Watson, Stanley Henry v Commissioner of Taxation of the Commonwealth of Australia

[1984] FCA 226

Re: STANLEY HENRY WATSON
And: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA
No. WA G32 of 1983
Income Tax
3 FCR 380 / 84 ATC 4606 / 56 ALR 505

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 in partnership - creation of unit trust to purchase practice and employ doctors - whether income splitting an objective purpose of the arrangement - whether incidence of taxation altered - provision of superannuation benefits - whether ordinary family or business dealing - existence of antecedent transaction - annihilation of arrangement - whether "full and true disclosure" of all material facts necessary for assessment. Income Tax Assessment Act 1936, ss.6(1), 19, 170, 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 Bowen C.J. and Toohey J., Fisher J. dissenting, that s. 260 applied to a transfer of a medical practice from a partnership which had been established five months previously to a company as trustee of a unit trust.

Peate v. Federal Commissioner of Taxation (1964) 111 CLR 443 (High Court), (1966) 116 CLR 38 (Privy Council); Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647; Slutzkin v. Federal Commissioner of Taxation (1977) 140 CLR 314; McAndrew v. Federal Commissioner of Taxation (1956) 98 CLR 263; Foster v. Federal Commissioner of Taxation (1951) 82 CLR 606; Australasian Jam Co. Pty Ltd v. Federal Commissioner of Taxation (1953) 88 CLR 23; Jones v. Federal Commissioner of Taxation (1977) 15 SASR 462; Federal Commissioner of Taxation v. Phillips (1978) 36 FLR 399, referred to.

HEARING

Perth, 1984, May 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.

Solicitors for the appellant: M.A. Bibby.

Solicitors for the respondent: Deputy Crown Solicitor.

G.F.V.

ORDER

1. The appeal be dismissed.

2. Stanley Henry Watson pay to the Commissioner of Taxation his costs of the appeal.

Appeal dismissed with costs.

JUDGE1

This is an appeal from the Supreme Court of Western Australia concerning the application of s260 of the Income Tax Assessment Act 1936 ("the Act"). The detailed facts are set out in the judgment of Fisher J. I shall not repeat this detail. In my opinion the appeal should be dismissed.

Prior to the year of income which is in question in this appeal, namely the income year ending 30 June 1979, Dr. Watson carried on a medical practice in partnership with Drs. England, Law, McGregor and Taylor. During the income year ending 30 June 1979 each partner entered into a similar arrangement, whereby he ceased to be employed as a partner and became an employee of a unit trust. The medical practice was sold to the unit trust. Units in that trust were issued to Dr. Watson and his wife as trustees of a family trust. The children of Dr. Watson, and he and his wife, were among the objects of discretionary trusts on which the property of the family trust was held. Units in the unit trust were also issued to the other doctors or trustees of their family trusts. A superannuation fund was created by the unit trust for the doctors who were its employees. The income derived by Dr. Watson in the income year ending 30 June 1979 was, in consequence of the arrangement, different from what it would have been had the arrangement not been made.

At first the Commissioner assessed Dr. Watson in respect of income derived during the year ending 30 June 1979 on a basis consistent with the effectiveness of the arrangement. However, he later issued an amended assessment based on applying s.260 to the arrangement.

Two questions arise for decision, first, whether s.260 is properly to be applied to the arrangement and secondly, if so, whether the Commissioner had power to issue the amended assessment having regard to the terms of s.170 of the Act.

As to the first question, it is my opinion that s.260 was properly applied to the whole arrangement. My reasons for reaching this conclusion are similar to the reasons set forth in my judgment in Gulland v Federal Commissioner of Taxation. Gulland's Case was heard at the same time and judgment in that case has just been delivered. I do not propose to recapitulate those reasons.

As to the second question, I am of opinion there was not in the taxpayer's return a full and true disclosure of all the material facts necessary for his assessment. I agree with the reasons set forth in the judgment of Toohey J. for reaching this conclusion.

In my opinion the appeal should be dismissed with costs.

JUDGE2

This appeal was heard at the same time as Gulland v. Commissioner of Taxation in which the Court has just delivered judgment.

Both matters were concerned with the application of s.260 of the Income Tax Assessment Act 1936 ("the Act"). In this appeal there is an additional issue - whether, if s.260 is otherwise applicable, the respondent is precluded by s.170 of the Act from issuing the amended assessment upon which he now relies.

The relevant facts are set out in the judgment of Fisher J. and I do no more than summarise them for the purpose of dealing with the questions now before the Court. It is convenient to begin on 1 July 1978 when Dr. Watson, a surgeon specialising in urology, entered into partnership with Drs. England, Low, McGregor and Taylor. In November 1978 the partners met, on the advice of their accountant, to discuss a superannuation plan in which the partners would become employees of a trust of which they would be the trustees. Subsequently the matter was placed in the hands of solicitors to prepare the necessary documents and in the following year three trusts were created.

