IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. G31 of 1983 On APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN: IAN FERRIS GULLAND Appellant - and - THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORRIGENODA Fisher J: Seven lines from the bottom "Division" should read "Part" I. Tokley Associate to Fisher J. 1Yy a 4%. Cd Y Income Tax - assessable income - avoidance of tax - doctor previously operating as sole practitioner - creation of unit trust to purchase practice and employ doctor - objective purpose of arrangement - relevance of taxpayer's evidence - potential for incone splitting - whether one of the main purposes - consideration of the "choice principle" - whether incidence of taxation altered - existence of antecedent transaction - whether ordinary family or business dealing Income Tax Assessment Act 1936, ss. 82AAC, 260 IAN FERRIS GULLAND v. THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA No. WA G31 of 1983 CORAM: Rowen C.J., Toohey & Fisher JJ. Perth 3 August 1984 IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION JUDGES MAKING ORDER DATE OF _ ORD! WHERE MADE No. WA G31 of 1983 ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN: IAN FERRIS GULLAND Appellant and THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent Bowen C.J., Toohey & Fisher JJ. 3 August 1984 Perth THE COURT ORDERS THAT: The appeal be allowed. The judgment of the Supreme Court of Western Australia be set aside and in lieu thereof the appeal to that Court be allowed. The Commissioner of Taxation's assessment of income tax for the year ended 30 June 1979 be amended by excising from allowable losses the sum of $3,109. The Commissioner of Taxation pay to Ian Ferris Gulland his costs of the appeal to this Court and of the appeal to the Supreme Court. IN THE FEDERAL COURT OF AUSTRALIA ) ) WESTERN AUSTRALIA DISTRICT REGISTRY) No. WA G31 of 1983 ) GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN : IAN FERRIS GULLAND Appellant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent CORAM: Bowen C.J., Toohey and Fisher J.J. 3 August 1984 REASONS FOR JUDGMENT BOWEN C.J. This 18 an appeal from the Supreme Court of Western Australia concerning the application of s.260 of the Income Tax Assessment Act 1936 ("the Act"). The primary judge dismissed an appeal by the taxpayer, Dr. Gulland, against the rejection of his objection to his income tax assessment for the year ended 30 June 1979, The facts are set forth in the reasons for judgment of Toohey J. and Fisher J. and I shall not repeat them except so far as may be necessary 1n discussing my reasons. I am of opinion the appeal should be dismissed. The evidence discloses that before the arrangement in question took place, Dr. Gulland was a general medical practitioner in sole practice. He paid the "Dr. I. Gulland Family Trust" ("the family trust") to provide administrative services to him. The trust's "specified beneficiaries" are Dr. Guliand's children. Dr. Gulland and his wife are "additional members of the class of general beneficiaries". In the relevant tax year, the "Gulland Medical Clinic Unit Trust" ("the unit trust") was formed. The trustees are Dr. Gulland and a Dr. Burke, who practices on her own account in a nearby practice. All units in the unit trust are held by a Dr. Brindal in his capacity as trustee of the family trust. The Commissioner sought to avoid both the formation of the unit trust and all relevant dealings entered into by it. The Commissioner did not challenge the primary judge's decision that no part of the arrangement was a sham. He sought to support his application of s.260 to the arrangement. As the primary judge noted, in applying s.260 1t 1s not the motives of the taxpayer in entering the arrangement but the objective "purpose or effect" which is relevant (see Newton v Federal Commissioner of Taxation (1958) 98 C.L.R. 1 at p.8 and Hollyock v Federal Commissioner of Taxation (1971) 125 C.L.R. 647 at p.655; cf Federal Commissioner of Taxation v Lutovi Investments Pty. Limited (1978) 140 C.L.R. 434 at p.466). In considering the application of s.260, the relevant "purpose" is the effect sought to be achieved by the transaction. To ascertain this objective purpose, the Court will need to examine the circumstances of the case to be able to draw the correct inferences. I agree with Toohey J. that the evidence of the taxpayer may be relevant as to "purpose" as thus understood. Dr. Gulland gave evidence with respect to the arrangement before the primary judge who, in his reasons for judgment, commented: "The appellant's stated reason for entering into the foregoing arrangement was to establish a superannuation fund after he had become an employee. He denied that, at the time, he appreciated that the arrangement would result ina reduction in his personal iliability for income tax....He was familiar with the notion of income splitting; but he said that he regarded it as something which just might occur in the future, for he could see no immediate prospect of any advantage in that direction, there being insufficient income in the unit trust to do more than pay his salary and an amount of superannuation. But this was not an arrangement designed only for one financial year and the naming of the trustee of the discretionary trust as the beneficiary in the unit trust suggests that income splitting was a significant factor.....I did not find the appellant's evidence as to certain advantages of the superannuation scheme in providing disciplined saving and greater control over investments to be very convincing." Counsel for the Commissioner emphasised the decisions of the High Court and the Privy Council in Peate v Federal Commissioner of Taxation (1964) 111 C.L.R. 443 and (1966) 116 C.L.R. 38, in which s.260 was held to be applicable. Peate's Case was of course decided before cases such as Cridland v Federal Commissioner of Taxation (1977) 140 C.L.R. 330 and Slutzkin v Federal Commissioner of Taxation (1977) 140 C.L.R. 314 developed an extended application of the "choice principle". Nevertheless, as Counsel pointed out, Peate's Case has never been overruled or called into question by the High Court in later cases and is concerned with facts basically similar to those in the present case. In it, a partnership of doctors was dissolved and a company was incorporated to receive the fees of the 'practice. The net profit of the company was in turn distributed to the family companies of the doctors who had formerly constituted the partnership. Every judge and law lord who heard the case in both the High Court and Privy Council held that the purpose or effect of the arrangements was the avoidance of income tax. With respect to those who think otherwise, I am unable to accept the view that Peate's Case is to be distinguished from the present situation on the basis that, because of the relevant legislation at that time, the company in Peate's Case was unable to sue for the medical fees of the practice. I can find no reliance on this feature of the case in the judgments of either the Privy Council or the High Court on appeal. Further, I do not read the reference to this aspect by Menzies J. at first instance {at p.460) as constituting a basis for his decision. It may be that the use of an entity which cannot sue for fees may he relevant when considering whether the arrangement is capable of explanation by reference to "ordinary business or family dealing" (see Hollyock v Federal Commissioner of Taxation supra at pp.657-658). However, this does not impinge upon the relevance of Peate's Case to otherwise analogous situations. In my view, the present circumstances are substantially similar to Peate's Case. The income of the practice which was formerly assessable in the hands of the taxpayer is now derived by the unit trust which may distribute profits to the family trust. The fact that in practice no such profits were made in the relevant year does not negate this. An objective purpose which is apparent is income splitting; if this purpose is, in fact, present, the Commissioner need not wait until income splitting becomes manifest before attempting to attack the arrangement. The fact that no income splitting did in fact occur here is a consideration to be taken into account in determining the purpose but, in my view, the circumstances indicate that the avoidance of tax was a main purpose nonetheless, just as it was in Peate's Case. As Kitto J. said (at p.469): "But the question remains, whether the overt acts that were done under the plan are fairly explicable without an inference being drawn that tax-avoidance is a purpose of the arrangement as a whole. Menzies J. thought they were not, and with respect I agree. The arrangement bears ex facie the stamp of tax-avoidance. An understandable purpose of providing for the doctors' families, and doing so quite honestly, is perfectly evident; but what is equally evident is a purpose of doing so by a method which will divert income away from the participating doctors to or for the benefit of their families, to the end that a substantial part of the tax might be avoided which would have been incurred if the income had first been derived by the doctors and then applied by them for the benefit of their families." The need for the taxpayer to be an employee to enable tax deductible superannuation contributions to be made was undoubtedly also a main purpose (which the Commissioner also attacked). However, the way in which the arrangement was structured makes 1t apparent that income splitting was not simply inessential or incidental. The fact that it was one of the main purposes is sufficient to enable s.260 to operate; Newton's Case supra at p.10, Europa Oil (New Zealand) Limited (No.2) v Commissioner of Inland Revenue (New Zealand) (1976) 76 A.T.C. 6001, Hollyock supra at pp.656-657. Counsel for Dr. Gulland submitted that the arrangement was open to him as a choice offered by the Act. The "choice principle" ensures that s.260 is inapplicable if: (a) the taxpayer has a choice under the Act of two or more alternative bases of transactions; or (b) the taxpayer can create a situation by entry intoa transaction which will attract particular tax consequences under specific provisions of the Act. (See W.P. Keighery Pty. Limited v Federal Commissioner of Taxation (1957) 100 C.L.R. 66, Federal Commissioner of Taxation v Casuarina (1971) 127 C.L.R. 62, Mullens v Federal Commissioner of Taxation (1976) 135 C.L.R. 290, Cridiand v Federal Commissioner of Taxation supra.) As Barwick C.J. stated in Mullens' Case (at p.302): "Though the section speaks of the purpose in entering into the transaction, it can have no relevance