his appointment as an accredited agent of NML.

I accept that the taxpayer did hope to provide his wife with a greater income and that he did expect business advantages of the type mentioned in (c) above. The taxpayer was unconvincing when attempting to explain his belief that incorporation of the company with limited liability would protect him from exposure to any possible actions for negligent misstatement and thereby place his personal assets including his home at risk. Although he said that his possible personal liability when employed by the company was explained to him by his solicitors I find it impossible to believe that he was not told that if he made a negligent misstatement he would be exposed to personal liability and the company might well be too. In the circumstances of this case I am unable to see how incorporation would protect the taxpayer himself from any such liability bearing in mind that he was the sole employee of the company engaged in selling insurance.

I find that, as the company held no assets (other than those fixed assets acquired from the taxpayer's business after incorporation and as shown in the 1980 balance sheet) the company's structure in the circumstances of this case could not protect the taxpayer's personal assets such as his house. At the material time his house had not become a trust asset."

After referring to Newton v. Commissioner of Taxation (1958) A.C. 450 at p.466, the learned judge continued:

"And so, I have to consider objectively whether the transactions forming part of the arrangement can be classified as an ordinary business or family dealing. In my opinion they clearly cannot. Before the transactions the taxpayer was an agent of NML selling life assurance on its behalf. The sales were made purely as a result of his selling ability. After the transactions the taxpayer sold life assurance on behalf of NML - as he had done before - save that he was then an accredited agent and an employee of the company. In the 1980 year all the gross earnings of the company were derived from the taxpayer's selling ability. The taxpayer, so far as dealings with clients and potential clients were concerned, operated in exactly the same way both before and after the transactions. There were admittedly minor differences - e.g. the business cards, the letterheads and NML paying commission to the company and the company acquiring certain assets. These differences do not in my view cause me to believe that from the clients' viewpoint there was any substantial change in the taxpayer's operations after the transactions were completed.

If I had had any doubts about whether or not the transactions were an ordinary business or family dealing (and I do not) those would have been dispelled by the way in which the taxpayer used monies in the company bank account as his own by creating substantial loan accounts in his favour and subsequently liquidating or reducing them by the management fee credit device."

In this Court also, the Commissioner contends that the transactions relied on were a "sham" and should therefore be ignored. Although his Honour made no findings on this score, the evidence I have recited, particularly the material originating from N.M.L., clearly establishes that the parties intended that the transactions, which were obviously genuine, take effect according to their tenor (see Mullens v. The Commissioner of Taxation of the Commonwealth of Australia (1976) 135 C.L.R. 290 at p.316). Indeed, since the supposed fiscal and other advantages could only accrue to the taxpayer within a given legal framework, it was essential, from the taxpayer's standpoint, that the transactions take effect in accordance with their terms.

In this connection, it is an important consideration that this was not a matter for the taxpayer alone. The transactions were bilateral, involving N.M.L. as a vital party. From the documentary material earlier described, it is clear beyond demonstration that all parties, including N.M.L., intended that the documents executed take effect in accordance with their respective provisions. So far as the taxpayer was concerned, any departure from the plan of action sketched out for him by N.M.L. would have led to the highly improbable result that entry into the transactions was an exercise in futility. Since the parties were fastidious to ensure that the scheme was put into effect in the manner outlined by N.M.L. in its informational material, it is impossible to attribute to the parties any intention other than a genuine desire to give effect to the documentation which they so carefully prepared. It follows that there can be no suggestion here of any "sham".

Then the Commissioner submits that, independently of the operation of s.260, the arrangement between the taxpayer and the company should be ignored as an ineffective attempt by the taxpayer to assign future gross earnings - the product of his personal exertion. Reliance is placed upon some observations made by Taylor and Windeyer, JJ. in Peate v. The Commissioner of Taxation of the Commonwealth of Australia (1964) 111 C.L.R. 443 (at p.475 and pp.480-1 respectively) said to be on the point. It is suggested that a sole trader is unable to assign the product of his personal exertion so as to avoid its derivation. Reference is made to the discussion of the question by the majority (Barwick, C.J., Stephen, Mason and Wilson, JJ.) in Everett's Case (The Commissioner of Taxation of the Commonwealth of Australia v. Everett (1979) 143 C.L.R. 440 at pp.453-4).

True it is that, in the passages cited from Peate, supra, both Taylor and Windeyer, JJ. likened that case to one where an attempt was made by a taxpayer to assign income earned by his personal exertion. But these remarks were made in the context of their Honours' consideration of the question whether s.260 applied to those transactions. Their Honours thought that to view the matter as an attempted assignment of personal earnings assisted in the process of the characterisation of the transaction as having the purpose of the avoidance of tax. But this perspective of the matter does not assist for present purposes, whatever significance it may have in considering the possible application of s.260 - a matter to be dealt with later.