The first, the S.H. Watson Family Trust ("the Family Trust") was established on or about 12 April 1979; the second, the Urological Service Unit Trust ("the Service Unit Trust") was constituted by deed dated 12 April 1979; and the third, the W.E.L.M.T. Urological Unit Trust ("the WELMT Unit Trust") was constituted by deed dated 29 May 1979.

Although the learned primary Judge was critical of the dating of these documents and of circumstances surrounding their execution and the recording of various minutes in company records, he rejected the argument that the arrangements amounted to merely a sham. In particular his Honour said:

"Two contracts, the contract of sale of the partnership practice and the contract of employment, were central to those arrangements. All the evidence points to the conclusion that the five partners were of the firm belief that these contracts, and the four other contracts of employment, would be operative according to their tenor and that they would each be bound by them".

There is no cross appeal; the respondent has not challenged the conclusion reached by the primary Judge.

Following the establishment of the three trusts, employment agreements were entered into between the trustees of the WELMT Unit Trust with Dr. Watson and the other doctors with whom he had been in partnership. A management services agreement was made between the trustees of the WELMT Unit Trust and Beates Nominees Pty. Ltd. as trustee for the Service Unit Trust. A sales agreement was made between the former partners as vendors and the trustees of the WELMT Unit Trust as purchaser for the sale of the partners' medical practice. The trustees of the WELMT Unit Trust leased the practice premises at 167 St. George's Terrace, Perth. Units in the WELMT Unit Trust were issued to Dr. Watson and his wife as trustees of the Family Trust and to others as trustees of family trusts established by the other partners. A superannuation fund was created for the doctors as employees of the WELMT Unit Trust.

The effect of these arrangements was to convert Dr. Watson and the other doctors from self-employed partners to employees of a unit trust, with a sale of their medical practice to that trust. His Honour commented:

"The magnitude of the income splitting may readily be assessed by comparing the appellant's earnings from the partnership for the tax year in question with the amount of the salary he was prepared to accept as an employee".

For the year ended 30 June 1979, Dr. Watson made a return of income for tax purposes in accordance with the arrangements that have been described. Initially the respondent accepted the correctness of the return and assessed Dr. Watson accordingly. Subsequently he issued an amended assessment, adding to the taxable income returned by Dr. Watson an amount of $5,484, referred to in the adjustment sheet accompanying the amended assessment as "income adjusted as a result of variation in partnership distribution". In fact the amount represented Dr. Watson's share of an adjustment made to the partnership income by the addition of the superannuation contributions for the five medical practitioners, less the net loss shown in the trustees' accounts. The amended assessment was based upon the application of s.260.

At the hearing in the Supreme Court, counsel for the respondent said that the adjustment sheets issued in relation to the partnership and to Dr. Watson required amendment. The net income of the partnership should be increased by $29,106 (instead of $19,939). This figure was described by the respondent as "net income purportedly derived by the unit trust" and was made up as follows:

"Gross fees $33,905 Salaries 3,120

Less deductions claimed $40,557 Less disallowed salaries 9,167 Superannuation 23,471 7,919 $29,106"

The reason for the amendment, it was said, was the fact that the original adjustment sheet, in relation to the partnership, had failed to take into account salaries paid to the doctors in addition to their superannuation. His Honour described the end result in this way:

"As a consequence, the adjustment sheet relating to the appellant required amendment by deducting the salary and allowances from the trust, totalling $2083, and by adding the increase in the appellant's share of the adjustment to the partnership income. This was said to be subject to the same two qualifications as were referred to in Gulland v. Commissioner of Taxation. The same comments apply in relation to those qualifications, namely, that the appropriate method of accounting was that based on cash receipts and payments and that no issues as to any of the deductions allowed to the trustees were identified".

In delivering judgment in the Supreme Court, the learned primary Judge found it unnecessary to restate the views which he had expressed in Gulland's case on the various issues and matters which were common to the two appeals. As his Honour pointed out, the principal factual distinction between the two appeals was that in Gulland's case an outside trustee was introduced to join with Dr. Gulland in employing him, whereas in the present case the trustees and the employees were identical. The respondent did argue in the Supreme Court that no contract of employment had been concluded before 30 June 1979. His Honour, while expressing the view that not all the terms of the contract were agreed until late in 1980, said that he was satisfied that the essential terms were agreed on 31 May 1979. He then concluded that Dr. Watson "did not, in his individual capacity, derive income from the practice. The income produced from the carrying on of the practice was relevantly income of the trust estate".

His Honour's reasons for holding that s.260 applied to the arrangement made by Dr. Watson in 1979 may be summed up in this way. The assets of the partnership were sold to the WELMT Unit Trust and the doctors were then employed at salaries considerably less than their former earnings. The establishment of a superannuation fund allowed a tax deduction for contributions to that fund. The arrangements thus made permitted income splitting between Dr. Watson and the Family Trust which he largely controlled. So far as patients were concerned, the practice continued as before and the only indication to them of the existence of a trust was to be found in the forms of accounts and receipts which they received after services had been rendered. No business purpose was apparent, apart from the avoidance of income tax. There was no limitation of liability or any advantages in the structure of the practice. The arrangements could not be explained on the basis of ordinary family dealing. In his Honour's words "the extreme artificiality of the arrangements tells against them".