if, being effective, the transaction does not alter the incidence of tax, as that expression has come to be understood. As I have already pointed out, there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act." However, I am of opinion that the present case does not come within the choice principle. The arrangement under attack, taken as a whole, aitered the incidence of taxation as it previously fell upon the taxpayer. He was previously conducting a business of a general medical practitioner with a reasonably successful practice employing a trust to provide services to him. It was a practical way to run a business which had certain advantages and certain disadvantages in comparison with other methods. Just as in Peate's Case, the taxpayer then substituted one business arrangement for another with a main purpose of avoiding income tax. In my view it would be a misapplication of Barwick C.J.'s analysis of s.260 to hold that the section may operate to avoid the substitution of a partnership with such an arrangement but not operate to avoid this change from a businesslike sole practice operation. It may be that an alteration of the method of conducting a business as a_ sole trader may be more easily explicable as an ordinary family or business dealing; however such a change will in other instances be seen as altering the incidence of taxation. The taxpayer in question here did not merely "create a situation by entry into a transaction" to attract particular tax consequences (Cridland supra at p.339). The arrangement here goes beyond mere entry into a transaction such as a university student buying units in a trust. Here, with a purpose of altering the incidence of taxation in which his income from his Practice was taxable in his hands, the taxpayer set about creating an entirely different situation whereby by means of a number of agreements entered into by a trust which he set up for this purpose the income could eventually end up in the hands of a family trust rather than his own. Although the fact that a taxpayer alters his position from a sole trader does not automatically mean either that he has or he has not altered the incidence of taxation, such a change of structure may often be explicable as an ordinary family or business dealing. However, I am of opinion that that is not so in the present case. The primary judge found that the arrangement showed no business purpose which could be identified; no limitation of liability was achieved and no advantage was gained in the running of the practice. The medical practice, so far as the patients were concerned, was conducted in virtually the same manner as it was before the arrangement was entered unto. Dr. Burke did not contribute at all to the day to day running of the practice. Many of the steps to implement the arrangement were "carelessly executed" and the dates of the documents were "totally unreliable". The business name was not registered in the trustees' names. Such matters, especially the total lack of any business purpose, lend weight to the view that the arrangement here bears "ex facie the stamp of tax avoidance." It aus true that the absence of commercial reality does not in itself attract s.260. However, when the extraordinary aspects of the arrangement are aggregated, they indicate that the setting up of such a structure is far removed from any ordinary dealing. It is in this sense that the primary judge labelled the arrangement as "artificial" . 10. and held that this lent weight to his conclusion. Used in this sense, "artifical" does not mean the opposite of "real" - it was not argued before this Court that the transactions were a sham; the primary judge found that they were intended to have legal reality. However, "artificial" is here used in the sense that the arrangement was not ordinary, that 1s, not natural in the sense that it would not be carried out for merely normal business purposes. Even though the arrangement was intended to have legal effect, 1t was carried out with disregard for detail and without any benefit for the running of the practice. In my view it was not explicable by reference to ordinary family or business dealings. Section 260 is, of course, an annihilating provision only. It operates in this case to avoid the whole of the arrangement particularised by the Commissioner. This results in the income of the practice being derived by Dr. Gulland; no reconstruction is necessary. In my opinion the appeal should be dismissed with costs. = . vrlgoveat IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No. WA G31 of 1983 ON APPEAL FROM THE SUPREME COURT OF WESTERN AUSTRALIA BETWEEN: IAN FERRIS GULLAND Appellant and THE COMMISSTONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent a ORAM: BOWEN C.J., TOOHEY & FISHER JJ. 3 AUGUST 1984 REASONS FOR JUDGMENT TOOHEY J. The question in this appeal is whether s.260 of the Income Tax Assessment Act 1936 ("the Act") avoids transactions entered into by the taxpayer, Dr. Gulland. In 1977 Dr. Gulland conducted a medical practice on his own account as a general practitioner in Maylands. In that year, on the advice of his accountant, he set up a service trust known as the "Dr. I. Gulland Family Trust" ("the Family Trust"). The Family Trust was created by a deed of settlement dated 8 April 1977. The settlor was Dr. Gulland's mother and the trustee was his former partner, Dr. Brindal. It should be said immediately that the establishment of this service trust was not challenged under s.260 or otherwise. In 1979 Dr. Gulland's accountant suggested the creation of a "medical unit trust" which would employ Dr. Gulland and establish a superannuation fund for his benefit. Such a trust, the Gulland Medical Clinic Unit Trust ("the Unit Trust"), was established with Dr. Gulland and a medical colleague as co-trustees. There followed a number of formal agreements, the details and consequences of which are set out in the reasons for judgment of Fisher J. and need not be repeated here. But, in summary, there was an employment agreement between the trustees of the Unit Trust and the taxpayer; a management services agreement between the trustees of the Unit Trust and the Family Trust for the latter to provide services to the former; an agreement between Dr. Gulland as vendor and the trustees of the Unit Trust as purchaser for the sale of Dr. Guiland's medical practice in Maylands; an agreement or arrangement by which the trustees of the Unit Trust assumed responsibility for the lease of the premises at which the practice was conducted and for certain hiring agreements of office and surgery equipment; the issue of units in the Unit Trust to Dr. Brindal for the Family Trust and finally an agreement to establish and operate a superannuation fund for employees of the Unit Trust. Before the learned primary judge the various agreements and arrangements just described were attacked by the respondent as shams. Although his Honour was critical of the manner in which some of the agreements were entered into, he rejected the contention that they were shams. He held them to be valid agreements intended to achieve the operation of which they spoke, though he expressed reservations about the status of Dr. Gulland as an employee under the employment agreement made with the Medical Clinic Trust. There is no cross-appeal by the respondent and this appeal must be determined on the footing that his Honour's findings concerning the circumstances in which the agreements were made, the dates upon which they were entered into and their legal effect are not the subject of any challenge. The only question before this Court is the operation of s.260. The learned primary Judge expressed his view of the operation of s.260 in this way: "The main purpose of the present arrangement was, in my opinion, to avoid income tax. This was to be effected by diverting what would otherwise have been the appellant's income from the practice to the trustees of the unit trust and by his then receiving back a lesser sum by way of salary. It would thus serve an income splitting purpose. It was then apparent that the trustees of the unit trust would seek to obtain a deduction against its assessable income by making a contribution to the superannuation fund for the benefit of the appellant, a deduction not available to the appellant whilst he was carrying on his practice on his own account. There was no reason, apart from fiscal considerations, why the appellant should not have made provision for his own superannuation. Any surplus held by the trustees over and above the superannuation contribution and the other expenses of the trustees was available for the family trust, in respect of which each member of the appellant's family, was a potential beneficiary." His Honour went on to point out that Dr. Gulland retained a large measure of control as a co-trustee of the Unit Trust and that, so far as his patients were concerned, the practice continued as before. His Honour could identify no business purpose in the arrangement and he concluded by saying: "The very artificial nature of the arrangement provides, in my view, additional support for my conclusion that the avoidance of income tax was its main purpose". The application of s.260 had curious consequences for Dr. Gulland, at least for the income year the subject of this appeal, the year ended 30 June 1979. For the year in question, he returned a taxable income of $19,405. The respondent assessed income tax on a taxable income of $16,296, a difference of $3109.00. His Honour pointed out: eT ond yeep * eon "The difference is accounted for by a loss made by the Gulland Medical Clinic Unit Trust, which the Deputy Commissioner treated, in effect, as the loss of the appellant. The assessment was based on the application of section 260 of the Income Tax Assessment Act 1936, to the arrangements entered into by the appellant". During the hearing in the Supreme Court, counsel for the respondent stated that the adjustment sheet accompanying Dr. Gulland's assessment should more correctly read: "Taxable income returned: $19,405 Less 'salary' 5,001 $14,404 Add net income purportediy derived by unit trust 1,892 $16,296 The figure of $1,892 is calculated as follows: Gross fees: $12,130 Less deductions claimed $17,239 Less disallowed wages 5,001 Less superannuation 2,000 10,238 $ 1,892 " Even the corrected adjustment sheet was said to be subject to qualifications. One was that the assessment had been raised on the basis that the income claimed to have been received by the trustees was calculated on a cash basis, as had Dr. Gulland's earlier personal income. It appeared however that their income was in fact calculated