It is also true that in Everett, supra, reference was made to (without necessarily approving) the remarks of Henry, J. in Spratt v. Commissioner of Inland Revenue (1964) N.Z.L.R. 272 at p.277 that:

"No taxpayer can, by way of assignment, escape assessment of tax on income resulting from his personal activities - such income always remains truly his income and is derived by him irrespective of the method he may adopt to dispose of it."

But here, whatever practical importance the parties attached to the continued participation of the taxpayer in the affairs of the company, the legal source of the company's income, in the form of remuneration or commission earned by it, was the contract of agency made between N.M.L. and the company. If, in accordance with that contract, commission becomes payable to the company by N.M.L., then, at law, the operation of s.260 apart, it is income derived by the company: it is not technically income derived by the taxpayer, however instrumental he may have been in the performance of the company's contract with N.M.L..

The statements in Spratt and Peate, cited supra, may, I think, be distinguished for present purposes. These cases may well have been in point here if, say, the company in this case had purported to assign to a third party its remuneration under its contract with N.M.L.. But no such question arises here. In my opinion, once it is accepted that no "sham" is involved, it must follow that the legal source of the company's income is its contract of agency with N.M.L.. It further follows that no question of any attempt to assign any income can arise in the present case: on the hypothesis that there is no "sham", and this hypothesis must now be accepted, the efforts of the taxpayer should be seen as acts done by the company, through the taxpayer as its agent for the purpose, in the performance of its agreement with N.M.L.. From its inception, the commission was income technically derived by the company. Since, apart from the possible operation of s.260, it never was the taxpayer's income to assign, no question of his purporting to assign it can arise. It follows, in my opinion, that this submission also should be rejected.

Finally, the Commissioner contends that s.260 applies to the transactions embarked upon in June 1978 in the form of the resignation of the taxpayer as an N.M.L. agent and his replacement as an N.M.L. agent by the company as trustee of the Gary Tupicoff Family Trust in the circumstances already described. The consequence of the annihilation of these transactions by s.260, the Commissioner submits, is that the sum of $10,492.00, being the net income of the Gary Tupicoff Family Trust, should be included as part of the assessable income of the taxpayer. The Commissioner's argument is that the transactions now under challenge, consisting, as they did, of a series of pre-ordained steps, had as their main purpose and effect the splitting of the income of the taxpayer among members of his family. The result, the Commissioner argues, is that the arrangement, consisting of these overt acts, "bears ex facie the stamp of tax-avoidance" (see Peate, supra, per Kitto, J. at p.469; Gulland v. The Commissioner of Taxation 1984 A.T.C. 4587; Oakey Abattoir Pty. Limited v. The Commissioner of Taxation 1984 A.T.C. 4718).

Support for the view that s.260 is applicable to the subject transactions is, I think, found in the decisions of the Privy Council and High Court in Peate, supra. The case was recently considered by a Full Federal Court in The Commissioner of Taxation v. Pincus 1984 A.T.C. 4730 (at pp.4737-8) and it is unnecessary to repeat that discussion here. Suffice it to say that, in my view, the following observations of Kitto, J. in Peate, supra, at p.469 are equally pertinent in the present case:

"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. (All of these purposes, indeed, the appellant swore were actually contemplated in the formation of the plan.) 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 taxpayer seeks to avoid the application of s.260 here by contending that the transactions now attacked may be explained as an "ordinary business dealing" of the kind contemplated by Newton, supra, at p.466. In my opinion, no such explanation is properly open here, any more than it was in Peate. The position may well have been different if the family trust were not part of the scheme. But, in my view, the introduction of the trust as the intended destination of income generated by the efforts of the taxpayer, robs the transactions of any commercial character. The trust, discretionary as it is, provides a strong indication that the real objective underlying entry into these transactions was that of income-splitting between the members of the taxpayer's family.

Although the trustee's discretionary powers must be exercised in accordance with established fiduciary principles, it is still open to the trustee, consistently with those principles, to divide the trust income between members of the taxpayer's family. In short, whilst it is possible to point to commercial reasons for the incorporation of the taxpayer's agency, no business justification can be found for the introduction of the family trust into the scheme that was adopted. Its existence is consistent rather with the fiscal objective of splitting the taxpayer's income between the members of his family.

It is further submitted that both Peate and Pincus may be distinguished for present purposes on the footing that in each case there was involved the special feature, not present here, of the provision of professional services. In my opinion, no matter of principle turns on this distinction. Although, in Peate, Menzies, J. (at p.460) adverted to the point, it is clear that the distinction formed no part of the ratio decidendi in either the Full High Court or the Privy Council.