His Honour held that he was bound by Peate v. Federal Commissioner of Taxation (1962-1964) 111 CLR 443 (High Court), (1966) 116 CLR 38 (Privy Council) to hold:

"that s.260 operates to avoid the arrangements, as particularised, as against the respondent, their purpose being to avoid tax. The annihilation of the arrangements, during the year in question, leaves any income or loss of the trust in the partnership".

His Honour considered that had the service unit trust stood on its own, it would not have been struck down by s.260, but that "it must fall as part of the general arrangements, depending, as it does, upon the conduct of the practice by the former partners as trustees".

In Gulland's case I examined the submissions of the parties concerning the operation of s.260 of the Act. I shall not repeat what is said there; so far as is relevant, that consideration should be regarded as part of the reasons for judgment in this appeal.

There is a difference in the situation in Gulland's case and in the present case; in my view, it is crucial to the outcome of this appeal. Whereas in Gulland's case there was no antecedent transaction altered for the purpose of altering the incidence of tax, there was here an antecedent transaction (the medical partnership) which was altered (by the establishment of a trust and the employment of the partners by the trust). And the purpose of altering the antecedent transaction was the purpose of altering the incidence of income tax. That may not have been the only purpose for which the rearrangement was made but it cannot be described as "an inessential or incidental feature of the arrangement" (Gibbs J. in Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647 at p.657).

I am unable to find any ground upon which Peate's case can be distinguished in the present appeal. It is a decision which, in relation to its own facts, has not been overturned by the High Court; nor does any decision of that Court cast doubt upon the correctness of Peate's case, in relation to its particular facts.

A question does arise as to the implications of applying s.260. It is unnecessary to refer to the many decisions in which those implications have been considered. However, in Slutzkin v. Federal Commissioner of Taxation (1976-1977) 140 CLR 314 at p.320 Barwick C.J. said:

"Further, it is fundamental that the section is, as it has been said, no more than an annihilating section. It does not itself impose tax, nor does it construct or reconstruct any transaction. It does no more than avoid a transaction. The avoidance is of no consequence unless, if the transaction were set aside, a factual situation involving the payment of tax is exposed".

It was this aspect of s.260 that led to Lord Donovan's dissent when Peate's case reached the Privy Council. His Lordship had "no doubt . . . that the conditions precedent prescribed in s.260 exist in Dr. Peate's case" (116 CLR at p.52). But, on the facts before him, Lord Donovan considered that the section could not operate so as to render Dr. Peate assessable as if the partnership which preceded the establishment of various companies continued. In his Lordship's view:

" . . . the Commissioner must take the facts as he finds them, and assess Dr. Peate on the basis of the doctor's own return" (116 CLR at p.60).

That difficulty was not shared by the other members of the Privy Council. Viscount Dilhorne, delivering the judgment of the majority, spoke of the agreement to dissolve the partnership, its dissolution, the formation of companies and the agreements made with them as all part of the scheme and having the purpose and effect of avoiding liability to tax and so coming within s.260. In the view of the majority:

"The Commissioner was therefore entitled to proceed on the basis that these arrangements had not been made.

He was therefore entitled to treat the partnership as continuing until, if in fact it had been in existence it would have been dissolved by operation of law. Until then he was entitled to treat the income in fact received by A.E. Westbank Pty. Ltd. as if it had been received by the partnership, and to treat as the appellant's share the same percentage of the net income of that company as he was entitled to of the income of the partnership; that is, the same percentage as that provided in the service agreement between the appellant, Raleigh and Westbank" (116 CLR at p.44).

As it happened, some 3 years after the establishment of the scheme one of the doctors who had been a partner withdrew. Of that event, Viscount Dilhorne said at p.45:

"The Commissioner cannot therefore treat the original partnership as existing after that date. To do so would be not to destroy but to supply".

Nevertheless, in the view of the majority, there remained an association of persons in receipt of income jointly so that there was a "partnership" as that term is defined in sub-s.6(1) of the Act. Accordingly the Commissioner was entitled to treat the income received by Westbank as the income of a partnership.

The readiness of the majority in the Privy Council to permit the Commissioner to assess on the basis that the agreement to dissolve the partnership, as well as the arrangements that followed it, had not been made went further than the approach taken by Menzies J. at first instance and by the members of the High Court, on appeal. The view of Menzies J., with which the members of the High Court concurred on appeal, may be found in this passage in 111 CLR at p.461:

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

This is a view which does not involve resurrecting the earlier partnership. It relies upon the definition of "partnership" in sub-s.6(1) and also upon s.19 of the Act which reads:

"19. Income shall be deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve, sinking fund or insurance fund however designated, or otherwise dealt with on his behalf or as he directs".