upon an accruals basis so that if the cash basis were correct, to that extent the assessment was incorrect. The second qualification was that, if Dr. Gulland were to fail for reasons other than the application of s.260, questions might arise as to certain of the deductions allowed to the trustees. As the appeal did not fail other than by the application of s.260, no such questions arose. In the course of his reasons for judgment, the learned primary Judge said: "The motives of the appellant were fully canvassed before me, although it was acknowledged that it was the character of the acts done and transactions entered into with which s.260 is concerned". That statement is in accord with authority (see for instance Hollyock v. Federal Commissioner of Taxation (1971) 125 CLR 647 at p.655; Slutzkin v. Federal Commissioner of Taxation (1976-1977) 140 CLR 314 at p.329) and was not challenged by appellant or respondent before this Court. Section 260 speaks of "purpose or effect". While it is possible to say of a written contract, agreement or arrangement that it has a particular effect, it will in many cases be difficult to infer the purpose of a contract, agreement or arrangement merely from the documents that constitute it. I accept the submission of counsel for the respondent that the evidence of Dr. Gulland is relevant, not as to motive, but to the extent that it may throw light upon the objective purpose of the arrangements into which he entered. In particular, the absence of any suggestion by a taxpayer that an arrangement had some business or family purpose may be relevant to a consideration of whether s.260 operates. Because his Honour concluded that the avoidance of income tax was the main purpose of the arrangements made by Dr. Gulland, it was unnecessary, as he said, for him to determine: "... Whether, for an arrangement to be avoided under s.260, its main purpose, or one of its main purposes, must be tax avoidance, or whether some less substantial purpose will suffice". In this respect, Dr. Gulland's counsel took his stand on a statement by the Privy Council in Europa Oil (N.2.) Ltd. (No. 2) v. Commissioner of Inland Revenue (N.Z.) (1976) 76 ATC 6001 at p.6009. Dealing with a section of the Land and Income Tax Act 1954 of New Zealand, similar to s.260, their Lordships said: "Fourthly, the section in any case does not strike down transactions which do not have as their main purpose or one of their main purposes tax avoidance". Counsel for the respondent appeared to accept this formulation when he said: "We are searching for a main purpose". He added: "As long as it is not only an incidental purpose, it only has to be one of the purposes". Although the language is different, this formulation seems to have been taken from the judgment of Gibbs J. (as he then was) in Hollyock at p.657 where his Honour said: "The arrangement in the present case, considered objectively, can be seen to have several purposes, including the making of provision for the appellant's wife and the avoidance of death duty, but the avoidance of tax is clearly one of those purposes, and an essential purpose". In Bayly v. Federal Commissioner of Taxation (1977) 77 ATC 4045 and Jones v. Federal Commissioner of Taxation (1977) 77 ATC 4058 Bray C.J. examined the authorities in which this aspect has been considered. His Honour found some divergence between what had been said in Europa and in Hollyock and considered himself obliged to follow what had been said in the former. But in truth there may be no divergence in what was said in those cases. In Europa, the reference was to transactions having as "their main purpose or one of their main purposes tax avoidance" (at p.6009). In Hollyock Gibbs J. adverted toa situation in which the avoidance of income tax and the avoidance of death duties were equally important so that he expressed the matter, not in terms of main purpose or purposes, but by saying that s.260 would not apply if tax avoidance was "an inessential or incidental feature of the arrangement" (at p.657). If tax avoidance is the main purpose or a main purpose of an arrangement, s.260 will operate to avoid the arrangement. It was Dr. Gulland's case that the main purpose of the arrangements into which he had entered was the obtaining of superannuation benefits, available in the case of employees but not in the case of self-employed persons. Those benefits were said to be twofold, a greater ""end-benefit" on ultimate retirement or death and deductibility, to the employer, of contributions. It was part of that submission that any potential for income splitting was no more than an incidental consequence of arrangements which had, as their main objective, the attainment of superannuation benefits. It was a further arm of Dr. Gulland's case that s.260 operates only on arrangements made with respect to an antecedent transaction with the objective of avoiding tax consequences which would otherwise flow from that transaction. The section, it was said, has no application to a transaction or arrangement entered into by a taxpayer in the exercise of a choice given to him by the Act. It was said that there is no prohibition, statutory or otherwise, on a trust conducting a medical practice and that the employment of Dr. Gulland by the Unit Trust did not affect or seek to affect any antecedent transaction having tax consequences. His Honour found the "choice" principle emanating from a number of cases including Cridland v. Federal Commissioner of Taxation (1977) 140 CLR 330 to be an "attractive argument". But, in his view, the matter before him was to be determined, not by those cases, but by Peate v. Federal Commissioner of Taxation (1962-1964) 111 CLR 443 (High Court), (1966) 116 CLR 38 (Privy Council). Of that decision his Honour said: 10. "It may well be that, since 1977, Peate's case has been left to operate only within a fairly narrow field; but in my view the appellant's arrangements come within that field". The respondent sought to uphold the primary judge's conclusions by emphasising that Peate's case had never been doubted or overruled by the High Court, that it was binding on this Court and that the present appeal fell squarely within the authority of that decision. By way of elaboration, the respondent stressed what was said to be the extremely artificial nature of the arrangements made by Dr. Gulland, the absence of any commercial reality, and of any apparent business or family purpose. Borrowing an expression of Kitto J. in Peate's case, the respondent submitted that the arrangements made by Dr. Gulland bore "ex facie the stamp of tax-avoidance" (Kitto J. in 111 CLR at p.469). In considering the implications of Peate's case for the present appeal, one point should be made at the outset. Counsel for Dr. Gulland sought to distinguish the facts in Peate's case from those in the matter now before the Court by submitting that in the present case there is no difficulty in the recovery of fees for medical services rendered. In Peate's case the medical practice was conducted by a company which was not and could not be registered under the Medical Act of New South Wales and in consequence could not sue for fees. In the present case Dr. il. Gulland's practice is conducted, not by a company, but by registered medical practitioners (of whom he is one) as trustees. There is no difficulty in the trustees suing for any fees that may be outstanding and equally patients have no difficulty in claiming concessional rebates for fees paid. But, in my view, Peate's case cannot be put to one side in this way. Of the eleven members of the High Court and of the Privy Council who heard the case, only Menzies J. adverted to "a company which could not sue for fees ... particularly in the circumstance that, to the extent to which patients paid fees to the company, their expenditure was not deductible under s.82F" (111 CLR at p.460). But it is clear froma reading of the judgment of Menzies J. that the inability of the company to sue for fees played no essential part in the decision he reached that 5.260 was applicable. See in particular at p.460. The facts in Peate's case are well known. The appellant, a medical practitioner, had for some years practised in partnership with other doctors. In 1956 the partnership was dissolved and several companies were formed and agreements made, the effect of which was that each doctor no longer practised in partnership but attended to patients on behalf of a company. The company also employed other doctors and some persons who were not doctors. The fees received by the company for medical services rendered were applied in accordance with decisions of those doctors in the group who were directors. Monies were disbursed 12. in paying salaries and wages of outside doctors and other employees and in meeting the expenses of the company's business, also in making contributions to superannuation funds for the employees and in paying service fees. The service fees were received by family companies, one of which had been formed for each of the doctors in the group. The payment of service fees represented the distribution of the company's net income among the family companies in proportions agreed upon from time to time between the doctor directors. At first instance Menzies J., on appeal the High Court unanimously, and on further appeal the Privy Council (Lord Donovan dissenting), held that the plan constituted an arrangement within s.260. Without referring to any of the judgments in detail, it is apparent that in the view of the High Court and the Privy Council the arrangements made were not fairly explicable except by reference to a purpose of reducing the incomes of the doctors from the practice of their profession and thereby avoiding income tax that would otherwise have been payable. Since Peate's case the operation of s.260 has been narrowed by several decisions of the High Court, in particular Mullens v. Commissioner of Taxation (1976) 135 CLR 290, Slutzkin and Cridland. In Cridland at p.337 Mason J., with whom the other members of the court agreed, said: 13. "Although the very restricted operation conceded to section 260 by the course of judicial decision and the generality of the language in which the section is expressed stand in high contrast, the construction of the section is now settled. It is therefore a source of some surprise that it continues' to be relied upon when its defects and deficiencies have been apparent for so long". From those cases and from the earlier decision in W.P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66, a principle has emerged "that s.260 has no application to a case in which the Act