RAS we . IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. G.32 of 1983 ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN: STANLEY HENRY WATSON Appellant - and - THE COMMISSIONER FOR TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent Fisher J: CORRIGENODA Page 4: Last paragraph top line "Mr. E.J. Soutar" should read "Mr. N.J.E. Soutar" Page 9: Eigth line "cae" should read "case" Ninth line "reason's" should read "reasons" Page 10: Six lines from bottom "happening's" should read "happenings" I. Tokley Associate to Fisher J. 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. STANLEY HENRY WATSON v THE COMMISSTONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA No. WA G32 of 1983 CORAM: Bowen C.d., Toohey & Fisher J.J. Perth 3 August 1984 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION JUDGES MAKING ORDER DATE OF ORDER WHERE MADE No. WA G32 of 1983 ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN: STANLEY HENRY WATSON Appellant and THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent Bowen C.J., Toohey & Fisher Ju. 3 August 1984 Perth THE COURT ORDERS THAT: The appeal be dismissed. Stanley Henry Watson pay to the Commissioner of Taxation his costs of the appeal. IN THE FEDERAL COURT OF AUSTRALIA ) ) WESTERN AUSTRALIA DISTRICT REGISTRY ) No. WA G32 of 1983 ) ) GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN : STANLEY HENRY WATSON Appellant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: Bowen C.d., Toohey and Fisher J.J. 3 August 1984 REASONS FOR JUDGMENT BOWEN C.J. This is an appeal from the Supreme Court of Western Australia concerning the application of 5260 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 1s 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 1t 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. LRU th AT 20CLU TS v "ey \ ro alee ee EEN ane MSE a NG hc ally ae ln nt tele late Beale Ae fet ied yatta sabato edie ae ere ee IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. WA G32 of 1983 ween ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN: STANLEY HENRY WATSON Appellant and THE COMMISSIONER OF TAXATION OF THE COMMO TH OF AUSTRALIA Respondent CORAM: BOWEN C.J., TOOHEY & FISHER JJ. 3 AUGUST 1984 REASONS FOR JUDGMENT TOOHEY J. 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 pian 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 WELMI 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 show 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 $37,025 Less deductions claimed $40,557 Less disallowed salaries 9,167 Superannuation 23,471 72919 $29,106 " The reason for the amendment, it was said, was the fact that the original adjustment sheet, in relation ta 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 ov. 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 relevantily 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 a <cs wh acI -4 at ' 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 3.260, 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 10. 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 hy 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. ll. 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 invoive resurrecting the earlier partnership. It relies upon the definition of "partnership" in sub-s.6(1) and also upon 3.19 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". 12. 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 13. 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 ail 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 persona 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 14. 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 Vv. 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 15. 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 "AW.E.L.M.T. Urological Unit Trust". Under the heading "partnerships, trust estates, etc." appeared the following: 16. 0 $ 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 mot 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. 