CATCHWORODS INCOME TAX - Assessable income - Taxpayer a medical practitioner - Partnership practice restructured to secure tax advantages - Practice split and sold to two unit trusts - Taxpayer emploved by trustee of a unit trust - Family trust buying units in trust employing taxpayer - Income splitting - Whether arrangements void as against Commissioner - Consequences of such avoidance - Whether issue of -amended assessment authorised - Whether full and true disclosure made. INCOME TAX ASSESSMENT ACT 1936 55.260, 179, 19. THE COMMISSIONER OF TAXATION v DAVID FABSAN PINCUS Fox, Fisher and Beaumont Jd. 5 October 1984 Sydney. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION NO. G44 OF 1984 wee ww « Pa, ON APPEAL -FROM THE SUPREME COURT OF QUEENSLAND BETWEEN; TF THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant - and - DAVID FABIAN PINCUS Respondent ORDER JUDGES MAKING ORDER : Fox, Fisher & Beaumonc Jd. WHERE MADE : Svdney DATE : & Octoper 1984. THE cOURT ORDERS THAT: 1. The appeal of the Commissioner of Taxation be allowed. 2. The cross-appeal of the taxpayer David Fabian Pincus be dismissed. 3. The amended assessment of the Commissioner of Taxation adding to the taxable income of the taxpayer the sum of $14,404 be confirmed. 4, The taxpayer pay to the Commissioner of Taxation his 2. costs of the appeal and cross-appeal of the hearing in the Supreme Court. in this Court and IN THE FEDERAL COURT OF AUSTRALIA } ) QUEENSLAND DISTRICT REGISTRY ) NO. G44 OF 1984 ) GENERAL DIVISION ) QN APPEAL FROM THE SUPREME COURT OF QUEENSLAND BETWEEN; THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALTA Appellant - and - DAVID FABIAN PINCUS Respondent CORAM: Fox. Fisher ard Beaumont Jd. 5 October 1984 REASONS FOR JUDGMENT The Court: This 1S an appeal by the Commissioner cr Taxation of the Commonwealth of Australia ("the Commissioner") against a decision of the Supreme Court of Queensland given on 30 March 1984. That Court allowed the appeal of David Fabian Pincus (| 'the taxpayer") against an amended assessment of income tax for the vear of income ended 30 June 19739 ("the vear of income"). which amended assessment was issued pursuant to the provisions of 2. sub.s.170(2) of the Income Tax Assessment Act 1936 ("the Act"). The trial judge held that the Commissioner had correctly applied the provisions of s.260 of the Act but held that the issue of the amended assessment was not authorised by sub.s.170(2) of the Act. The taxpayer cross-appealed against the finding of the trial judge that 5.260 avoided the arrangements into which he had entered. In his return of income for the year in question the taxpayer disclosed by his amended return dated 5 December 1979 assassable income which included $23,000 being salary paid by "Stafford Road Medical Practice" and $9,817 being "Share of Partnership - Pincus, Backstrom. Richardson and Seet". On 21 May 1980 the Commissioner issued an assessment based on this return which disclosed an amount of $93 721 as refundable to the taxpayer. On 11 March 1983 the Commissioner issued to the taxpayer an amended assessment which disciosed an amount of $8,134.51 as payable by him. By the adjustment Sheet wrich accompanied the amended assessment the Commissioner identified the aiteration which he nad made as follows. "Taxable income previously assessed $28,045 Add: Share of net income - Stafford Road Medical Practice $14,404 Taxable income as shown in attached notice of amended assessment $42,449 3. The taxpayer objected to this amended assessment and upon the objection being disallowed requested that it be treated as-an appeal and forwarded to the Supreme Court of Queensland. That court allowed the taxpayer's appeal. It is appropriate at this stage to relate happenings which occurred subsequent to the end of tne year of income although these matters are not strictly relevant to the arrangements which the Commissioner contended attracted the application of s.260. By return of income dated 23 November 1979 Dr. D.L. Backstrom as trustee of the "Stafford Road Medical Centre Trust", being the Stafford Road Medical Practice identified by the taxpayer in his return for the vear of income ending 36 June 1975, returned the net income of that trust as $28,808. On 21 April 1980 the Commissioner issued an adjustment sheet in respect of tnat return to Dr. Backstrom which indicated that the net intone of the medical practice. namely $22,808 as returned, was assessea as to pe the income of Dr. Backstrom. This amount was added to the taxable income returned by Dr. Backstrom in his personal return by an assessment dated 2 Mav 1980. Dr. Backstrom objected to this assessment which objection was on 16 September 1981 disallowed and he then requested that his objection one treated as an appeal and