offers to the taxpayer a choice of alternative tax consequences either of which he is free to choose, as for example, in the case of a company whether it should be constituted as a private or non-private company with the different taxation consequences appropriate to each class of company" (Mason dg. in Cridland at p.339). However the principle is not confined to cases in which the Act offers alternative bases of taxation: ... it proceeds on the footing that the taxpayer is entitled to create a situation by entry into a transaction which will attract tax consequences for which the Act makes specific provision and that the validity of the transaction is not affected by s.260 merely because the tax consequences which it attracts are advantageous to the taxpayer and he enters into the transaction deliberately with a view to gaining that advantage". (Mason J. in Cridland at p.339). Underlying those decisions, I think, is the notion that by adopting a choice offered by the Act or by entering into a 14. transaction having tax consequences for which the Act makes specific provision, there will ordinarily be no antecedent transaction the incidence of tax of which is sought to be altered. Speaking of s.260 in Mullens, Barwick C.J. said at p.302: "Though the section speaks of the purpose in entering into the transaction, it can have no relevance if, being effective, the transaction does not alter the incidence of tax, as that expression has come to be understood. As I have already pointed out, there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act. Section 260 is not directed to tax on income to which the taxpayer is entitled only by reason of the actual transaction into which the parties have entered". That statement was referred to with approval in both Slutzkin and Cridiand. It is against that background that some of the submissions made on behalf of the respondent must be considered. To point to the artificial nature of the transaction entered into by Dr. Gulland, the absence of commercial reality, even the absence of any business or family purpose is not enough to attract ake te ht tt Renn eenk ths An 6 es, fhe de RL See a ee ie ak 15. the operation of s.260. Thus in Cridland s.260 was held not to apply where an engineering student bought a unit of entitlement in two unit trusts for the sole purpose of averaging his income pursuant to Part III Division 16 as a person who carried ona business of primary production. The Act made specific provision for such a situation and the fact that the taxpayer entered into the transaction deliberately to gain the advantage of that provision did not bring 5.260 into operation. To the extent that some reconciliation is thought to be called for between Peate's case and more recent decisions of the High Court, the reconciliation may be found in the fact that in Peate's case the taxpayer did not merely select one of two choices offered by the Act or merely create a situation attracting tax consequences for which the Act made specific provision. He and the other doctors concerned dissolved their partnership and formed family companies, the operations of which have already been described. There was in truth an antecedent transaction (the partnership), the tax implications of which the doctors sought to alter by establishing a company. In such a case it is relevant to ask whether the transaction is capable of explanation by reference to ordinary business or family dealing (see Newton v. Commissioner of Taxation (1958) AC 450 at p.466) or whether, in the words of Kitto J. in Peate's case, the arrangement bears ex facie the stamp of tax avoidance. 16. In the case now before the Court Dr. Gulland was, immediately before the arrangements attacked under 5.260, a medical practitioner in practice on his own account. It is true that there existed a service trust, the Family Trust, which was established to administer the practice and for which Dr. Gulland agreed to pay the cost plus 30% thereof as a reasonable charge. There is no doubt that the service trust was established with a view to diminishing the taxable income of Dr. Gulland. But until Dr. Gulland's tax return for 1979, no challenge had been made to the operation of that trust under s.260 or under any other provision of the Act. And no challenge was made to its validity before the Supreme Court or before this Court even though the service agreement was established for the sole purpose of reducing the tax liability of Dr. Gulland. Can the pre-existing arrangement fairly be described as an antecedent transaction for which the arrangement now under attack was substituted in order to obtain the benefit of a particular provision or provisions of the Act? It is the position of the Unit Trust that is under attack. The assessment raised by the respondent, in reliance upon s.260, treated income returned by that trust, of which Dr. Gulland and Dr. Burke were trustees, as income of Dr. Gulland. Seen in that light, there was no antecedent transaction altered for the purpose of altering the incidence of income tax. Dr. Gulland was a self-employed practitioner who opted to become an employed practitioner. What the respondent argued was that the taxable 17. income of the trust was in reality the taxable income of Dr. Gulland. The arrangements made in 1979 did not, in that respect, alter some antecedent transaction. Although it was argued that the contract of employment was highly artificial and pointed to the unreality of a situation of a medical practitioner who purports to be both employee and co-employer, the respondent accepted the finding of the learned primary judge that this arrangement was not a sham and that it gave rise to rights and obligations enforceable at law. Peate's case has been the subject of much comment and some criticism. In large part the criticism has stemmed from the argument that, in applying s.260, the High Court and Privy Council were driven to do more than merely annihilate the company arrangement into which the doctors entered. Their former partnership had in any event come to an end when the company was formed; to treat the doctors as still operating in partnership and assessable on the fees received by the company was to revive an arrangement that no longer existed. Though much oversimplified, this was the basis on which Lord Donovan dissented in the Privy Council. His Lordship had no doubt that the conditions precedent prescribed in s.260 existed but thought the section inadequate to meet the particular circumstances of the case before hin. If the arrangements made by Dr. Gulland in 1979 are avoided as against the respondent by the operation of s.260, the 18. taxpayer remains as a self-employed practitioner assessable in respect of the income of the practice. A question may arise as to the role of the Family Trust, for in April 1979 that trust resolved to terminate the service agreement with Dr. Gulland and to enter into such an agreement with Dr. Gulland and Dr. Burke as trustees of the Unit Trust. If s.260 is held to apply to the arrangements made in 1979, it may be that not only is the income of the practice the income of Dr. Gulland but that the expenditure incurred in earning that income no longer includes what would be payable under the original service agreement. But that would not be an argument against applying s.260; it would simply point up the fact that, as a consequence of its operation, Dr. Gulland's income might have to be determined without reference to the service agreement made between him and the Family Trust. But, in my view, the answer to the question raised by the present appeal is not to be found in Peate's case. That was a decision which turned very much on its own special facts, in particular the substitution of one arrangement for another for the purpose of reducing the taxable income of the doctors concerned. In the case now before the Court, there was no substitution of one arrangement for another. Dr. Gulland established a Unit Trust which employed him and acquired his practice. Before the Supreme Court and before this Court there was much debate as to whether the purpose of establishing these trusts and entering into agreements with them was to secure superannuation benefits or to split income. The establishment of such trusts and the making of 19. such agreements are contemplated by the provisions of the Act and, there being no antecedent transaction to which s.260 can apply, I am of the opinion that the section has no application to the arrangements made by Dr. Gulland in 1979. I should add that, since preparing these reasons, I have read the judgment of Shepherdson J. in Tupicoff v. Commissioner of Taxation (1984) 84 ATC 4367. The facts in that case were different from those in the present case and nothing said by Shepherdson J. leads me to conclude that in the matter now before the Court there was an antecedent transaction to which s.260 can apply. The appeal should be allowed and the judgment of the Supreme Court set aside. In lieu thereof Dr. Gulland's appeal against the assessment of income tax for the year of income ended 30 June 1979 should be allowed and the respondent's assessment amended by excising from allowable losses the sum of $3,109. It is not possible for this Court, on the material available to it, to give effect to the first of the two qualifications to which the corrected adjustment sheet was said to be subject. The respondent should pay the appellant's costs of this appeal and of the appeal to the Supreme Court. I certify that this and the eighteen preceding pages are a true copy of the Reasons for Judgment herein of his Honour Mr. Justice Toohey Associate Dated: 3 August 1984 IN THE FERPERAL COURT UF AUSTRALIA 3 ) No.wWSh of 198% WESTERN AUSTRAL(A TLSTRICT REGQISLR1 } GENERAL ULVislon ) ON APPEAL FROM THE SUPREME CUURT GF WESTERN AUSTRALIA BET WEE els LAN rEKe LS GULLANLE Appeldant and Thi, CUMM ISS TUNER OE TAXATIUN OF (HE LUNMUAWLALTH Ul filles CR AL Lh Kesponsont Cumann? Kowen C.d., Tooney and Figsnes Jd 3 August, Lyb4a PEOSUNS FUR JWOUMoNT Fismer f.2 Tni¢ 2s gh appeal brauyab by Jan Ferrie burl and «tne tacpayer*') against a decision Of tne Supreme Court oF Western AUetralis given an £4 lune LYBo. rat Lourt dismissed the appeal of tne taxpayer against the assesrment of Imcome tax assued Pursuant to toe Income Tax Asse@usment nicl LY3G C*tue Act*?s eQainet him by tne Cummigsigner of Janalion o1 the Commonwealin ot fustralia ("the Lommassioner") in respect wt tne year of income ended 3O June Jy/o. In Mac return Une laxpayer adistloted his assessable and taxable ancome as $147,405, comprisiny, to tne extent relevant $SS,00L salary recerved aubsequenl tao April 