As to the matter now before this Court, if one applies the approach of the Privy Council in Peate's case s.260 operates to avoid the arrangement in its entirety including the dissolution of the partnership between Drs. Watson, England, Low, McGregor and Taylor. But even on the approach taken by the High Court (which does not avoid the dissolution of partnership) there is still, on the facts, a receipt of moneys by the WELMT Unit Trust on account of Dr. Watson and the other doctors concerned. Section 260, read with the definition of partnership in sub-s.6(1) and the provisions of s.19, operates to render the income of the WELMT Unit Trust the income of the doctors in question. Accordingly, subject to the questions raised by the issue of an amended assessment, I am of the opinion that the respondent was entitled to assess Dr. Watson in the manner in which he did.

As already mentioned, Dr. Watson is challenging an amended assessment issued by the respondent. One of his contentions before the Supreme Court and before this Court was that even if s. 260 applied, the provisions of s. 170 of the Act operated to preclude an amended assessment. The learned primary Judge rejected that contention.

Dr. Watson relies upon sub-s. 170(3) which provides that where a taxpayer has made "a full and true disclosure of all the material facts necessary for his assessment, and an assessment is made after that disclosure, no amendment of the assessment increasing the liability of the taxpayer in any particular shall be made except to correct an error in calculation or a mistake of fact; . . . ".

The respondent relies upon sub-s. 170(2) whereby, in the event of a taxpayer not making a full and true disclosure of all the material facts necessary for his assessment and there being an avoidance of tax, the respondent may amend the assessment.

While the respondent invokes sub-s. 170(2) to justify the amended assessment, it is clear that:

". . . the onus probandi lies on the taxpayer if his objection is that he did make a full and true disclosure of all the material facts necessary for his assessment . . . ". (McAndrew v. Federal Commissioner of Taxation (1956) 98 CLR 263 at p. 269.

The obligation imposed by s. 170 is to make "a full and true disclosure". A taxpayer does not fail to discharge that obligation merely because he does not, in his return, advert to matters already known to the Commissioner.

"In my opinion it is not possible, according to the ordinary use of language, to 'disclose' to a person a fact of which he is, to the knowledge of the person making a statement as to the fact, already aware. There is a difference between 'disclosing' a fact and stating a fact. Disclosure consists in the statement of a fact by way of disclosure so as to reveal or make apparent that which (so far as the 'discloser' knows) was previously unknown to the person to whom the statement was made". (Latham C.J. in Foster v. Federal Commissioner of Taxation (1951) 82 CLR 606 at pp. 614-615).

On the other hand, it is not enough for a taxpayer to show that, in his return, he provided enough information to put the Commissioner on inquiry and to argue that, if further information had been sought, it would have been provided. See Australasian Jam Co. Pty. Ltd. v. Federal Commissioner of Taxation (1953) 88 CLR 23 at p. 33.

The learned primary Judge's approach to the application of s. 170 was to say that once it is seen that regard may be had to the overt acts by which the arrangement avoided under s. 260 was implemented, "it will be appreciated at once that the disclosure of facts in this case was inadequate". His Honour made particular reference to the failure by Dr. Watson to produce to the respondent a copy of the sale agreement or particulars of the five employment agreements, bearing in mind that the written agreements had not then been executed. His Honour also referred to the failure to supply minutes or any information as to how the change from a partnership practice to a trust practice was effected. I do not accept the argument of counsel for Dr. Watson that the matters mentioned by his Honour did not relate to s. 260 but only to the question whether what had been done was a sham. Any facts relating to the change made in the medical practice from a partnership to a company and trusts were relevant to a consideration of s. 260.

Counsel for Dr. Watson argued that if some additional material fact came to light during the Supreme Court hearing, that fact could not ex post facto be relied upon to authorise the making of an amended assessment which was not brought about by the non disclosure of that fact. But that, I think, begs the question. The mere fact that something emerged during the course of the evidence in the Supreme Court which had not been brought to the attention of the Commissioner does not necessarily mean that there was a failure to make a full and true disclosure of all the material facts necessary for the assessment. But if what emerged was in truth a material fact necessary for the assessment, that may well of itself demonstrate a failure by the taxpayer to discharge the obligation cast upon him by s. 170. When there is an objection to an assessment before the Court, it must in the end be a matter for the Court to determine, on the material before it, whether there was a full and true disclosure of all material facts necessary for the assessment raised by the Commissioner.

Counsel for the respondent drew attention to Dr. Watson's return for the year ended 30 June 1979 which identified his income by way of salary as "Sir Charles Gairdner Hospital" and "W. E. L. M. T. Urological Unit Trust". Under the heading "partnerships, trust estates, etc. " appeared the following:

" $ Watson England Low & McGregor 1673
Watson England, Low McGregor & Taylor 96327

Totals 98000 "

Counsel argued that there was nothing in the return to cause the assessor to make any connection between the WELMT Unit Trust and the partnership arrangement between Drs. Watson, England, Low, McGregor and Taylor. In particular, he said, the fact that the first letter of the surname of each doctor in the partnership was the source of the initials used in the unit trust was not something that should have occurred to the assessor and, on the assessor's evidence, it did not occur to him. Mr. Gleeson Q. C. acknowledged that even though the assessor did not go to the partnership return, the facts disclosed in that return can be taken to be known by the Commissioner. But, he said, a perusal of the partnership return does not identify the doctors in the partnership with those comprising the WELMT Unit Trust. The return of the WELMT Unit Trust has attached to it a copy of the trust deed. That identifies, among the beneficiaries, only the "S. H. Watson Family Trust" though it does specify Stanley Henry Watson and Jill Dorothy Watson as trustees.