forwarded to the Supreme Court of Queensland. However, prior to the hearing of the appeal the Commissioner issued an amended assessment on 28 February 1983 and 4. excised from the personal return of Dr. Backstrom this amount of $28,808. As earlier mentioned, the assessment of the taxpayer was on 11 March 1983 amended to increase his taxable income by one half of the amount of $28,808, namely $14,404, It appears that the original assessment of Dr. Backstrom as trustee of the Stafford Road Medical Centre Trust was prompted by an instruction dated 27 March 1980 from the First Assistant Commissioner in Canberra and the amended assessment by a letter to the Deputy Commissioner in Brishane dated 21 February 1983 from the Senior Assistant Commissioner in Canberra. All of these matters and the contests between the parties to this appeal and cross-appeal arose out of the Followinad circumstances. Frior to the commencement or the 'vear of income the taxpayer, a medical practitioner, was in partnership with Dr. Backstrom, Dr. Richardson and Dr. Seer. Thev had been partners Since 1975. On 14 August 1978 the taxpayer and Dr. Richardson worked at a surgery at Stafford Road. Dr. Backstrom worked at Stafford Heights and Dr. Seet workea at both places. By early 1978 the taxpayer had become dissatisfied with the manner in which the partnership was being conducted in that he did not consider all the partners were making an equal contribution. The taxpayer''s brother suggested to him that two trusts be established one with Dr. Backstrom as trustee of a practice at Stafford Road and one with Dr. Richardson as trustee of a 5. practice at Stafford Heights. Neither of the trustees would be employed in the particular practice of which he was trustee. The taxpayer gave evidence that his brother had explained to him that as an employee he could be superannuated and that there was a possibility that the beneficiaries of the trust could be members of his family and not the taxpayer himself. Evidence was given by the taxpayer as to his motives and purpose in entering into the subsequent arrangements, although it was acknowledged before this Court that it is the character of the acts done and transactions entered into with which 5.260 aus concerned. (Slutzkin v Federal Commissioner of Taxation (1977-78) 140 C.L.R. 314 at p.329. See also Holivock v Federal Commissioner of Taxation (1970-71) 125 C.L.R. 647 at p.655). On 18 June 1378 the partners held a meeting at whicn they agreed to proceed with the ""spl_tting' of the partnership. The Minutes of this meeting were as follows: "Meeting on 18/6/78 at Dr. G. Seet s home. 8 p.m. Present: R. Richardson D. Backstrom G. Seet D. Pincus Item 1 Partners agreed that partnership should be split in a way that 1s equitable to ail. 2. Leqal advice from C.W. Pincus and Paul Lee is that our best way of achieving this would be by establishing two trusts, one with trustee D.L. Backstrom employing R. Richardson, D. Pincus and G.Seet and second with trustee R.G. Richardson to employ D. Backstrom and G. Seet. 3. Present year's accounts to be managed by Bruce Kennelly & Associates, Suther Street, Redcliffe. 6. 4. Partners discussed trust scheme as outlined in sheet proposed by D. Pincus and agreed that if Paul Lee ' thought the trust scheme was legally correct and Bruce Kennelly agreed it was fair. we would carry out the proposed scheme." ' Mr. Lee arranged for a number of documents implementing the arrangements to be prepared which were executed by the partners on 14 August 1978. These documents were identified by ' the trial judge as follows: ""(1) A Deed of Dissolution and Sale which provided for the following matters: (a) the sale to Dr Richardson as trustee of "The Stafford Heights Medical Centre Trust" of the qoodwiil, lease (1f any), chattels and all other assets associated ' with the practice carried on by the partners at Stafford Heights and owned by \ the partners save and except only book debts and casn; (b) the sale to De Backstrom as trustee of "The Stafford Road Medical Centre Trust" of the same items associated with the practice carried on by the partners at Stafford Road: (c) In the case of each sale the purchase price to be the aqgreaqate of the value of the qoodwill ana lease (1f any?) as ' determinea by Australian Medical Agency of Queensland Pty. Ltd. of its nominee and the book value of the other property sold: (d) completion of both sales to take place on 14th August 1978; (e) the existing Partnership between the partners to be dissolved as from 14th August 1978; (f) a restraint on the partners practising as a general practitioner or otherwise acting in the capacity of a medical practitioner within a specific area but (3) The Backstrom as 7. with a proviso that any of the partners