19/79 from the fuliand Medical Clitnte Uiet Trust amd $14,604 "net business income", The Commissioner hawever im waking has aesessment reduced the taxable income as returned to $'lL6,296 and identified this siteration in his adjustment sheel a6 follows: "salury b 3,0Ul Love from toe wuld ain Medreal wilaneier try luge Peoressionmal Jmeowme La. 44 Or elsglland amd Brirmdat C dutas Imbereet 16% Tacabie bicuome blisp2ac * Tring lr. Meapiny bePocw the bLrtal judoe counsel for the Commislyoner awpdivat@d btnat. ruteyect te lwo qualifications . nob presently relevant, the wzdjustmant sneek snould more Correctly fave 1e@ad as Pulluwes "Taxable come returns ly,au's Les: salary wud 14.44 Add met wncome purported: derived by Unit Peuedt Tyt, blo6,241 * It 25 readily apparent toatl this figure of $1,892 added by tne Commissioner as the difference betwee the salary of 5,00) returned ty toe tLartpayver and tne luss of $39,109 described in toe original sdjuetment eoeel as Luss from tne ullsand medical Clainze". fhe end resusjt was tnal the Commissioner ii nis 35sessment reduced tne taxable income returned by the taxpayer from $19,405 to #lu,296, against which assessment the taxpayer paradoxically, tut understandably in the circumstances, objected. The tascpayer contended ai etfect Loal tne Lommicsioner should not have disregarded the fact that he had earnad a salary and that certain of the income, mamely $1,890, assessed against him bad been derived by tne Gulland Unit Trust. He also dreputed that 2260 of the Act had any application to his arrangements and that Peatea''s case nereatter _rererred to wat a3 relevant authority. Con¢ideration of thece ques Lions requires the facts to be related, altnougn nok in great detail, as otney are not Ss1ygnm1iicantly in i¢sue and have been Sully tated by the trial Judge. Tnere 135 4189 mo need Lo review in delarl much of tne oral and documentary evidence as the trial jyudge's findings that tov arrangements were mob a sham but untended to have and did nave Legal ertect were mob chaddenged. rluen evidenve re roedauvant only to tnese two topics The Lacpayer o12 3 medieak practituoner who al all relevant times prive bo tne year ot tncome was a sole Praclitioner operatiny on Hal uw ateuunt and under ois own lame, In @perl 1977 on nis aeeounbanl's advice ois molner established by deed of settlement a bLrust an favour of tne taxpayer, nis wife and chaddren. Or. Gremdal, a lLormer partner of Loe Lakpayer, was the sole trustee of thit trust, which was mamed the "fr. .. Gulbaned Famaly Trusl", mereatier called "the Famely Trusl*. The trustee fad tne power ta delermine the ultumale deslination of the capital of the trust, sand 3 diseretion to distribute ancome among the Fenelacsarieus. Jn derauit of e.ercise of the Latter discretion, the income Wis divivifble between the children of the taxpayer. The taxpayer had power to remove the trustee and appoint a new trustee in his place. Pursuant to srrangements between tne taxpayer and Dr. Brindal as trustee of tma Eamily Trust, that Trust took over tne Management of the taripayer's wedical practice as from 8 April 1977. The services to be pertormed were preseribed and included employment of etall, payment oar #.alaries, the assue and colileebtion of secounle ate general provision of management and tC) orlice tervicc:. The Lavpayer agreed ta pay for thore services on obtne tasis of Fiogir enst ote tne Famriy Trust plug JoZ. Pursuant to thee arrangqgemermk: certain office ps ant was purchased from bone tacspayer amd Leased loock to ham. The Esmtly Trust perlormed lihese gervices cur the Laspayer fue tree years of rmeome eredurny 3O dure LIYZ amd ie amd oboe tae pertod expering o April 19s. Tne Commissioner avereplad bre rangements and issued asovesments on the basis binerewt,. fe men Was Made on the tearons of tne trial judqe ad ah argument oof appeal or the Income splitting potenbroal ot lie Bamily Traut, particularly wher wt was auntroduced onto otlne L979 pe-arrangement of the taxpayer's atturrs, tb af porbinest to hohe toatl relatively small sums of Money were iamvaiverd, Letlarity liey were insiiricirent Lo prompt Or ware ank the LU7 arrangements. ln ioe year vl income endany 30 June 1978 the trustees made payments Lor the benefit of the children of the taxpayer tolailing bu.d//7 aid an Lne year ending 3) June 1979 65,808. much the came pusition prevailed in the two succeeding years of income. {mn escn of the years of income ending $0 June 1977, 1978 amd 1979 the children were the ondy beneticilarile@s Wh parlicipated im tne net income of the Trust. outa euuentb to the or: bablastment or Lhe Family Trust andl tne ospraungements For wb Lo provide management services for his practice, the taxpayer tad discustions with his accountant, 43 mr. Usborne, regarding the pussthle creation of a Superannuation fund for hig tenetit, because, as the trisl judge found, he remyined concerned aboul toe tinaneral well-being of his family and himeselr. At the teqinning at J979, the taxpayer was 46 years or age with a wile and three enildren aged L/y 150 and oo respectively. Apart Jvum lie mouse ae oo small ameunb oF metre al equate and a WOoboOr Sane le May wily vs seb was properly inmreritved from his parents from wnich oe was Gald Lo fe receivany Teul, though none was dibelvsed tn Oils return ot income for the year in question. He mad taken oul Jate astursnce policies to the estenb oot spprovtmableby $60,000 ced acetdental death cover for oan adaitioanal amuund of POO.0ND aid Was paying annual premiums totalling bl,iduo on tite polleres and $43l4 on sickness and accident poliviaes. evauee oof the modical and educational ev penses of his Camily and a Pabes and Lanes tLucurred um each: Ingtance ty the taxpayer am tne year ornding o0 sme LOZI ne was, in lnab year, only emtvbled to a noneessional rebate of tax of 33.'% cents tor esen doltar us the premiums paid on bas Life polisies. There 25 no dunk d that al lieat lime an eiplLoyed person was ama wore advantageuus pusstion than one who was self-employed, canmtrakutuwer. tor N13 superanmmuatlon being allowable deductions tuo nis employer. Youn was acknowledged by both Lhe Report ot lne Liyertwood Committee and the Asprey Report. The fartl slept ta improve Lone position of a self-employed person weee tobroduend by o.32 AAC of the acl enacted on lY September IO. vy Lois provisdom ne wat entitled to an subi ign deduct ta Ot Np tG blyuvu and a concessional Telbate aor 4 Luriner lesan The triad Jit tyes Toriid tnak ine attraction to tne taipsyer Of a Superannuation tuned was ""S6en Lo be toat tt was a Torwm i Compulecury Saviney, aldowany dur the cuilaing up of a fund for Lone eventuality ol line appellant 2 Cha wayer os retirement or deach, alinouyn Lb Was ark tow} wabyecd lial, Whether sone circumstances, earlter banmetvbs vould te obblatied. Ik was an mpurtLant consideralion ttrat Puntratutauns to tae durd should Comsbtitute s banalion dechueboon. LL wan glean sald to be a Material consiueration toal the appellant wla payer) should nave some control over baw tive viemant of Lhe bund', Early an Vey ome. Cthurne argaueted ta the lLaxpayer the Cregbkronm oF 4 "*Medteat Unit Trust* whorn would employ the taxpayer and establisi o4 Super sumuation fuml tor his benesat. The baxpayer accepted tris suggestion and mide arrangements wath a medical colleague, fr. Burke, to acl a» co-trustee with him of the Writ Trust on tna basis, tm thm words of tne triil judge "that the proporal was essentially concerned with securing superannuation tor toe uppellant Cbkaxpavers ated that the obtaining by the appellant fclsacpayer) of the stutus of an enplovee was 3 central tealure of it". [rh JM pLementatran of toe propotas colicitors were Instructed by mr. O3berne by Jelbtor wWalbed to Fenruary L979 to prepare tne MEeCessaPyY sluctmentabron Lor 4 Urnat Trust, 3 stiperannuation fund, BS Warraygeweiit "REYLCH sgreement and a sale agqreemenk for tne cale of bone medivsl practice ot the taxpayer to tne Unit Trust. Cl ts abo this slags only tecessarv to refer trieily to the conmtenls of these ducuments. The deed of trust establionteg une Unit Trust bears date Lomaren 1979. Me. Osbourne Was Unerein deceribed as "founder ' being the setbtlur unger tne dew snd tne bacpayer aml lr. Burke were the lrusleec. Ine Trug', to be Frown a: "The wuld and Medical Clinie Urit Yrust* and hearearter called 'tne Unik Trust', was created with ten units, gli oof which were isgesued to Ur. Rriivdal a3 trustee of tne kamaily Trust. Lt contained power for vt: trustees, ander alia, to osovest ats Lunds am carrying on the business of providing medicil services, to employ a medical practitioner or olner employers, and to enter ynto amd maanlbain 4a oa . superannuation fund for tne beneLit of any employee. The trial judge tound that there was mo doubt Liat the trustees nad power dowcrey on the business of 3a medical practitioner, amd that the trustees themselves were required ta be qualified amd registered Medical practitioners entitled to practice in Western Australia. Ir. Breindal, who was sl all relevant times tne only unit holder. had power to remove any trustee of Lone Unit Trust and, under the terns of the Family Trust, was lisble to be removed by the taxpayer as trustee of that trust. Three further documents, a scale agreement, an employment agresment and x service ajgecgemant all bear date Oo April 1979 althougn Lhe trial yudepe was oumable to be satusfled that this dale was bine Adsbe of aseculion of any of the ducuments. On 3 April L979 done tu.payer ollered gt wrailaig to ecell to the trusted o s of the Unit Teust mis medical practice i wneluding the A00dwill and plant and equipment uit excdudiwy book deblbs ror gu, U4, Tois Glrer wos accepted on tnat day. Chere was mucn debate at trial and am tne reasons Lor juregmenk cuncerming tne figura placed on goadwikh bub tiveness ts oro swdVvanbage oat considering this topic atl this elage. Tne purecnase price was never paid but remained im toe Looks of tne Unit Trust as a loan by Lae taxpayer. At this meeting on GF Aprsud 1979 the taxpayer and Or. Burke as trustees of the Untte Trust deeded to employ the hacpayer oas oa sadarzed medics) practitioner st a commencing + annual salary of $29,900 an tne Lerms and conditions of an employment agreement wnoicn the trial judge found was nob executerl untis some 2 or 3 weeks Later. There was again much debate as aforg¢s3id on toe amount of tne salary amd this was one of the matters relied upon by counsel for the Commissioner on the appeal. fu the agreement the tavpayer and Dr. Burke as trustees of the Unzt Trust are deserabed as "the employer" and the tanpayar as "the Loctor", (t