In my view, a full and true disclosure of the material facts necessary for the assessment required Dr. Watson to identify, in his personal return, the connection between the WELMT Unit Trust, the partnership of Drs. Watson, England, Low and McGregor and the beneficiaries under the S. H. Watson Family Trust. This he failed to do; nor did he provide the respondent with adequate information as to how the change from a partnership to a trust was effected or provide the respondent with agreements and records evidencing that change.

Having reached that conclusion, it is unnecessary to consider an alternative submission by the respondent that there was, on the part of the assessor, a mistake of fact.

In my opinion, this appeal should be dismissed with costs.

JUDGE3

In this matter Stanley Henry Watson ("the taxpayer") appeals against a decision given on 24 June 1983 by the Supreme Court of Western Australia. That Court dismissed his appeal against an assessment of income tax issued in respect of the year of income ending 30 June 1979 by the respondent the Commissioner of Taxation of the Commonwealth of Australia ("the Commissioner").

The taxpayer was a surgeon specialising in urology. In his return of income for the year ending 30 June 1979 he disclosed a taxable income of $91,978 comprising to the extent relevant of gross salary of $1,683 received from the "W.E.L.M.T. Urological Unit Trust" and $98,000 being his share of income of 2 partnerships. His return was accepted by the Commissioner and an assessment issued on 29 January 1980.

However on 5 May 1980, after the due date for payment of the original assessment, the Commissioner issued an amended assessment whereunder a further amount of $3,372.62 was assessed as payable by the taxpayer. In the adjustment sheet which accompanied the amended assessment the Commissioner identified the adjustment made by the amendment as follows:

"Add Income adjusted as a result of variation in partnership distribution $5,484."

During the hearing of the appeal by the trial judge, counsel for the Commissioner indicated that adjustment sheets which had been issued to the partnership as well as the taxpayer required further amendment. From the point of view of the taxpayer the necessary amendments required the deduction from his assessable income of the salary of $1,683 abovementioned together with an amount of $400 identified as an allowance and the addition thereto of his share of the adjusted partnership net income. The partnership net income as returned had been increased by the Commissioner by an amount of $19,939 but counsel intimated that it should have been increased by $29,106. Even this further amendment was, as the trial judge found, liable to be further qualified on the grounds more particularly referred to in his reasons for judgment.

The trial judge heard the evidence in this matter separately from that in Gulland's case although the appeals were before him, as they were before us, argued together. It is unnecessary for me, as it was for the trial judge, to reiterate my view on issues and matters common to both appeals. In so far as the evidence in this matter is relevant to two common issues, namely whether the arrangements were a sham or had the proposed legal effect. It is not necessary to relate this evidence. Both of these issues were determined by the trial judge in favour of the taxpayer and not challenged on appeal to this Court. On the further common issue, namely the applicability of s.260 of the Income Tax Assessment Act 1936 ("the Act") it is necessary to review the facts although not in great detail as they are fully set out by the trial judge in his reasons for decision and not in dispute.

The taxpayer objected to the amended assessment on the ground that it was not authorised by s.170 of the Act as he had made full and and true disclosure of all material facts necessary for his assessment. The trial judge found against the taxpayer on this ground of objection as well as on the taxpayer's objection to the application by the Commissioner of the provisions of s.260. The consequence of my findings on the applicability of that section relieves me of the necessity to decide whether, in the relevant sense, the taxpayer failed to make full and true disclosure. My tentative inclination would be to find that he had made such disclosure but I refrain from arriving at a final or considered conclusion. I base my decision on my view that the arrangements into which the taxpayer entered did not attract "the thunder of Section 260" (see per Bray C.J. in Jones v Federal Commissioner of Taxation 77 A.T.C. 4058 at page 4066).

At all relevant times prior to the end of the year of income the taxpayer was a member of various partnerships of medical practioners. He first entered into a partnership in 1957 and as from 1 July 1978 was in partnership with Mr. E.J. England, Mr. A.I. Low, Mr. B.W. McGregor and Mr. T.A. Taylor. The trial judge found that the taxpayer had been concerned for some time with his personal financial position. At the end of 1978 he was aged 55, and married with 4 children then aged approximately 15,16,18 and 22. His principal asset was his home and he had no investments apart from a relatively small life insurance policy. As the trial judge said, he was quite naturally concerned with his financial security upon his retirement.