may be employed as a medical assistant by either of the trustees at the address set out and that each trustee shall be entitled to conduct the Practice purchased under the deed. Unit Trust Deeds for the Stafford Road Medical Centre Trust and for the Stafford Heights Medical Centre Trust. In the case of each trust the settlor was Cecil William Pincus and the settlement sum was §2.00. The original unit holders in the former trust were the respective wives of Dr Pincus and Dr Richardson and in the latter trust were the respective wives of Dr Backstrom and Dr Seet. Service Aareements which in the case of the appellant provided for his employment at the Stafford Road Medical Centre as from 14th August 1978 at an annual salary of $25,000 to be reviewed annually, for termination by either party on six months written notice to the other, for five weeks annual leave plus one week study leave. for six months continuous sick leave after which termination of employment was in the discretion of the trustee, for payments received for outside work dene curing normal working hours of the practice to belong to the practice and for attendance at eight half day sessions each week un accordance with a roster to be drawn up by the trustee. with provision also for a weekend roster." Service Aareement between the taxpayer and Dr. trustee of the Stafford Road Medical Centre Trust was in the form of a letter as follows: "Dr.D.F. Pincus llth Auqust, 1978 30 Tasman Street, STAFFORD, 94053 Dear Or. Pincus, Re: Stafford Road Medical Centre I confirm that the following are the terms upon which you are to be employed as a Medical Assistant at the above practice. 8. 1. Employment: Commences on 14th August, 1978; 2. Annual Salary: $25,000.00 payable weekly to be reviewed annually; 3. Termination: Either may terminate on s1x (6) months written notice to the other; 4. Holidays: Five (5) weeks annually plus one (1) week's study leave to be taken at mutually agreed times: 5. Sick Leave: In the event of your becoming 111 and unable to attend the practice employment will not be terminated until not less than six (6) months continuous sick leave nas been taken and then shall bea Matter for my discretion; 6. Additional If you receive any payment for Earnings: any work done (such as from hospital appointments. lectures, etc.) perlormed during hours when you ares normally expected to work in the practice then those earnings shall belong to the practice and shall be paid to me; sl Attendance: Your employment 1s based on eight (8) half dav sessions per week in accordance with a roster tao be drawn up by me. There will also be a roster for week-ends. Would you please acknowledge your acceptance of tne above terms by signing the acceptance at the foot of this letter. When time permits a more formal Service Aqreement wiil be drawn up for execution. Yours faithfully, (signed) D.L. Backstrom as Trustee of 'The Stafford Road Medical Centre Trust' ACCEPTED: (siqned) D.F. PINCUS " 9. No formal Service Agreement was subsequently prepared. However these arrangements were supplemented the following year by-an undated letter as follows: "211 Stafford Rd., Stafford. Dear Doctor Pincus, I confirm that the following terms are also to be included in the conditions of your employment as Medical Assistant:- (a) Disablement Income Insurance: I will at my expense provide a disablement income insurance policy for your benefit for such amounts as may from time to time be agreed and until otherwise aqreed for an amount of not less than EIGHT HUNDRED DOLLARS ($800) per calendar month with a qualifying period of six (6) months before benefits payable. Full salary will be paid during these six (6) months. (b) Superannuation: I will also at my expense establish a Superannuation Fund to provide such benefits as we shall from time to time agree but not in any event to exceed the maximum benefits from time cto time allowed by the Commissioner of Taxation. Yours faithfully, Signed David Leon Backstrom (As Trustee of Stafford Road Medical Practice}." The Superannuation Fund was established by a Trust Deed dated 27 April 1979 between the "Stafford Road Medical Practice" as Principal Employer and the taxpayer and his wife as Trustees. The return of income lodged by Dr. Backstrom as trustee of the Stafford Road Medical Centre Trust disclosed that during the year ending 30 June 1979 superannuation contributions totalling 10. $1,152.34 were made. It is doubtless a reasonable assumption that these were made in respect of the two practitioners exclusively employed by Dr. Backstrom at the Stafford Road practice. The trial judge made findings concerning the manner in which the Stafford Road practice was thereafter conducted. These findings were not challenged and 1t 1s appropriate to