was evecubed by Ur. Burke and the ta.psyer as trustees and by tne taxpayer ain his employee CuUpAac ty. Tie minutes ay tie me@eebing om April L979 alco record that tne trustees WOHLT @iber into 3s management services agreement with Ilr. Kramdal as Urustee os tne Family Trust to provide management services to the Unit Trust, Ine warnagement eervices agrevmant also bure date 3 April 1JY¥7) Lut the trial Jielye tound toat rt slso was execuled subsequeuy to that date. {to provided oaoar Tir. Kigndal a+ troslen or the fomily Trust to supply tne necessary management amd admintslralive »services for the conduct of the medieval practice of the trustees. TL was an Sohmewiat Similar bterws, e#xcepl as 10 reamunerablion, as the L977 agreement between the taxpayer and Br. Kramdal, the termination of which agreement was recorded tn the minute book ot the Famaly Trust on that date. Tnac meeting of the tructees of the linait Trust also dealt witn tie AytalblLtotment of toe superanaouation furmd, LQ. resolving that 1t be established and tmat Fim Fadelaty vey. bLbd, be the trustee of the furd. Upon preparation of the necessary trust deed ait was to be submitted 1o the fleputy Commissioner of Taxation ror his spproval. LL appears that 1t was contemplated that an ultimate benefat of $205,010 would be made available for tne taxpayer, tne mecessary anmtusl contetbution by his employers, the trustees o1 tne Unit Trust, veing anitisally $5,485. lt ue nul bFnown woelher toe Commissioner or as Neputy approved this amourmk as am allowsble deduction, but Lor tmis and each of the bWwu sueceedtigy years vonbreulutvions of $2,600 were made. Tne meeting alsu requsre:l thal tne taxpayer register the Bictheas came "Gulland Medical Clinic" on fehalt of the trust. The mecessary decumend was signed ty the btavpayer but mot lr. Furke whose mame iw wot mentored therein. tnere 15, im the Light oof tne traad Suge ¢ Laimlings, mo mevud loa rerer to the Manner im Which Ine practise wa Lieievatter conduchlouw except to mote tie Landing of tre braal pidye tock tne only possible reetiee chan Vash patients would Mave ct ay mange to bow practice Wie Lhe reference Peo tdae tls t Prieto on Purms: of accounts and PerVipts. Moreover Ur. Burle, albiougn Se Saw te tirancial stalements relating to the setivalser of Che Untl Teust, dad nol seat tu anmterfere with or take any part an the management of the méedteal practice. Tne sacsesement under challenge by the taspayer was based on tne application of 5.2460 Lo Loe abovementioned arrangements. Tine fLaret question the Lrasd judge Lound mereceary ta determine Was whether the arraijgemweatits Cetweoen tne lLavvayer and Dr. Burke amounted merely tu 4 sham. Notwithetanding he: view that many of these atrangements were artieticial ind Garelessly @xecuted 3nd thak tne dates ul documents were Llubtally unreliable, he found that they were intended lo Nave leual reality and to create ragnts and obligations. They were esbleced anlo wilh the genuane inlention wh erealing a Lrusl to carry om the taxpayer''s practice and bee employ fam Urnerein. nis Ladiiy wae mot enallenged on the uppeal. The trial judge une vansadlers a wheter Lhe ducuments whieh tae parties libended bo ovmave etter Lo aeeording to thes tenor, produced Lb law tne resusb- anleroled du (has regard ne Tevigwed Lhe conteatt Lur vile oul 'ae qonlwill or tne practice amd tae Cconmtrach oF empsuymenl. He Por me dwetlaeully am svanding trial bro former Paw aw b Wea ol bu vaste. Tow wonlract of employment pused Lor usm greqker olitdaeudtsee, tinal ae tas wre Loer Une Lasrpayer Conte erbe a tile a boiebingy Contract wailin Hinmesell and Ur. Burke ae tras heuws if 30, (ne mest question was w + weerner the conbrorbh would praperly be coat atler ised Conte act oF employment. Facn oF these quechiuns ae determsned an Toveur ob tne tavpaeer oth ote tlner Was sober Lo challenge on Tae oo appeal, excepl lu tne axvenb that cuuneel for the Commissvomer combed rat tine ba paver wih ol om Law ats euployee™ for toe purposes of tude ANC o1 Lee At. The es¢ential queztion beture thie Court on appeal was whether 5.260 operaled tu avold Loe arrangemantls a5 agutast Lhe tanpayer. The Lhoadtay of lhe triads qudge was that that section dad avoud the arrangements, whiten avoardunce left exposed 4 sitvation im witch lie Us payer, iio has personal capacity, was in receipt of tne income of tne me aical practice. The Lommissioner at trial gave particulars or the arrangements which he challenged ay tollow. hha) The Jormatiun od the Gulldamt Medical Clinic Urouh trust, fit) Ine employment agreement mate between the truyvtees of Lhe Mullband Medical Clamie Trust goed lie appell anil. KL11) The Waboayemend servis agreement mide between toe trustees ut tne uulland Medical Unit Lrust and tne wuldand Family Trust. (iv) The wale ayreement midge bebween toe appellant as vender oat tine bLrustees of the und lane Meddteal Clanmrve Unwe trust a5 purenaser for the vale oul dae appellant's medical practice at 34 Ergubea Aavetue Mayl andes, wy Tne aAyreemetel ud 4Ptateyemend wnereby the teusteer yt toe ulliand medical Glinmte Unit Teast purpordisd te oa -umi responeibality ror tree praca promt. aL "4 bkiynth Avenue mMaVb atid. fyas Tre a ecticnl or oarrainjement whereby the Hil | ated basme by Titiot pul por eed bo assume tire wpeLiant «= reeponsiosdily as lessee wider leases tor offtee and surqery equipment. yi?) Ine Letue 1 woe us lie Gulland tfedical Cliteic Unit Trust to Ur. C.F. Graredal for the fogdd shut Family Trust. (vii Toe est akblisnmmert are Spearalr~wa4n or 4 supe rabiialson Lite tor the purported employees of tre Gulla Medical Clarte UMnae Traust.? The trisl yudge made a number of Landings of Facl which are pedevant on Lhis aspecl of tiie sppesl, if only, Lm some instances, fur the purpose of explaining amd tnoereby assisting the Court to determine tie miture of tie arrangements. fn respect of tne taxpayer 3 stated reason tor emlering aunto the arrangaments he said as tollows: "Tite appelJantl's ¢tated reason for entering aunto the foregoing arrangement was to establish a superanmuation fund after be had btecome am employee. He denied that, at the time, he appreciraled that Lhe arrangement would ceasujt in a reduction ti mis personal dirabslaty for ineome bax. However, the erpected mo longer to be LiakJ@ tor dine payment' or provisional tax, and he anticipated tLnak fie wordy ooltain 4 refund of Pprovitional ta. woien he had siresaay paid. lt was cloar that bine appellant nad in the past been concerned With geeerrmMetts ol pravizional La. which he had recervad. He wi tamiltsr with bine noblion of income splattang; bul we cane thal ne regarded it as samething whacnm just might oecur in the future, fur he could sev nO immedrable Bre peck of any suvantage oan bial direction, bLoere beuig inluefic tent income an tne unit teoust to do more tian pay that salary and am amount of Super anmyab bore iit Litto Wa4a WUOl an oar anigemeil designed oly For one Lainancial year and the maming of toe trustee of the diserebronmary trust as the hermes rerary oom the west lrush stieyyueke that aimcome splrbbiuny Wan 4 GEQeebreasl Lacbor. Eurboernkore, the appelJant conveded thal there cagulu te a Limit to tne @>dedib tu which tne Gervlee trast could operate tou epliv mas dieume. He al Gg acknowledged tinat oan important advantaje ol the arrangement was Lhat a Lar deduction would be avartable boo the trustees of the wert oblruet Lor ier SU Per snnwatlon Comer rbubLon. L did omotv tund tne appellant's evidence as to certain advantages ool lise per snlsbvwonm seheme im providing dieciplinedt saviid ames greater contrel over investments to be very Convincing." Toe tay return of the Ungt Trust tur ine year as income anda) 30 dime LOYO diselbeadd, 28 Ie tioned atuove, a loss or Su, lLo alter paytenlk vo tie Lonpayer oL a salary of $3,900) ane let providing for him a conlribubron of $2,000 to the cuper annuation furnel. In the year enmied 30 Jume 1980 the Unit Trust made a Loss or #731 after paying the taxpayer a gasary of $20,004 = and contributing %2,006 to bre sttperanmuation furod. Tne loss neurred by the Unit Trust for tne y ended 30 June 1981 was disclosed 45 $4,957. tn that wear the salary paid to the taypayer was $24.072 amd oa Jake amount of $2,000 was contribuled tu oboe superannuation fund oon mis benallf. there was ain Consequence mo distribution of sieome an any or these years to fir. Beindal a5 'fustes of tne bamily (Crust as tnere was no income to distribuole. Frais oat tl an arreleyvant matter tor Colts tderaubion oon Lae question af Lncome splitting. It was confirmatory of Lire taxpayer's evidence Loal he did nol see the arrangements as providing diy Limedtate prospect of advantage by way oF liicume splitting. Tne trial juuye caid thot tne Commiseianer sought to dient iby two relevanl pi poses webirth Gieg mMeatitiey wt 9.250. Ine Tuesi Wat Lo PECUPY Super anisakran bebefil: mol otherwise aVallable to baw barpaye: "tow bey betiy LO Geers at theome tax l , J Heduetlion wi rebalyoui co eaonleslarbaen tooo tre Jute? . Sue second Wan brat of rneome Ppleb_bung. LL owas satd bLnat aven af the teusdves did not oblain 4 deslietaon of Lre amount of their conmtiibubaon to tne super antiratbeon kid, thare would stiil be avaslable to Line La poyeer tne benalril of income splitting whach would secure a reduction ti fie personal wnicaome bar. boa The cantentironw pul by the tarspayer tu tie trial judge was -Ehat the purpose of toe srranjyement was to obtain for the taxpayer an entitlement to superannuation, whicn could only be Made avartsable to him as an employese, The ottaining of this beanerit was, lo some extrnl ab Jeact, dependent upon the eunployers being abte Lo Ghbain an wuimeome tar deduction under 5.82 AAU of tne Act ol their conlributions wr oO the superannuation fusd. The tral judo ackiOwledged that although toe motives or the Laxpsayor were fualy canvarted berore Aim, it was the Character of hie ae0s clone uel ottah azbions entered tito with When FeUoO Wat Cuneethiet. ue bag port he Pound Laur tne main PUtpoee Of be art ateyetetites Way bo aveied iumeame rar by divervinsg wital would otherwise te Lie Carpoiyer - aieome from Lie practice to tne Unit (List ane] Wy di Pee LVL Late a Lesser sum by way ur salsly. Whadet ackhowledginy tinat Lae taxpayer could nat OPath deduetiuies Lor conti ghettos to lane superannuaviven Lued ac ano emploaye@y feosalg toat lieve War mo eeaton, aparl from rascal Cunslderat tone, wy Lue la, paver onoubd nob bsave mide provicion ror Mis own Superanmualson and Liial, even tovuge no Surplus funds Wele oon @arly yours sVall alle trom ote Wiel [rust for distribution to the bumiiy