17. This he failed to doz mor did he provide the respondent with adequate information as to how the change from a partnership toa 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. I certify that this and the sixteen preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Toohey Associate Dated: 3 August 1984 eee oe RR RAE Som enIRET WenEnE ae ee os wee oo IN THE FEDERAL CuukRT DE WiioTERN AUSTRALIA DLSTRILT GLANERAL OLVISIUN lURAM. Howen C.Ja, o Augist LybB4 KREMSUNS FUR J baitmer J. ln this matter stanicy Ippesl:s aguingt 4 decisiat given on Vourd ot Western Atstralias. fival Jyainst am acsesement or income tas vi uiceme ending 30 June L979 Ly Lie WI Tuation of ine Commonwe Commissioner"). Tne taxpaver was a AUSTRALIA 3) ) REA LSTR, > } ON vt) EB Nu.O32 of 1983 APFEAL FROM THE SUPREME URT OF WESTERN AUSTRAL1A BOT WEEN: STANLEY HENRY WATSON Tu Ur Au surgeon Appellant and E COMMISSIONER FOR TAXATION THE CUMMONWEALTH OF STRAL IA Respondent Toaoney and Fisher JJ. UULMENT Henry Watson ("the taxpayer') 24 June ives by the Supreme Court dismissed his appeal iseued if respect of the year respondent Loe Lommigsiloner alth or Australia ("the specialising in urology. In bie return of income for the vear ending £9 dune L979 he disclosed a tasable ineawe of 891.978 comprising to tne extent relevant o1 gross salary a2 $1.beo reverved srom the "W.E.L.M.T. Urodoyical Unat Truse* and $8,000 being ais amare of income of 2 parineresthips. Hie reburnm wat sacelpled by lhe Commissioner and oan BsSussmeant sted 01 29 Junmuary Lose However an S may lyvo, atver tne due dale for payment of tne of19inal asseosment, Loe Commisstoresr issued am amended accescment whereunder 3 fFurtner amount o1 $32,372.62 was assesced at bpayabie ty tne baipayer. Li Lie adjustment smewb woich acecoamp jnm.ed Like ameridend gesesement tie Commissioner szdenbifred tro ad gusbment mad@ oy bue anerdinerne a5 Pellow s "ay dd imetom., sd puted B32 a re ult of variation an PaPrlLreresnitp Wisse roo lats ba,tua, © Wigs Vey Uae earns Od the sapped iy Lae trial judge, rouse kb TOL Fre Lud ovetieh tfotetated biak Diyusbmenk smeeek widen Mad beer sezued to the parteersolp a Weld an tne ba .paver required furtoer sheroelwo2ent . rrom Lhe pucnmh or view of bau Tacpaver the nécesssry amendments required Loe deduction from his apsessable income ut tae salary of bL,U83 shovemenvtvoned together with gn amount of $4uu ideibitiod as oa allowance and the addition thereto ot his snare or tne sajusled partnership met rncume . ne partrersaip mel lucome gy returned tad been eres ed by toe Lommigsstuncr by an smounk az tly, 959 tub counsel intimated that at sooaula nave been aeressed by buy,loc. Even this turther amendment was, aS tine trial guage Tound, lishkle to be Further qualified on tne grounds more particularly referred to am fia reasons for judgment. The trial jydge neard the evidence in this matter separately from that in Gulland's case alinough the appeals were before him, 35 they were berore we, arqued together. It 15 unnecessary tor me, as 1t was tur tne trial judge, to reiterate my View om issues arg matters vomnon to both appeals. in ¢o Yar a» Lhe evidence im this mabter 15 relevant bo two conmon issues, hameiy wnelher tie arrangements were a sham or nad the proposed leyal erfeor., 1t ts mob hecessary ta rulate tars evidence. Hoth Or these iseues were uetercmined by the trial judge in cavour of the Laxpayer and not cnallenged on appeal to thas Court. On tne Turther common itcue, mamely tne applicability oi ¢.206 oj} the Income bax AsSsesoment Act bGsu c"tne vAvcb"?y Lt 1s Weeessary to review the sels althoudn mot an great detasl 3a¢ Lhey are tully sel oul by Loe bLreisl gudge tn mit Pedeens Lup decrs,com amd mot an Secpipte. Tne tanpayer Gaoyected Lu Lhe amendes a¢Sessment on the 910M Lhat 1t was not sutnurised by s.17@ uot tne Act as he had made Pull) and and true disclosure of gil miterial lacus necestarv to his. aosessmenc. 