relate them as made: 'So far as the Stafford Road Medical Practice was concerned. a bank account entitled 'Dr Backstrom Trust Account' was opened and the first deposit to the credit ' of that account was made on 14th August. Staff who had been employed by the partnership at Stafford Road immediately prior to 14th Auqust were thenceforth employed by Dr Backstrom. A notice was placed in the surgery informing patients ctnat from 14th Auqust the practice would be conducted by the Stafford Road Medical Centre Trust and that the Doctors in attendance were Dr Pincus, Dr Richardson and Dr Seet. Plates outside the surgery were changed to read 'Stafford Road Medical Practice. Dactors in attendance - Dr Pincus, Dr Richardson and Dr Seet''. It appears that approval couid not be onptained for the reqistration as a business mame of Stafford Road Medical Centre and accordingly the name of Stafford Road Medical Practice was rea1lstered. The name of the trust, however, remained unchanged as The Stafford Road Medical Centre Trust'. For work dene on and after 14th August patients were asked to make out cheques to Staffora Road Medical Practice. The letter-head used was headed 'Stafford Roaa Medical Practice' and then named Dr Pincus, Dr Richardson and Dr Seet as 'Doctors in attendance' and the Memoranaum of Fees was in a similar forn. Suppliers were asked to render accounts in the name of Starford Road Medical Practice and they were then paid by Stafford Road Medical Practice cheques. A new entry was made in the telephone book under the name of Stafford Road Medical Practice and the telephone was answered in that name. The obtaining of the necessary consent by the lessor to the transfer of the lease to Dr Backstrom took some time and the transfer was not ultimately registered until 13th June 1980. ll. From 14th August Dr Backstrom visited Stafford Road approximately once aweek. On these visits he signed cheques for the payment of accounts and for staff wages and he said that he had conversations with the : receptionists to see 1f they had any problems and also very occasionally with the doctors. The doctors employed at Stafford Road received in addition to their salary an annual bonus based on work generated by each of them, although it appears that no bonuses were paid in respect of the year ended 30th June 1979. The four doctors held clinical meetings about once a fortniaht and on some occasions they held separate business meetinas although, apart from the matter of superannuation, the evidence does not indicate the nature of the business discussed at those meetinas." The Australian Medical Agency of Queensland Pty. Ltd. assessed the value of the goodwill of the partnership practices and cheques for these amounts (319,000 each) together with the cost of other practice property purchased were paid on 24 October 1978 to the partnership by the trustee of each of the unit trusts. The taxpayer's share of thes moneys was $5,338 and on the same day he paid $5,400 to an existing trust. the Pincus Children Trust, to enable that trust to acquire units in the Stafford Road Unit Trust. An amount of 535,399 was on the same date paid to the trustee of that Unit Trust for the issue of 5,299 units. These units were 1ssued to the taxpayer as sole trustee of the Pincus Chiidren Trust, in which his children were the beneficiaries. As such trustee that taxpayer received during the year of income $14,404 from the Crustee of the Unit Trust which the trial judge found was distributed as income to his children as beneficiaries of the Pincus Children Trust. 12. The principal issue before the trial judge was whether these arrangements attracted the application of s.260. [In this regard the Commissioner identified the arrangements which he contended were void against him as follows: "(ad The Agreement to dissolve the partnership between Drs. Pincus, Seet, Backstrom and Richardson; (b) The dissolution of the partnership; (c) The formation of the following Trusts: (1) The Stafford Heights Medical Centre Trust; (2) The Stafford Road Medical Centre Trust; (3) The Pincus Children Trust; {4) The R.G. Richardson Family Trust; (S) The D.L. Backstrom Family Trust. (di All Aqreements made between the abovementioned doctors and/or the trustee or trustees of the abovenamed Trusts or any of them relating to the medical practices carried on at Stafford Road and at Stafford Heights." However during the trial the Commissioner withdrew his contention that the formation of the Pincus Children Trust was void as against him. He acknowledged that that trust had been estaplished some vears prior to the arrangements between the former partners. The trial judge made certain findings as to thse subjective purpose of the taxpayer in entering into the arrangements, which