Trust, tie arrangement clearly offered scope for fulure income splerlring. he satd this was undoubtedly appreciated when the Family Proust was selecled a¢ benericuary of the Unit Crust. {ro Mk bry ko tibtimabte tandiuiy ne celted upon the fact tust., as tar ow the paliermt. were concerned tie pracbice conbintwed as beetare armed ui tae tach thsby 6 vee rea, HO BUS ines r lo. purpose, such 3s Limitation of Isabaliaty, could be identified am conmection with the arrangements. He retterated his view that "the very artificial nature of the arrangemenl provides, im my view, additional support tor my conclusion Lhat the avoidance of wncome tax was i1tS main purpose'. Nuring the course of his reasons he stated his view that the appeal betore him was ta he determined by Peate + cise (Peste vy Federal Commissioner of Taxation (1964) 111 C.L.k. 443, (1966) 116 U.L.R. 38). Although he acknowledged thst Peate's case tad, since 1977, teen left to operate only within 3 very marrow Lieled, ble view was that the arrangements Game within ULnat Creld, although he did mot attempt to specafy the metes and obywunds theeeor. Reliance, ne said, had been placed by the Laxpayer on the line of cases culminating an Cridbkand vv Federsl Commassroner of Taxation L977) 140 CLK. 3390, which establiened and sliustrated the application ot the principle of choice. His Honour acrnowledged that tf those cases stood alone, tne chaice aryument would be attraclive. His conmelusion however Was Liab the matter was to be determined by Feats Oase. Tt ws my upslen that toe brag juedyo eried ain adopting this approaen. The appropriate course was to identify what were the principles for whicn Pesate's case ¢tood as an authority in L979, These principles snould then, to the extent appropriste, have been applied to the facts, in this present malter, In this rejgard at as necessary lo bear in mind that mere than 22 years intervened between the dates of the two arrangements. Duran at iF. a Pee RE APE + ™ ze LY. that period standards ol acceptable conduct as well as the Operation of $.260 had changed. If nis decision was (to use the relevant words of Newton's case) that the arrangements must necessarily be Labelled as a means to avoid tax, ne was obliged to consider whether tne choice principle was applicable tefore finding that the provisions of 5.260 avoided the arrangements. Peate's case hag not, as the trial judge s3id, been critically examined or questioned otnerwise than by single judges but this because there nas nut been at appellate level any cause so to do. However, as he acknowledged, at has mow only application within 3 Very marrow fteld, Lhough counsel for the Commissioner on the appeal was mot prepared Lo agree with this statement. It 15 my opirnian thal on a mumber of grounds there 16 no scope for it to pe applied uncritically to avoid what at first glance have the appearance af Sumewnat similar arrangements. It Nas Without doubt been arfected by "lhe very restricted operation coneeded to $.200 by the cuurse of giedintal deersiom" since 196, See per Mason J. an lrarthonmd¢s aor supra at page YS Even the legislature has atl Lasst recognised the limstabions of 5.2600 by imter alias enaseting Lavision tVA of the Act in June LIB. Subsequent judicial decisions and changing times must be taken into account when considering Lhe very Qeneral Language of the members of the various courts who heard Feate's case. Ir particular what was accepted im L9OY9Y 45 am "ordinary business or family dealing", particularly fy protessional men, differed, i18 my opinion, greatly trom what was tne morm in 1956 when Dr Peate , ae Ly. entered anto his arrangements. T regard Peate's case, with respect to those matters in issue im it and the present case, as authority for the following proposition. A matter to te accorded considerable weight, in assessing an alleged ordinary business or family dealing, 1s aif the dealing purports to vest an activity in a person or body which 1s prevented by professional or statutory controls from Pursuing that activity. Such #4 transaction might well only be explicable as a means to avoid tax, as ait would be an unlikely feature of an ordinary business or family dealing. The trial judge was of the view that Menzies J. an Peate's case did mot see fis conelusions on the topic of legal or professional comtrols as vital to his decision. It has been said that this was mot the ratio of N15 decision. this 15 doubtless correct. The words however thal Mensies J. used on this aspect ot Peste's casG@ have attracted judiacital abllention and appear as follows on page 4690: "Tt as true that 1 do regard this incorporation of Raleigh and the seven olher sloctors' family companies as colouring everylhing thst was done here but, even without this, [€ would nave concluded that 1t was mot an ordinary business transaction tor 3 body of professional men who are entitled to sue for fees for medical services to transfer their practices, their libraries and their instruments to a company which could mot sue for fees and to become that company's servants an the conduct of their profession, particularly in the carcumstarnce that, to the extent to which patients paid fees to the company, their expenditure was not deductible under s.%2F. Winat, Outside s profession, might be regarded as an ordinary business tramssction may, within a profession, have ar altogether dafferent appearance." Gther menters of the Court did mot expressly refer to this particular passage but endorsed the general view of Menzies J. at page 459, namely "...e when all that 1s done 1s looked at and an particular when tine role of Ralergnh 1s examined there 18 a strong prima facie case that the purpose and effect of what was done was to obtain ancreased tax deductions from assestatle income and to divide what would otherwise have been Ur, Peate's taxable income between himself, his wife and nis children." Tt as pertinent Lo remember that the role of Raleigh was to carry on a medical practice the fees payable to whach it could nat recovery by suing and which were wot deductible to the patients. Numerous Judges, dim congiuering s.260's impact upon arranyements bearing some similarity to those in Pesate's case, fave used toese matlers 35 a gruounms of distinction. Bray Ces. cast oan Jores ov Federal Commisstoner o4 Taxation 77 ALT.b. 4,055 at 4,007 "The Lact Lnal tne appel}ant ee) registered pnarmaceutical ronem1sb mikes Lie transaction appear at first sight urmuseyal toa a laiwyor's mind, hecause the notaon of 4 protessiunmal man working aim the course of his professiun as a s3laried employee of a Lay employer seems disturbing or, to some mands perhaps, shocking. In this connection ab 165 am important, though mot 4a decisive, consideration tnat aim my view there 1s nothing sllegal oun the ownership of the McLaren Vale pharmacy kustuess by Mro. Jones im tne circumstances of this cage. Here the case falls in dine with Peacock's cate and mot with Peate's case or Hollyocr's case." ope Tk at A In Federal Commissioner of Taxation v Kareena Hospital Ply. Limited 79 A.T.C., 4667 at 4684 Lockhart J. relied on this aspect of Peaute's ease sve one of the grounds ror distinguishing 1t. He said in respect of am argument that the facts in Peate's ease provided a close analogy ta the matter before him: 'In my opinion beate's case 1s clearly distinguishable from tne present case. First, 30 fundamental distanetion between Paate's case and the present 15 that oornly a qualifted medicak practitioner, being a natural pergon, could carry on the profession of nedicine under the Medical Practitioner's Act of New South Wales, soa Lhat at all times the carrying on of the medical practice necessarily involved the activities of dr. Peate amd his fellow practitioners. In tne present case the carrying on of a hospital business 15 an aetivaty which may be legitimately engaged oan by corporations as well as by natural persons... ". T refer also to the discusiliun of the same topic by Brenman J. on page 4673 of tinat cave. In Hollyock v Federsl Commissioner of Taxation 71 AwT.C. 4202 the present Chief Justice of the High Court had to consider an arrangement by 3 chemist to sell a nhalf share in a pharmacy business to hus wife. Afler deciding that what was done didi mot seem capable of explanation by reference to ordinary business or family dealing, Without mecessarily being Labelled as a means to avoid tax, tne Chief Justice ssid at page 4206 "An important feature of the case 15 that the business which the appellant declared that he neld ain trust was one that could lawfully be carried on only by a pharmaceutical chemist, so0 that 1t remained necessary for the appeilant to carry om the business and his wife could mot lawfully join with him an carrying 16 om. As Menzies J. said an Peate y F.L.T. supra 3st p.460 "what, outside a profession, might be regarded as an ordinary Gisiness transaction may, within a profession, have an altogether different appearance', Millard v tae ale F.C.f. (LYGQII18 Celik. 396 provided another example of a case in which the business whose aznucome was the subject of the agrecment avoided by sec.460 - that of a tookmaker ~ could only be carried an by 3 person whoa had the necessary registration'." In Jones v Federal Commissioner ot Taxstionm supra at page 4,067 Bray C.J. said of the arrangement an that case, which contained mo rllegal aclivaty om the part of tne wife, that 'lon my view the arrangement 15 capable of explanation by reterence to ordinary family dealing and 1s not necessarily to be labelled as a means to avord tan. Lt falls within the class of cages illustrated by Peacock v Federal Commissiuner of Taxation 7G ALT.C. 4375 rather than within the class of case aullustrated by Peate's case (lilo ULAR. 38) or Hollyock's case above." In Peacock's case ait was permissible for a wife to become a partner in 3a surveyor's business, even though she was mot qualified as such. In the present matler there wat mo prujetbsional or stalutery restriction on the trusteos ot Lhe Unit Trusk carrying on the medicas practice, There ds Uneresure this dilttinclion, wheen f see aS signmiticant, between toe farts of this case and Puake's case. lt follows wnat Fo can mut accepl that the decision im Poate's case cam be applied as Pesiny closely analagaus to the precent matter. The trial judge drew atlention to the general fanding of Mensies J. im Peate's case, Sel of above, that there was a strony prima facie case that what was Jone there was to increase w a ees be cmp » deductions and split ancome. He and other judges fall that the arrangements were so exceptional in the case of professional people that they necessarily carried the stamp of tax avoidance. I have already set out Menzies J's comments concerning the position in which professional men, aid doubtless many others, stood in the middie of this celtury. There ts mo doubt that times amd circumstances nave changed and had changed by 1979 when the taxpayer made his arrangements. Mengtes J. said at p.4s59: pay *To arrange for the formation of a Company am which all tne snares would te tela in trust for two children and Loen tnat tir. Feste ¢ehould transfer nis protessional practice, hts books and his amstruments ta tiat company and become ils servant am the practice of his protession... 