Towards the end of 1978 Mr. N.J.E. Soutar a chartered accountant in the firm of accountants who acted for the taxpayer's partnership had discussions with the taxpayer concerning his financial position. He said that a superannuation arrangement for the partners might be possible, and such an arrangement was put before the partners by him at a meeting in November 1978 at the home of Mr. McGregor. Mr. Soutar spoke of a superannuation plan which would involve each of the partners becoming an employee of a trust of which the partners would be the trustees. He said that each of them could pay into a superannuation fund which would provide superannuation benefits on retirement, and that the taxpayer's entitlement would amount to approximately $150,000. The trial judge stated that the taxpayer's evidence was that the object of the proposal was "predominantly superannuation", but that there were clearly other objects and in particular the distribution of profits of the trust to the families of the partners and the creation of a service trust. As the trial judge said, there were obviously income splitting advantages to be gained from the implementation of the proposal. This matter differs on that aspect from Gulland's case in that that taxpayer had already achieved "income splitting advantages" because he had, with the concurrence of the Commissioner, earlier established a service trust. These "acceptable" advantages had not been achieved at the relevant time by the partners in this matter.

At a meeting in December 1978 Mr. Soutar's proposal was again discussed by the partners and agreement reached for it to be implemented by Mr. Soutar and his firm. A letter was written on 16 February 1979 to a firm of solicitors with instructions to prepare the necessary documents to establish a unit trust, the name of which was given as "W.E.L.M.T. Unit Trust". This name represented the first letter of the surnames of the partners. Instructions were given as to the name of the settlor, the settled sum and that the "S.H. Watson Family Trust" was to be the first unit holder. The five partners were nominated as the trustees of the "W.E.L.M.T. Urological Unit Trust", hereinafter called "the Unit Trust". Instructions were given concerning discretionary rights to income and capital of the trust and voting rights, and for the preparation of an employment agreement between the trustees and the partners. The salaries under this agreement were to be as mutually agreed, and there was to be provided for each of the partners a "non-contributing superannuation scheme, contributions to which are not to exceed the maximum as allowed by the Deputy Commissioner of Taxation".

As a result of these instructions three trusts, a sale agreement and an employment agreement were prepared.

The mother of the taxpayer established by deed the S.H. Watson Family Trust ("the Family Trust"). The taxpayer and his wife were trustees of this trust deed, which was undated but stamped on 12 April 1979. The taxpayer was contingently entitled to a beneficial interest in the capital and income of the Family Trust prior to its termination but not on termination. The other classes of beneficiaries, all of whose interests were discretionary, comprised the wife, children and remoter issue of or persons connected with the taxpayer and his wife and charities selected by the trustees. The taxpayer had during his lifetime power to remove existing trustees and appoint new trustees.

The Urological Service Unit Trust ("the Service Trust") was established by Mr. E.W. Kyle as settlor by deed dated 12 April 1979 of which deed Beates Nominees Pty. Ltd. was trustee. This company was controlled by the 5 partners. The taxpayer and his wife as trustees of the Family Trust held 50 units in the Service Trust, which entitled them to a beneficial interest in the capital and income of the Service Trust. The trustee of this trust was given power to engage in any business activity.

A third trust, being the Unit Trust previously referred to, was established by Mr. E.W. Kyle as settlor by deed dated 29 May 1979. The taxpayer and his partners were trustees of this trust, the rights of unit holders being in part materia with the rights of unit holders in the Service Trust. Clause 12 (2) of the trust deed required the trustees to be medical practitioners and employees of the Unit Trust and they were empowered to carry on any business activity. The taxpayer and his wife as trustees of the Family Trust held 10 units in the Unit Trust, as did the trustees of the Family Trusts of other partners and in one instance a partner in his own right.

In addition to these three trusts various other documents were prepared by the solicitors and forwarded to the taxpayer by letter dated 11 May 1979. These included a management services agreement, a deed establishing the Unit Trust Superannuation Fund and documents incidental thereto and a draft employment agreement and draft sale agreement. Documents relating to the business name of the Unit Trust were also forwarded for completion. On 31 May 1979 a meeting attended by the 5 partners, Mr. Soutar and a further accountant Mr. Fayle as advisor to Mr. England and Mr. Low, approved generally the arrangements and in particular the purchase, pursuant to the sale agreement, of the medical practice of the partners by the Unit Trust. In relation to this matter there appears to have been much discussion concerning the price to be paid for the goodwill of the partnership practice. The figure of $30,000 was ultimately included in the sale agreement.

This agreement was made between the five partners as vendors and the Unit Trust as purchaser. It recites the sale of the practice of the partners on 1 June 1979 for $30,000 together with plant and equipment at written down values for taxation purposes and medical supplies at agreed value.