findings although not directly relevant, can assist to throw light upon the objective purpose of the 13. arrangements themselves. He said that the effect of the taxpayer's evidence was that the primary consideration was to dissolve the partnership in a way satisfactory to him and and the secondary consideration was to maintain his long = standing relationship with Dr. Backstrom and to enable him as an emploves to obtain superannuation. The taxpayer was aware that tax advantages were likely but contended they were of secondary importance to the dissolution of the partnership. The trial judge accepted that the taxpayer was dissatisfied with the operation of the partnership and that he wished to maintain 2 relationship with Dr. Backstrom. However his view, with which we agree, was that in order to do so 1t was not necessary to enter into such arrangements as he did. He accepted that the taxpayer wished to have the benefit of superannuation. but doubted now strongly this consideration weighed with him. The trial judge drew attention to the fact that superannuation was not referred to in the letters from the solzcitors. nor, we would add. was it mentioned at the crucial meeting of the partners on 18 June 1973, in the employment agreement or in any of the initial documentation. His opinion was that the substantial purpose of the arrangement was to minimise the taxpavec's taxation ana i our opinion this conclusion 15 confirmed by an objective assessment of the overt acts which constituted the arrangement. However the trial judge accepted the taxpaver's contention that the Commissioner was not empowered by sub.s 170(2) of the Act to issue the amended assessment on 11 March 14. 1983. He came to this conclusion notwithstanding his finding that the taxpayer had not in his amended return made "full and true disclosure of ail the material facts necessary for his assessment". He held that this non-disclosure had not resulted un any avoidance of tax by that taxpayer. This avoidance, he said, was the consequence of a failure by an officer of the Commissioner to carry out his instructions. The officer misunderstood these instructions and the failure to apply them to the return of the taxpayer was in the trial Judqe's opinion an error of law. The Commissioner was therefore not entitled to amend the assessment, notwithstanding the avoidance of tax. and the assessment was set aside and the taxpayer's appeal upheld. The Commissioner appealed tz this Court aqainst this finding of the trial Judge. His cztunsel contended, for tne purpose of keeping the point open, that sub.s 170(2) did not as a Matter of construction require that the avoidance of tax be the result of the failure to make full ana true disclosure. However he conceded that the authority of Federal Commissioner of Taxation v Levv (1960-61) 106 C.L.R. 448 especiraliy at page 468 per Owen J.precluded this Court from deciding in his favour tnis question of construction. For our part we would acknowiedge that sub.s.170(2) requires both of its conditions, which are cumulative and related, to pe satisfied. However whether. as a 15. matter of causation, it is necessary for the avoidance of tax to be the "result" of the failure to make full and true disclosure may well be the subject of debate. Counsel's submissions were, in consequence of his concession, confined to the trial judde's finding that there was no connection between the non-disclosure and the avoidance of tax. The taxpayer by his cross-appeal challenged the finding that he had not made full and true disclosure. We agree with the trial judge's finding in this regard and in particular with his identification of the relevant facts and documents which were not disciosed to the Commissioner either by the taxpayer or Dr. Backstrom. In our opinion the Commissioner's original assessment was correctly meade in the light of the facts disclosed on the return as lodged by the taxpayer. Prior to the making of this assessment the Farst Assistant Commissioner had by letter of 27 March 1980 instructed the Deputy Commissioner in Brisbane to rely upon Peate' 0) case te) > (Feate v Federal Commissioner of Taxation 11964) 111 C.L.R. 443 and (1966) 116 C.L.R. 38) and to issue assessments nased on s.260 against doctors who sold their practices to companies or unit trusts. In accordance with these instructions an adjustment sheet was issued to Dr. Backstcom as trustee of the Stafford Road Unit Trust. the nét income of which was then assessed against him personally. A very full notice of objection was lodged by Dr. Backstrom and ultimately the assessment was amended excising that 16. income on the basis that the instruction of 27 March 1980 had been misunderstood and as against him misapplied. This instruction, amplified by