16 mot, to my mind, explicable by Teference eltner to ordinary business or ordinary tamily dealanmys..." Tt wat accepled oan argument that suen a transaction, namely the sale ot a medical practice to a company, can these days be so explicable, titough ut was mot su aim J979 when the ta:.payer sold nis practice. Lo refer also tue tne vbservabiuns of a general nalure which Menzies J. made at pager 440-6 of Peate's case and which were set out by the trial gudye in Mis ressorns. These comments purported to set aparl the protressional man from the mainstream of tne community in a way which difters trom the state of affairs existing now and ain 1979. Mensies J referred to the expedient of a professional mat assigning his earnings toa his wite and childen ag unacceptable an 1956 bul at is mot so at the present time (see + ra Po park 73. Cf Everetts' case infra). Taylor J. at page 475 also expressed his distaste for the assignment of professional income and Katto J. at p.469 had the same concern with the diverting of pratessional izncome of doctors to or for the benefit of their families. It 15 relevant to note that om the same page Kitto J. saw "the markang of superannuation provision for employees", including employed doctors, and "tne making of provision for the doctors' families" as mot beiny mecessarily connected wath taxation. Windeyer J. for nis part indicated at page 479 that he could not see that "for 3 medicsl practitioner to enter anmto am agreement to become the paid servant of a company which was to make 1% ats business to hire him out as a3 servant of another company 15 surely mot an ordinary business dealing." Such general statements may well have reflected attitudes prevalent ain 1956, but by 1979 there had been 3 considerable swing ain favour of permilting professional persons to srrange their affairs im favour of Lneir tamilies im the same way oas builders, plumbers, carpenters etc, albeit by more sophisticated means. Such re-arranrgements were mecessarily at all times subject to proiessional amd statutory restrictions. The decisions of the Courts who heard Federal Commissioner of Taxation v Phillips ©1978) 20 A.L.K. G07 are indicative of this trend. in that matter ajirm of chartered accountants formed ain 1971L a Unit Trust which acquired furnishings and equipment owned by the firm and took over the employment of the starf. Units in the Unit Trust were held cy the families of the partners and a4. associated companies. The trustee of the Unit Trust permitted the firm to use the furniture and equipment, for the use of which and for secretarial service: the firm was cnmarged. There was no doubt that the establishment and operations of the Unit Trust (which were very similar to those of the Family Trust ain the present matter) did enable some income splitting. This arrangement was considered acceptatle both by the Supreme Court of New South Wales and the Full Court of this Court and the payments made by the firm to the Unit Trust were allowsble deduetions Uider s.l of tne Act. The question of 5.260 was expressly abandoned by the Commissioner. In Fedecal Commissioner ot Taxation vy Everett the High Court (€(1980) 143 C.L«R. 440) and toe Full Court of this Court (C178) 21 ALR. O25) 3a well as Meares J. of the Supreme Court of New Souln Wales C16 ALL.R. GOS) found acceptable an assignment ly > sGlicitor to his waite wh "happened to te 4a qualified salieitor'? (145 C.L.R. ab page 444" Of portion of his share in Min tirm toyjetner wiln a ahare of profats, the solicitor constituting himself 3 bare truslee vl tne a6s19gned share. Nerther of nese deeisrons nor any of the reasonins therein 125 entirely an accord with the general comments of members of the High Court in Peale's case, For these reasons I Jo mov consider that this appeal can be wJetermaned by the application of the Geeltsion in Veste's case to the facts of this appeal. woke tai co . It 16 necessary in my view to consider in their context the overt acts which constitute bLhe arrangements, for the purpose or determining an the Liygnt the tests im Newton's case whether $.260 has application. Are Lhe transactions 35 3 whole capable ef explanation by reference ta ordinary family or business deslings, or are they necessarily to be labelled as a means to avoid tan" In applying these tests, which sre a gloss on the sectiom, 16 15 proper to note that they sare only one method of appruach. (See Cridband's eoase p.ddu). However it ais the appropriate manner ai which, in my opinion, initially to consider this matter. Equally 1% 25 important to draw attention to the use oy the words "capable oF explanation' on the one hand and "necessarily to be Labelled® on line other, Lnave added the emplasis. My assetoment of the overt acts whieh constitute the arrangenents 15 that they are ecapable of explanation by reference to ordinary family dealinys. L would attach far more siunificance than atid tne trial Judge to the purswit of Superanngation btenerite. This was 3 perfeclly understandatle objective for the taxpayer, us 16 15 generally tor persons wath dependants and no substantial arsets, to seer to provide for himself and his family wnen he retired throuyjh age or incapacity. Tt was very much ain the family anterest amd im particular the interest of nis wife that spproprisle provision should be made. However it ais unarguable dthat, desirable as it was to achieve these benefits, it was extromely ditficult far them to te rats " wlde provided by a proretssonad mam at the Lime, bearing im mind the then existing professional and stabubory reslrictions anmcluding the restriction om incorporation. Equally, im my opinion, it was mot reasonable to expect that ar) appropriate level ofr benefits could be 'purcnased"™ without the ac:istance of the provisions of tne Aet amd in particular those relating to tne deductability of premiums or contributions. Yue transaction imto which the taxpayer entered, om omy findings, for the purpose of making provision Yor superannuation was. pertorce, complex and nighly techniesl 36 well 45 doubtless distasteful ta many equity Lawyers. However af the objective was to be achivved there was no alternabive. feoas nok appropriate, im bie light of the finding tnoat the arrangements mad the Jegqal effect anmlended, to call tnem artifreral ercept in the sense toat they were rol normal and anmdeed were somewsial Whitsual. li may also be that ain the end the bLaxpaver did nob tecnmieally quality as am "*emplayee" under sad AAL of toe Act, art tmal ae nob 4 walter sar our consideration. Tne tris! judge fuwever duund dab toe arrangements must necessarily oe labelled 435 9 means to avoid cay. In making this Tinding ne appears to fave abllacned conmetderabie significance to tne fact that tne bamaly lrust was tne beneticrvary of the Unat Truet armed tuts 1 Was) poesabde £0 ermyaye li Lurther income splitting. tor my part £ wag mot see tne introduction of the Family Trust inte tne arrangements as being o4 any great siynuificance. {fo ag Unit Irest Was to be tne means wnereby the ip 3" r ame ae % tg Poe reel! MS Rage Pel iy ¥ Ree S7 whereby the taxpayer would seer to achleve superanmuation benefits at was mecessary as a matter of law that that Trust have a beneficiary. For the taxpayer to be the sole beneficiary, and therelby perhaps to miuimise the prospects of am allegation of incdme splitting, would result aim the trustees of the Unit Trust becoming virtually bare Lrustees for one of themselves and invite the contention that the Unat Trust structure was 3 sham and a facade. to provide tisat the Eamity Trust should be the beneliciary was sensible and reasonable im the circumstances and does mot Nevessarily require tne inference that it was inserted for tne purpose of avoldgiiny tax. Inis was particularly so as the Family Trust wa. an) IS bing trust, acceptable to the Commizsioner and must unlikely to receive, ifs its capacity as a Bbeneiiteiary, any incume an Lie furesevable future from the Urait Trust. 1 do mot ¢ee the anclucisgn of the Family Trust in the arrangements 2s having im the clreumslances any slgnaticant tax avaidance consequences. lt was tu my mind « relatively wictdental Feature of the arranyements. T conclude therefore by Fanding that for tne reasons Mentioned 5.260 does mot avoid the arrangements. { find that at 15 nmol necessary to label the arrangements a6 having either the Main OF 3 main purpose of tux avoidance (See Europa Oil N.Z. Lt. (No.2) Vo Commissioner of inland keverue (N.Z.' 76 A.~T.C. 6001) and that Feste's case 16 not conclusive authority to the contrary. a ab. It 16 strictly therefore not necessary for me to consider the argument based on the choice pranciple. 1 would draw attention however to the manner in which this principle was stated ty Mason J. an Cridiand's case at p.339, namely "Tt 19 not confined ta cases im which the Act offers two alternative bases of tanation: 41t proceeds om the footing tnat the taxpayer is enlitied to create a situation by entry into a transaction which will > attract tax consequences for which the Act makes special provision and that the validity of the tran¢action ic nut affected by s.260 merely because the ' tax consequences which it attracts are advantageous to " the taxpayer and he enters anto the transaction deliberately with a view to gaining that advantage. * CANE A aed ng AD BO Be The trial judge found tne argument bases on the choice principle attrsetive. lt appears he would have accepted it but for Peate's case. In my opinion Peate's case was not a bar to a decision favourable to the taxpayer on the batis of the choice principle. I also fand the applieation of the choice pranciple "attractive" tut it 1s not necessary for me to determine whelner it 15 avatlable on the facts of this malter. L would allow whe appeal and derecl tne Commissioner to psy the costs thereof as well as in the Supreme Lourt. ' { certify that this and the 2+ preceding 4 . pages are a true copy of the Reasons for : Judgment of Mr. Justice Fisher. AAn <— S ~« Associate Dated: "' A. qust Fou eh wie