The sheet-anchor of the taxpayer's defence to the Commissioner's attempt to invoke s.260 is the decision of the Full Federal Court in Federal Commissioner of Taxation v. Kareena Hospital (1979) 41 F.L.R. 307. The facts of the case, as summarised in the headnote, were that the taxpayer had been carrying on a profitable business conducting a private hospital. Its two shareholders and directors were a doctor and his wife. The taxpayer had leased its premises from a company ("Holdings") also owned and controlled by the doctor and his wife. Another company ("International") had accumulated losses which were thought to be $120,000 and which were deductible under s.80. Arrangements were made whereby International carried on the private hospital business of the taxpayer until its losses were exhausted. These arrangements involved various steps. They included the following: (1) the taxpayer surrendered to Holdings its lease of the hospital; (2) International was granted a twelve month lease of the hospital by Holdings; (3) the taxpayer lent International $120,000; (4) International paid Holdings a premium of $120,000 for the lease; (5) after a few months, International made profits equal to its deductible losses, and these were paid in varying amounts to the taxpayer to pay off International's debt to it; and (6) after the few months, International ceased to carry on the hospital business, and the taxpayer resumed control of the business. Further, as the learned judge in this case observed, it is to be noted that International engaged its own staff to operate the hospital.

The Commissioner argued that these arrangements fell within s.260 and assessed the taxpayer on the profits made by International while it carried on the business. It was held that, even if s.260 applied to annihilate the transfer of the business to International, the income would not be deemed to be that of the taxpayer: the income was earned by International; s.260 could not transform this income into the taxpayer's income; and the sums received by the taxpayer from International were capital repayments of a debt.

In my opinion, the learned judge correctly distinguished Kareena for present purposes when he remarked that, for the period there in question, International operated the entire hospital business - Kareena had no control or interest in the business. In the present case, the taxpayer not only remains as the operator of the company's business but, also, as its chairman of directors (and, with his wife, the controlling shareholder), he has vested in him the power to direct the ultimate destination of the income of the family trust. In these respects, the present case is, in principle, on all fours with Peate, Pincus and Hollvock v. The Commissioner of Taxation of the Commonwealth of Australia (1971) 125 C.L.R. 647). To adopt the language of Gibbs, J. (as he then was) in Hollvock, supra, at p.657, this is not a case where it may be said of the overt acts constituting the arrangement that tax avoidance is no more than "an inessential or incidental feature".

The taxpayer further argues that the reasoning in Purcell's Case (Deputy Federal Commissioner of Taxation v. Purcell (1921) 29 C.L.R. 464) demonstrates that s.260 cannot apply here. But that was a case of an out and out gift of a portion of certain property to members of the taxpayer's family under a declaration of trust. The beneficial interest in the property passed absolutely, and, despite the retention of wide powers of management, it was possible to characterise the transaction as no more than an "ordinary family dealing" (cf. Hollvock, supra, at p.655). However, in the present case, there is no such absolute gift. The taxpayer, through his control of the company, retains the power, fiduciary though it be, to control the distribution of both the income and the capital of the trust. This is more consistent with a plan to split income for taxation purposes than an "ordinary family dealing".

The taxpayer also suggests that there is scope here for the operation of the "choice" principle. Reliance is also placed upon the reasoning in Cridland's Case (Cridland v. Federal Commissioner of Taxation (1977) 140 C.L.R. 330 at pp.339-40). As has been said, the pratical, although not the legal, source of the income of the trust is the personal exertion of the taxpayer and, as Fisher, J. has pointed out in his reasons, that exertion continued to be applied after the making of the arrangements now attacked by the Commissioner. I respectfully agree with the reasons advanced by Fisher, J. for rejecting the application here of the "choice" principle, even in the extended form explained in Cridland.

In my opinion, s.260 is applicable in the present case.

Once the statute operates to annihilate the arrangement, there are left exposed facts which justify the inclusion of income in the sum of $10,492.00 as part of the assessable income of the taxpayer. Here also, the reasoning in Peate, Hollvock and Pincus is in point. Once the transactions now attacked are ignored, there remain the facts that the taxpayer, by his exertions, has earned gross income in the sum of $35,0003.88, giving a net profit from his activities in the said sum of $10,492.00, apart from the salary received by him. In my opinion, the learned judge was correct in confirming the assessment.

There was put into evidence in the Supreme Court an assessment issued by the Commissioner assessing to tax the taxpayer's wife in respect of the sum of $8,412.00 being her share of the income of the family trust in the year of income. The taxpayer argues that, by virtue of s.177(1) of the Act, the assessment is conclusive, not only for her purposes, but for present purposes also. In my opinion, s.177(1) has no relevant operation in the present case. It is concerned only with the personal liability of the taxpayer to whom it is issued and it cannot operate, in effect, in rem as the taxpayer's argument would suggest (see Richardson v. Federal Commissioner of Taxation (1932) 48 C.L.R. 192 at pp.206-7, p.212).

If it be material, we were informed during argument that, if the assessment challenged in this proceeding were ultimately upheld, the Commissioner would disclaim any intention to levy double taxation and would make an appropriate adjustment to the assessment issued to the taxpayer's wife, subject to certain machinery provisions which need not be stated here. But, in any event, the evidentiary conclusivity provided by s.177(1) cannot travel beyond the assessment of the taxpayer to whom it is issued.

I would dismiss the appeal with costs.