a further letter of instructions of 21 March 1983, was then correctly applied. assuming the arrangements attracted s.260, to the amended return of the taxpayer. The amended assessment, the subject of these proceedings, was un consequence issued to the taxpayer. The contention of the taxpayer's counsel, which was accepted by the trial judge, was that the avoidance of tax was not the result of his client's failure to make full and true disclosure but of the misunderstanding by the assessor of his instructions. We cannot agree that there was no or no. sufficient connection between the non-disclosure and the avoidance. No such Mistake of law, upon which so much reliance was placed by the taxpayer, was established as having been made when issuing the originai assessment to the taxpayer. The Commissioner 5 mistake was made in assessing the returns, both as trustee and personal, of Dr. Backstrom. When the full facts were disclosed in connection with his objection, Dr. SBackstrom's assessment was amended as was the taxpayer's. The taxpayer had not himself earlier made full disclosure and no error of law was estabiished as having been made when his return was originally assessed. Mistakes of fact were undoubtedly made in assessing him and were made because he had not made full disclosure of the arrangements 1?. into which he entered. The Commissioner was thus unable to make an informed decision on the application of s.260. In our opinion the taxpayer's appeal to the Supreme Court should not have been upheld on this ground. By his notice of cross-appeal the taxpayer challenged the trial judge's finding that Peate's case applied and that tne arrangements attracted the operation of 5.260. In assessing the scope, at the relevant time. of 5.260 counsel for the Commissioner identified correctly the three principal grounds upon which the courts have found that taxpayers have successfully avoided or negatived the operation of that section. It 41s apparent that although Peate's case remains as undisturbed authority upon its particular facts, its scope has been restricted by subsequent limitations on the operation of the section itself (see per Mason J. in Cridland v Federal Cormmissicner of Taxation (1977) 140 C.L.R. 330 at page 337). Peate's case adopted and appiied the ground propounded in Newton vy Federal Commissioner of Taxation (1958) 98 C.L.R. 1, namely whether the arrangements were capable of explanation as an ordinary business or family dealing or were necessarily labelled aS a means of avoiding taz. We recognize that what was unacceptable as an ordinary business of family dealing at the time of the arrangements in Peate's case may have gained acceptance by 1979. In this present matter it was said that the purpose of the arrangements was to obtain superannuation benefits for the taxpayer upon his retirement, which purpose was 18. explicable as an ordinary business or family dealing. However the only evidence in this regard was that of the subjective purpose of the taxpayer. It certainly was not objectively discernable as the purpose of the overt acts which constituted the arrangements, and it is these arrangements and not the purpose or motives of the taxpayer which must he explicable as an ordinary business or family dealing. Moreover the further fact that the trustee of the particular Unit Trust might, because of sub.s5.48(1) of the Medical Practitioners Act 1939-1976, have had difficulty in suing to recover fees counts against the arrangements as being so explicable. In our opinion the trial judge correctly concluded that the only objective discernable was that of income splitting. Counsel for the Commissioner correctly conceded that this was not the end of the matter and that notwithstanding tnat the objective purpose was to avoid tax in this manner. 1t was open to the taxpayer to negative, if ne could, on two further grounds the operation of the section ana to rely on the "cnoice principle". This principle, discussea at lenatn by Mason J. in Cridland's case supra, establishes that s.260 15 inapplicable if (1) the taxpayer has a choice under the Act of two or more bases of taxation or (2) the taxpayer can create a situation by entering into a transaction which will attract particular tax consequences under specific provisions of the Act. 19. Keiqghery Pty. Limited v Federal Commissioner of Taxation (1957) 100 C.L.R. 66 illustrates the operation of the first ground and Cridland v Federal Commissioner of Taxation supra the scope of the second qround. In this matter counsel for the taxpayer sought to avoid the application of s.260 in two ways. He contended that Peate's case could be distinguished on the ground that there was there a pre-existing partnership and thus an antecedent transaction which was cast