'The terial iudge found against the taxpayer Gm tories round mt ouqgerclion as well af oof lie taxpayer s objection to tae application ty bre Fommtss.oner of the Praviclans o1 8. cv. The cou-eguenee ul my findings on tne applicability or that section relieves me o1 the mecessity to decide whether, im tne relevant sense, the taxpayer farted to make full and true gisclosure. My tentative inclination would be to faire? that ne had made sucn aiscetosure but 1 retrain trom arriving at 4 final or comsielered conclusidn. Lo ivace my decision on my view that tne arrangements imto wnich tne taxpayer entered did mot attract "the thunder os seetian 26" «see per bray C.J. im domes v Fejer3l Lommissioemer of bLaxsation 77 A.T.C. 4058 at page 4u06). At all relevane Limes prior to the end ot the year ofr income whe taxpayer was 4a wember Of VaPrlous partnerships of Mesical practilionere. He first entered inlo a partnership ain 1YS7 and a5 from l July LY78B was own partnership with mr. E.J. England, mr. 4.1. Low, Ar. KeW. Mehregor and mr. L.A. Taylor. The trial guwige found tnat tne varvpayer had been conrerned tor some time witn hilt personal Lananctal posilion. AL the end of lt73 he wae aged o99, amd married with 4 wnildren then aqed appruiimautery Lu, ict, le and 2u. Hs principal asse@ebl wee nis hawe and he Mad mo investments spurt trom a relatively small lite Insurance palicy. AS otte tPbak Judge ¢s1d, ne was quite nhaturally concerned witn mis tinmancial security upon his retirement. towards tne end or 197% mr. E.d. Soubtar a chartered accountant im the farm of weeountaits who acted for the tacpayer's partnerenip hau discussions with tne taxpayer eoncerning his Financzyal position. He sald that 4 cuperanmuation arrangement tor the partners might be possible, and such an arrangement was put before the pariners by nim at a meeting in November 1978 atl tne home ot mr. McGregor. Mr. Soutar spoke of 3 Siperannuatzion plan woiecn would anvolve each of the partners becoming an employee of 3 trust of which the partners would be the trustees. He 31d that each of them could pay into a superannuation tund which would provide superannuation benefits on retirement, and tnat the taxpayer's entitlement would amount to approximately $150,0u0. Tne trial judge stated that the taxpsyer's evidence was tmat tne object of the proposal was "predominantly superanmuation*, but that tnere were clearly other objects and in particuisr the distribution of profits of the trust to bne families of tne partners and tne creation or 4 service trust. At tne trial judge suid, tnere were obviously incowe splitting advantage. to be gatned from tne implementation or the proposal. Tris matte: differs oun tisat aspect from Gutbamd's case in thal toat taspaver mad alresdy acuseved "income splitiiny sdvantayee" beau. Oe nad. with the concurrence of the Commissioner, @arlirer e@sbtablisner 2 $erviee trust. These "acceptable" advantages fiad ul been aenieved at the relevant time ty the partmers in this mutter. Hoe a meeting an Uecember 1978 Mr. suutar's proposal was ayain discussed by the partuers and agreement reached for it to be implemented by Mr. doutar amd nis firm. A letler was wratten on lo Februsry 1979 bo 4 Carm wt solticilorps witn unstructtons to prepare the mecessary documents fo evtablish a unit trust, the name of which was given as "W.E.L.M.T. Unit Trust'. This mame represented the first letter ot Lhe surnames of the partners. Instructions were iven as to tne mame of tne settlor, the selLlled sum and that the "S.H. Watson Family Trust" was to be the first wumit holder, Ine £1ve partners were mominabed as the trustees of the "W.EB.L.m.T. Urological Unit Trust', hereinafter called 'tne Unzrt Trusit. instruckions were jiven concerniny discretionary rights to income and capital of tne trust and voting raghts, and for the preparsution of an employment agreement between the trustees and ine partners, The salaries under this agreement were to te a5 mutually sgreed, and there was to be provided for each of Live partiers 43 *non-contributing superannuation scneme, cuntribulrons to witeh are mot to exceed ine waxaimum a¢ allowed ty the Deputy Commissioner of Taxation'. As