In respect of the employment agreements the minutes of the meeting of 31 May 1979 resolved to employ the partners as salaried medical practitioners at various commencing salaries on the terms of agreements dated 1 June 1979. The trial judge found that, notwithstanding certain discrepancies, the partners as trustees agreed to employ themselves in the practice at the salaries mentioned in the minute. There was thereafter much coming and going concerning the settling of the final terms of the employment agreements and there is no doubt that ultimately it was signed by the partners in their dual capacities many months after 1 June 1979. However the trial judge found that the essential terms were agreed on 31 May 1979 and that thereafter the taxpayer and his partners were employed in the practice from 1 June 1979 at salaries of $25,000 or, in the case of 3 of them $12,000. In consequence he found that, for the reasons expressed in Gulland's case, the taxpayer did not thereafter derive income from the practice in his individual capacity but that the income was income of a trust estate.

The Unit Trust was registered as a group employer under the Act on 12 June 1979, effective from 1 June 1979. On 11 June 1979 the taxpayer completed an income tax instalment declaration and deductions in relation to his salary for the year ended 30 June 1979 were calculated on the basis of a salary of $25,000.

In respect of the service trust the minutes of the meeting on 31 May 1979 recorded that the trustees of the Unit Trust would enter into a service agreement with Beates Nominees Pty. Ltd. as trustee of the Service Trust for the provision of certain services to the Unit Trust. These services referred to the practice carried on by the trustees of the Unit Trust and to services relating to provision of staff, surgeries and consulting rooms and medical supplies and equipment and other management services as required. The fees were to be as from time to time agreed.

On the matter of superannuation the minutes recorded that a fund should be established by the Unit Trust for its employees commencing 1 June 1979, the trustee of the fund being Fund Fidelity Pty. Ltd. It was resolved that a trust deed be prepared between the trustees of the Unit Trust as employers and Fund Fidelity Pty. Ltd. as trustee subject to the approval of the Deputy Commissioner of Taxation. The taxpayer was admitted as a member of the Superannuation Fund ostensibly on 1 June 1979 although the trial judge had, understandably in the circumstances, some doubt as to the accuracy of this date. The relevant cheques for contributions on behalf of him and his previous partners as employees were drawn on 26 June 1979.

The somewhat loose arrangements which the former partners made in respect of the rendering of accounts and provision of receipts, the termination of the services of employees and their re-engagement by the Unit Trust were all noted by the trial judge. Likewise he drew attention to happenings concerning the transfer of the leases of premises, workers compensation policies and other policies of insurance. However he ultimately found that the partners intended to enter into binding legal arrangements which arrangements did not amount to a sham. In respect of the contract of sale of the medical practice he was satisfied that there was an effective sale, the terms of the contract having been agreed on 31 May 1979. For the reasons expressed in Gulland's case he found that the taxpayer's contract of employment was a valid contract, the terms of which were also agreed on 31 May 1979.

Before turning to the principal matter in issue, namely the applicability of s.260 to these arrangements, it is necessary to note certain matters concerning circumstances in respect of the returns lodged by the taxpayer and by the various trusts.

The partnership return of the 5 practitioners appears to have been lodged on 9 November 1979, prior to the lodging of the taxpayer's personal return. The notes to the partnership accounts disclosed the sale of goodwill of each partner for $6,000 and that fixed assets were also sold during the year. There was also the following reference:

"Sale of Business On the 1st June 1979 the medical practice of Drs. Watson, England, Low, McGregor and Taylor was sold to the W.E.L.M.T. Urological Medical Unit. The purchase price paid was $51,450 being $7,125 for equipment, furniture and fittings, $14,325 for Leasehold Improvements and $30,000 for goodwill of the practice".

The trust return of the Unit Trust was lodged on or before 13 December 1979. Certain details in relation to the Superannuation Fund had been supplied in June 1979 and a copy of the trust deed of the Unit Trust and its financial statements disclosing a loss of $3,532 for the year ended 30 June 1979 were lodged with the return. The notes attaching thereto related the purchase of the practice from the partners and the terms thereof.

The essential question before this Court on the appeal was whether s.260 operated to avoid as against the taxpayer the arrangements above set out. The Commissioner at the trial gave particulars of the circumstances, arrangements or agreements which he contended were by the section rendered wholly void. These were:

"(1) the formation of the W.E.L.M.T. Urological Unit Trust.

(2) the formation of the Urological Service Unit Trust

(3) the formation of the S.H. Watson Family Trust

(iv) the employment agreement made between the trustees of the W.E.L.M.T. Urological Unit Trust and the appellant

(v) the employment agreements made between the trustees of the W.E.L.M.T. Urological Unit Trust and the following

(a) Ernest James England

(b) Antony Irving Low

(c) Brian William McGregor

(d) Theophilus Anthony Taylor

(vi) the management services agreement made between the trustees of the W.E.L.M.T. Urological Unit Trust and Beates Nominees Pty. Ltd. as trustees of the Urological Service Unit Trust

(vii) the sales agreement made betwen the appellant. Ernest James England, Antony Irving Low, Brian William McGregor and Theophilus Anthony Taylor as vendors and the trustees of the W.E.L.M.T. Urological Unit Trust, as purchasers, for the sale of the vendors' medical practice

(viii) the agreement or arrangement whereby the trustees of the W.E.L.M.T. Urological Unit Trust purported to take on lease the practice premises at 167 St George's Terrace, Perth

(ix) the issue of the following units in the W.E.L.M.T. Urological Unit Trust

(a) 10 units to Stanley Henry Watson and Jill Dorothy Watson as trustees of the Watson family trust

(b) 10 units to Ernest James England

(c) 10 units to Antony Irving Low and Joan Marie Low as trustees of the Antony Low family trust

(d) 10 units to Brian William McGregor and Dianne Patricia McGregor family trust (sic)

(e) 10 units to Adonis Nominees Pty. Ltd. as trustees for the T.A. Taylor family trust

(x) the establishment and operation of a superannuation fund for the purported employees of the W.E.L.M.T. Urological Unit Trust."