in a new form for the purpose of varying the incidence of tax. He contended that as the dissolution of partnersnip in this matter was not part of the tax avoidance arrangements there was no antecedent transaction, i.e. no pre-existing partnership. His further submission was tnat in consequence of the aissolution the taxpayer as a sole practitioner t:ad a choice as to how he would practice. The Act he contended offerea him the alternative or practising alone, or in partnershio or under ai trust structure. In adopting the lastmentioned alternative he aad exercised a choice and was enicying tnereafter income from a new source. In this regard he rei1led upon the following authorities in addition to those above mentioned: Mullens v Federal Commissioner of Taxation (1976) 125 ¢.L.R. 290 per Barwick J. at pages 298 and 302; Europa 011 (N.Z.; Ltd v Inland Revenue Commission £19761 1 All E.R. 503. 20. It is our opinion that this latter submission is ona number of grounds misconcelved. The very basis of the arqument, namely the contention that the dissolution of partnership, which was said to leave the taxpayer as a sole trader with a choice, Was not part of the tax avoidance arrangements. is fallacious. It was a condition precedent to the implementation cf these arrangements and was agreed upon by the partners at the same meeting as the arrangements themselves. The dissolution was effected by the agreement establishing these arranaements and also took effect on the date of that agreement. The dissolution of partnership was an element in the tax avoidance arrangements. Even 1f the taxpayer had been for a brief moment of time a sole trader with a cnolce. such choice was not of the kind referred to by Mason J. in Cridiand''s case. Mcreover we agree with what Bowen C.J. said of a like contention in his reasons in Gulland v Commissioner of Taxation an unreported decision of the Full Federal Court (dated 3 August 1384), namely, that it would be a misapplication of what Barwick C.J. said at page 302 or Mullen s case to apply s.260 if the change was Zrom a partnership but not 1f the change was from a sole trader. Furthermore 1t cannot be said that the taxpayer was enjoying a new scurce of income. The scurce, namely the conduct of a medical practice, remained the same throughout although the business structure on behalf of which he practised had changed. al. In our opinion the taxpayer's arguments for avoiding the application of s.260 are unacceptable and we agree with the trial judge that the arrangements attracted the operation of that section. It remains for us to determine the consequences of the annihilating effect of s.260. Counsel for the taxpayer drew to our attention the dissenting opinion of Lord Donovan in Peate's case, contending that it here raised an insuperable problem. However, in our view, this 1s not the case as the difficulties in applying the section which prompted his Lordship's dissent do not arise in this matter. The application of 38.260 exposes the taxsayer as carrying on practice at Stafford Road in association with Dy. Richardson. In return 'for medical services, the patients pay fees whicn he directs se paid to the account of Starrord Road Medical Practice. Dr. Backstrom operates on this account and deals with these moneys on behalf of the taxpayer and Dr. Richardson, paying expenses and salaries therefrom ana the amount remaining to the taxpayer and Dr. Rachardson equally. The arrangements which provided that the taxpayer acts as an employee or Dr. Backstrom who for his part owns the practice in his capacity as a trustes, accounting to the urit holders for the net profits are all struck down by the application of the section. The taxpayer receives his share of the net profits otherwise than as a holder of units in the unit trust, for the acquisition of these units is void as against the Commissioner. None of the avoided arrangements are necessary for the application of 5.19 of 22. the Act (as Lord Donovan found them to be in Peate's case) and nothing "new or fictitious" (again to use his Lordship's words) has been inserted in place of these arrangements. That portion of the net proceeds of the Stafford Road Medical Practice which was received by the taxpayer as trustee of the Pincus Family Trust has, in consequence of the application of s.260, the character of income in his hands. The Commissioner therefore correctly added this sum to the taxpaver's taxable income and assessed him to tax thereon. In our opinion the appeal of the Commissioner should be uphela and the cross-appeal of the taxpayer dismissed with costs cath here and in the Supreme Court. | certify that this and the 2! preceding Pages are a true copy of the reasons for judgment herein of the Court Bated 7 oc70eéK 1784 Associate