a result of tnese instructions tinree trusts, a s3le qqreement and am empsrayment aqreument were prepared. Tne mother of Loe taucpsayer #$tablished by deed the 5.H. Watouon ftamaly Trucl v'tihe btamaly TFrust*?. The taxpayer and his Wite were trustees ot this trust deed, whien was undated but stamped om L2 April Jy79. The ta.payer was contingentiy entitied tu 4 beneficial oberest in tne eaptbtal and income of the Family Truth prior to ite termination tut nat on termination. The other classes at beanerictarlesy, all ot whose wnberests were aqiserellionary, comprised toe wife, cnildren and remoter issue of Or persoms connected with the Laxpayer and nis wife and charities selected bKy the Lrustees., The taxpayer had during his lifetime power to remove existing trustees and appoint new trustees. The Urological Service Unit Trust ("the Service Trust") wae establicheu ty Mr. EW. Kylu as seltlur by deed dated 12 April 1979 of which deed Besates Nominees Pty. Ltd. was trustee. Thais company was controlled ty the Y vartners. Ihe taxpayer and his wite as trustees of the Family Trust held 50 umits an the Service Trust, which entitled them to a beneficial aunterest in the capatad and unmeome of tne Service Trust. The trustee of this trust wee given power tu engage un any business activity, f& toird Lrost, being tne Unoet Trust previously referred tO, wet established ty mr. LAW, <yle@ as settlor ty deed dated 29 May 1979. The bLaxpayer and his partners were trustees of this teuct, tne rignts of unit Nosders being im pari materia with the rights oF unit molders an the boervire rust. Clause Le (2) of tue trust deed required the trustuvs to be medical praclitioners aed eoployees of Lhe Unil Trust and tney were empowered to carry on any business activity. The Laxpayer and his wife 3: trustees or tne Family Trust beld LO unats i the Unel Trust, as did tne truslees of the Family Jrusts of otner partners and in one instanmee a partner an hws own raygol. [mn addataor to these thiee truetls varivus other documents were prepared by tne gsolicttoers and forwarded to the taxpayer by letter dated ll May 1979, These included 4 Management services agreement, 4a deed estatblisning the Unit Trust Superannustion Fund and documents ancidental thereto and a draft employment agreement and draft sale agreement. Documents relating to the business mame of the Unit Trust were also forwarded for completion. Gn 3l May 1979 3 meeting attended ty the S partners, Mr. Soutsr and 4a further accountant Mr. Fayle as advisor to Mr. England and itr. Low, approved generally the arrangements and in particular lhe purchase, pursuant to tne sale agreement, Of the medical peactice of tne partners wy the Unit Truet. in reLalion wo this mavver there appears to have been much J1SCuss10m Concerning bthe price Lo be paid for tne qoodwild ar the partnersenip practice. Yne fagure of $30,000 was witimately ineluded oon Loe sulw agreement. This agreement was made between the Sive partners a5 vendors ated toe Wot Trust as pircnaser. Lt reciles tie sale of tiie practice of tie partners oon d Sune su-9 Jor $0,000 Logetnuer Wwibto plant ard equipment 44 wreblern own values for tanatbirow Purposes std medical supplies af aireed value, in respect ot Iie employment ayreements Lhe minutes of the meeting of SL may LU°9O reculved to employ tne partners as sularied Medical practitioners ab various commencing salaries on the terms of ayreoements daleu bo dume Jura, Tine trial judge round toat, motwitnstanding certain discrepancies, the partners as trustees agreed to employ themselves: ati tie praclice at the nl salaries mentioned ai the mirule. Tere was tnereafter much coming and going concerning the settling of Loe tinal terms ol the employment asareements and Chere is: mu deubl that ultimately 1L was siymed by tie partrers wi lierr dusl Capacities many Months arter 1 June 3979. However the trial judge found that the ecsential terms were agreed on Sl may LYYY and that thereafter the taxpayer and his partners were employed im the practice from lo June (979 