The trial judge was of the opinion that he was bound by Peate's case (Peate v Federal Commissioner of Taxation (1964) 111 C.L.R. 443, (1966) 116 C.L.R. 38) to hold that s.260 operated to avoid these arrangements as against the taxpayer. He had discussed that case in some detail in the Gulland matter and did not repeat his views. For the reasons which I give in support of my decision in Gulland's case I hold that he was not bound by Peate's case to apply s.260 to the arrangements. I also set out in Gulland's case what I see as the correct approach when s.260 is in issue, and all that I said there has relevance in this matter and need not be repeated.

The trial judge was unable to discern any ordinary business or family dealing in the arrangements, which were very similar to those in Gulland's case. In line with my reasoning in that matter I see the arrangements, considered either objectively or subjectively, as capable of explanation on the ground that an attempt was being made by the taxpayer to provide, by way of superannuation benefits, for himself and his dependants when he ceased to carry on practice as a doctor. Provision was made, whether he ceased through voluntary retirement, death or incapacity. I see this as at least an ordinary family dealing and also as explicable on business grounds. The trial judge was of opinion that the arrangements were "artificial" although he had earlier found that they did not constitute a sham but had the legal effect intended. I do not see them as "artificial", except in the sense that they were unusual, but as complex and technical. The fact that they were thus was the necessary consequence of the then subsisting statutory and professional restrictions on members of the medical profession. Such statutory and professional restrictions did not then apply, at least to the same extent, to members of other professions and to tradesmen and proprietors of small businesses and do not now apply to the medical profession. Furthermore the restriction on recovery of fees and deductibility of payment thereof referred to in Peate's case to which I drew attention in my reasons in Gulland's matter, had no application to the arrangements in this matter.

The trial judge took into account the undoubted fact that as far as its patients were concerned the practice continued more or less as previously. This to my mind could have been a very relevant consideration in determining whether, contrary to his findings, that the arrangements were a sham. It is of less significance when assessing whether they must necessarily be labelled as a means to avoid tax. More important is the fact that the trial judge said he was impressed by what he saw as "the magnitude of income splitting available" to the taxpayer through the arrangements. However he did not attempt to analyse further the matters which gave him that impression, except that he saw it as available because of the decision of the taxpayer that his Family Trust should hold units in "the Unit Trusts". Certainly his Family Trust did take up units in the Service Trust and the Unit Trust but only the issue of the latter units was challenged by the Commissioner (See the particulars above and especially particular (ix)). The Commissioner challenged the formation of the Service Trust but not the issue by it of units to the Family Trust. The trial judge did not attempt to assess to what extent the income splitting he found available to the taxpayer was the consequence of the issue of units to the Family Trust in the Service Trust, an arrangement generally considered acceptable by the Commissioner in consequence of Phillips case (Federal Commissioner of Taxation v Phillips (1978) 20 A.L.R. 607) and an arrangement not challenged by him here or in Gulland's case. It was only the surplus income of the Unit Trust after providing for salaries and expenses and other payments to the Service Trust which would be available for distribution among the beneficiaries of the Family Trusts and Mr. England. That this surplus income was not contemplated as amounting to a sum of any magnitude is confirmed by the fact that the Watson Family Trust's share amounted to $6,735 at 25 February 1980 and was projected on 11 March 1980 as being $6,070 for the full year.

The trial judge also referred to the fact that the taxpayer had initially been against the income splitting aspects though it is uncertain whether he had in mind income splitting in consequence of the issue of units in the Service Trust or the Unit Trust or both Trusts. In so far as this matter is of any relevance it indicates to me that the taxpayer saw the superannuation benefits as the primary objective which he sought to achieve. However the trial judge attached significance to the fact that, unlike Mr. England, he ultimately agreed that his Family Trust should accept an issue of units. He saw this particular fact as an indication that the avoidance of income tax must necessarily be the purpose of the arrangements. However for my part it is, if relevant at all, an indication that avoidance of tax was a relatively incidental objective or alternatively a consequential benefit which was available to the taxpayer.

As I see the arrangements as capable of explanation on the ground of ordinary family dealings, it follows that they do not attract the application of s.260. There is therefore no need for me to consider the taxpayer's alternative ground of defence, based on the choice principle, nor whether he made full and true disclosure.

I would allow the appeal with costs both on the appeal and in the Court below.