at sataries ot $245,000 01, on the cae ot 3 of them $la,oo0o,. in consequence ne found tnal, ior trie reason's expressed oun Gubland's case, the tacpayer did pot therealter derive income Trom tne practice an nis individual capacity but that the income was incowe ot a trust wstate. The Unit Trust wse registered 3a¢ 43 group employer under the wetoon LQ June 1974, effective irom 1 June 1979, On Ll June byv toe taxpayer completed al aimeome tax anystalmenl declaration and Jeduecions otn ¢ lation bo tis salary tor the year @neded jo June i979 were culeulated om tie taras os a salary of b28,000. ln i@apect of the service trust bag minubes oft the meeting om 31 may L979 recurded Lnoat the lLrustees of the Unit Trust would enter inv0 3 serviee sjgreement wilh Bestes Nominees Pty. Lid. as trustee of the service Trust tor the provision of certain services tu tne Unit rust. Tnese services referred to tne practice carried on by tre Lrustees of the Unit Truet and to services relating to proviston Gt statl, Surgeries and consulting rooms and medicat cupplies and eyuspment and other management bu. services 35 required. The fees were to be as from time to time agreed. Gn the matter of superanmuation the minules recorded that oa fund should te established by the Unit Trust for its employees commencing Ll June 1979, the trustee of the fund being Fund Fidelity Pty. Ltd, Ib was resolved that a trust deed be prepared between time trustees of the Unit Trust a5 employers and Fund Fidelity Ply. Ltd. a5 trustee subject to tne approval of the Ceputy Commigeioner ar Taxation. Tne taxpayer was admitted as a member of the Superantuation Fund ostensibly or 1 dune 1979 although tine urial yudqe had, underetlandably im the circumstances, some doubl ss to Lhe accura.y ot this date. The relevanl cheques for contributions om behali of tim and Airs Previous partners as employees were drawn on 2o Jtme 197%. The somewhal loowe arrangements wich the frormer partners made ain respech of tie rendering of seecounts atid provicion of receipts, the Larhtination al (ne wvervices of employees und their re-engagemeant by the Unit Trust were alJ nated by the traal judge. Likewise ne drew attention to happening's concerning the transter of the leases of premises, workers compensation policies and other policies of insurance, However he "ibtimately found toast tne partners witended to enter nto banding egal arrangements which arrangements did nol amount tu oa sham. in respect of tne contract ot sale of the medical practice he was satisfied thal liere was alr @1rective sale, the lt. terms of the contract naving Leen agjrewd om 31 may LYvg, For the Teasons expressed an Guiland's e4a5e me found that the taxpayer's contract of employment wa: a valid contract, tne Lerms of which were 3150 a9reed on sl mav LOA), Berore turning to the principal matter ai issue, mamely the applicability of 5.160 Lu btnese uersangements, 1l 16 necessary to nute certain mitters concerning cCurcumelances im respect ot tne returns lodged my bow bavpaver and ly the various trusts. Che partnerenip revurn of tone Y practstsoners appears to have been lodged on Y November LlyYvs, prior to tne lodging of the taxpayer 3 personal return. The motes to tne partnership aeeodunte disclosed tne sale oot goodwiil of ewsen partmer for $b,00U and that aitised Were alco sold during the year. Inere was also Low tullewang releorences "sabe out Bis bite Oo tie Let Sune 2-9 tee medieas practice os firs. Waloon, kialana, LOW, Mtiieeoe ined 'lLavior was solr to the WekelLama lh. Urolouteat Meditear Unit. Tne puretase Prien patd way bub. being $%,105 Cor veoutoment, Turriidide sid Pateuina-, bla,cuy Jur LessehoJjil loprevements and b30,C00 tur goodwill of tne practice". The trust riturn oof bie Unat Trust was lodged on or belore oL3 December Lio. Uerbati detarckhs ain relation Lo the cuperanmustion Fund aad been supplied oan June L979 and a copy of the trust dead oar the Unit Trust and 1bs Linaneral slhalements Vaselorang a loss oF 3,5e2 For tae year ended 30 June 1979 were lodged with the return. Che nobles abating toereto relaled the purchase of the practice from the partners and the terms thereor., Tne essential question berore torts Lourt om tne appeal was woetner $.260 operated to avoid a5 ayainst the tarcpayer the arrangements shove Set Gut. The Lommissianer at tne trial gave particulars of tne circumstances. arrandements or 34reements which he contended were by tne section rendered wholly void. These were: fed) the Tormation of the Wer .L.m.T. Urological Uriat Trust. Cat) tne loarmation 3 tne Uralogical Service Unit Trust 'd) tne tormstion a1 the asthe Watson Famaly Trust Cav) the amplovnent iyrecment Mase between tne trustees o1 tne WeELLIM.T. Urological Unit Trust and tne sppeliant sv) the employment gjreemenls made between the trustees ol tne W.ELLAM.T. Urological Unit Trust and Loe rollowins (3) brnest Tames Lrgl and 'o) Antony levying Low (ee Brian Weltvan mMebreyjor Od) Ineophhitus Anthony Taysor (vl) the manayoment services aareemeul mate between The ustece o1 tne WeE.Lemer. Urological Unil Truezk and Heates Nominees Pty. Ltd. as trustees or the Urologiaeai Service Unil rise t'yta) the sales anresment made betwen Lore appellant, éroest Jame: bualant. nantony Lrving Low, Brian William mehre yor and Theophilus A@litiusony Taylor as VErdars abet Ute trougtevs oOo. the WeE.L.M.T. Urolagieal Urait trust, 48 puecnasers, for the sale or tne s mdors mewgseal practice AW1LL? (O@ ayreOme a uP aPran petent Woerehy tie trustee ar the WekwLeme tT. Urgionteal Unit Yrust purported to take ott dease the praclice premises at Jo7 St Geurge's Turcace, Perth Max the lzgue ol the following wunmaits in the WebebeMs fs. Urglogical Writ Trust Watson amd Jali s of the Watson tay 10 umive to SLamley Hew Dorgbtay Watson a5 Erughea Tamiiy tiust ths JU ynets to Ernest James briyl are Ces LO unmvts oo Antony Irving Low arel Joan Marie Louw gf trustees of toe Antony Low family trust ed) de uate tu Brian William meuregor ancl Taste Pobreeis Nehregor tamely truel (@, LO unats to Adunss Nominee. Pty. Ltd. ah leustevs tor tne Tea. Lavlor tamaly trust ory tne @e lLotlastimernt del uper3slron ar 4 SWpor anal ion lures Por Lie purported employees OL tne Wik LLM. T. Uruloyseal Unit Trust." Ine trial judge was ot Une Spinto Liesl me was Lound by Fe be ¢ ogee tbe be ov hecdec ak Lomaiss tones ot Caration ¢Jadas Lil Lele ke. boy, otto Tle 0 Lee. bo rede uiak se. bt Operated to avowed biases ait a jyemenet s az Hatake bow ne Ce Fhe had discus ced that esse Je some de brl bh lt tere lola atid matter abd did folk Cupaat mls Views. Poo baa resa:Ons wer Fo yave im support of Meo dee redone oat bebbaed » vaae dg Meld lhat he war nul bound hy Paat Case Lo gppiy ¢..49 to Lie arrangyemebls. 1 also ¢et out tho kd kame % C450 whab J fue us tne Curreet approsca when ¢.260 1s in lssue, anu all] tinal do:4nd tnere mak eolevance im tnie Waller and need nol be repeated The trial yedge Was Wn able to Wiscern any ordinary Cusiness or fCamiiy dealing in toe oosrranjemunes, wnhien were very similar to those in Guillarnd's cuse,. in line with my reasoning in that matter Ll cee the arrangements, considered eilher objectively or subjectively, a5 Capslble oft esplanstion on the ground Lhat ain attempt was being made py vive Laxpayer to provide, by way of Superannuation tveanetiis, for wimselt amd nis dependants when he Ceased to carry oh practice at 3 ductor, Provisioam wat mide, Whether ne ceased tEnrowgn volunblary eetirement, destn or 1c Apacity. Leee this sf ab destt am ourdatary tamily dealing and also a8 e/ plicable on nuslingos Giuuinls. Tne uwrlal judge was wt Opinden thal toe arranjements were *arbificiral" allnaugh he Dad earlier four kaist taey ded net onslreitle 9 Goam but nad the fecal @elteck aptenied. Joduoteet pee tiem a. "Saplatdcial*', e@.ctept an tne perms UN ab trey wees uiitioualy, lut ay momp ler ariel technical. Ine tacy thal toeyv were odinus was tne mecessaryv Consequence oul tate nen subbsteatbiny stabubory and protessianal Pe=Cricdruris On Members wd Lr Ih dlcas OLOievs 210. Lnen Stuvatery und professional restravtisn. iu mul Loan apply. al least to the same extent, Lo mumuer es OF ublner probesysons amd ty tradesmen oanmd proprietors ol smatl burinessoes amet do nat mow apply to tne wedica! profession. Furtonermere Loe restriction on recovery of fect sid deduetabelity ot paymenl Lonereof referred tu wn Pe she's Cade be wach £ ubbew stbention sm my reasons if fated L areet matter, mud Hw appdsuabicn Lo tne arrangements am thes Matter. L'a. The trial gudge took into account tne undoubted fact toatl a6 far as 2t5 patients were concerned tne practice continued more or ese at previously. This to my mind could nave teen 3 very relevant consideration im determaning whetner, contrary to his rindgangs, that the arrangements were a sham. it is of less stanificanece wnen assessing whether they must mecessarily be Labeiled as 3 M@ant ta avord tax. More amportant 1s the fact toat the trial Judge 3310 ne was impressed by what ne saw as "the Magnitude of ancome epsitting avarlable* ra the taxpayer throuvan the srrangements. However ne did mol attempt to analyse further tne matters wollen gave olLm tial impresction, except Loat ne saw 1t ay avatlsable berause wr tne deeciston ot the vcaxpayer that has Famity Trust could bold unable ion ttne Unal rusts'. Certainty has Family Trust did take rp untks wi tne soervere Trust amt the Unil Trust bul undy Line dese ub bine Jabter wiitys was enallenged by tne Lommissioner (cee toe particulars sbove sid especralliv particudar taste. The Commist tener oodideryed bie Lurmalbion of the vervice [rust bob mob the issue Ly Leo ul uate Lo tna Family Trust. Tine trioat judge dad mol ablempt te arenes ta what entemne tne income splitting oF tounmd avutlabie oo toe Linpayer was the consequence oo tie eee of umrls te toe Family Trust lm tne Service Trust, am arratipememt yeberalty colsiadered acceptable by the Commistloner in coneegquence ad Puttkaps wase (Federal Commissioner of Taxation vo Fntllaipe C19? 2 ALL.K. 607) atid an arrangement mot coallengéd by him here or in Guillanmed s case, It way only the surplus income of toe Uorl trust ater providing tor salaries and expenses ahd other payments to tne bervice [rust It. waitin would be avarlavie for di-irabutionm among toe beneficiaries or the FEamaly Trusts and mr. Englatd. Tnat tnis surplus iumcome was not conmtemplaled 34 amounting (0 42 Sum of Any magnitude as confirmed by tne fack that the Watson Family Trust's share amounted to L,73u at wo February L980 and wae projected on il Maren L980 a5 Leing $6,070 for Lae tull year, The trial judge also relerred tu toe acl that the taxpaver Had initially been against che ancome splitting aspects thougn rat le Waeertain wartther we vad sy mind income splitting in cohseguence of bie Leelee tl umes in lig service Trush or the Ungl Yrust or ouolis Prusts. In 20 far as Lois matter 1s o1 any relevunee it Lived ee abes 3 bo ome Lak Lig Laxpayer Sau tno Superannuation benefLric 4: Lone pramary ubjyenbive woich he sought to x#enleve., NWolever be Li tak dane utbached gtguifiecance to the rach that. uniike MP. Pugh and, ue Wttlitaleiry ayreed that nis Family Teust sould atiinge Ale tobe out umtbe. Ha Gaw this Parictsar Yack ae am diode atyot teak lie avedanee of zucome tax MiHSt Gesessarliy ba brie purpose ol Low orrangements. However tor mY part at is, ify relevant al all, 4b brrdzcation ihat avoidance of tat Was 4 relatively incidental objective or atturnatavely 3 convequentiral benefit wien wir avattatle to Che taxpayer. Ay [ $@@ Loe arrangements 25 capable of explanation on toe grourel oF ordinary damidy ctustiny . ct fullaws birat they do mot attract tne application of s.dou. 'Cinere is therefore no need Tor me to comeider tue Latpayer 2 altlwsialave ground of defence, by Gased on the choice principJe. mor wnelner ne made full and true disclosure. T would allow tie appeal with costs both on the appeal and o1im tne Court below. | certity that this and the "G — precearng Pages are a true copy of the Reasons tor Judgment of Mr. Justice Fisher. _ VL. Associate